7. Leases

In February 2016 the FASB amended its ASC and created a new Topic 842, Leases. The final guidance requires lessees to recognize a right-of-use asset and a lease liability for all long-term leases at the commencement date and recognize expenses on their statements of income similar to the current Topic 840, Leases. It is effective for fiscal years and interim periods beginning after December 15, 2018 and early adoption was permitted. We adopted the new ASC 842, Leases effective January 1, 2019 using the modified retrospective approach, which allows application of the standard at the adoption date rather than at the beginning of the earliest comparative period presented. Therefore, no changes have been made to the 2018 financial statements.

The adoption of this standard resulted in the recognition of operating lease agreements with a net present value of $22.7 million, and corresponding right-of-use assets obtained in the same amount, at January 1, 2019. The leases were recognized with a weighted average discount rate of 5.5% and a weighted average remaining lease term of six years. In addition, deferred rent obligations of approximately $2.4 million recognized under prior lease rules were offset against the corresponding right-of-use asset and will be reflected in amortization over the remaining life of the lease.

Our operating and finance lease liabilities result from the lease of land and buildings that comprise our corporate headquarters, various manufacturing facilities and related space, leases on company vehicles, and leases on a variety of office and other equipment. Our leases do not include terms or conditions which would result in variable lease payments other than for small office equipment leases with an additional charge for volume of usage. These incremental payments are excluded from our calculation of lease liability and the related right-of-use asset.

Our leases have remaining lease terms of one year up to 11 years, some of which have options to extend the leases for up to 29 years and one lease contains a termination option with a two-year notice requirement. We do not include option terms in the determination of lease liabilities and the related right-of-use assets until we determine the exercise of the option is reasonably certain. Our leases do not contain residual value guarantee provisions or other restrictions or financial covenant provisions. The adoption of the new leasing standard had no significant impact on covenants or other provisions of our current term and revolver loan facility agreements.

We exercised judgment in the adoption of the new leasing standard, including the determination of whether a financial arrangement includes a lease and in determining the appropriate discount rates to be applied to leases based on our general collateralized credit standing and the geographical market considerations impacting lease rates across all locations. When available, we use the implicit discount rate in the lease contract to discount lease payments to present value. If an implicit discount rate is not available in the lease contract, we used our incremental borrowing rate. We have elected the package of practical expedients permitted under the transition guidance of the new leasing standard which includes a provision which allows us to carry forward the historical lease classification of identified leasing arrangements and not reassess (i) classification for any existing leases, (ii) whether any expired or existing agreements are or contain a lease, or (iii) whether any initial direct costs qualified for capitalization. We have also elected the practical expedients that allow us to omit leases with initial terms of 12 months or less from our balance sheet, which are expensed on a straight-line basis over the life of the lease. We have elected not to separate lease and non-lease components for future leases.

On March 8, 2019 we executed a modification to extend the lease of our On-X manufacturing facilities. This modification resulted in an increase in the net present value and corresponding right-of-use asset of $3.7 million, using a discount rate of 5.83%. We have not executed any material lease arrangements which have not commenced. We do not have any related party leasing arrangements.

We sublease, on an operating lease basis, two small unused office space facilities near our corporate office. Total annual rental income for these facilities is approximately $910,000.

Supplemental consolidated balance sheet information related to leases was as follows (in millions, except lease term and discount rate):


Operating leases:	March 31, 2019
Operating lease right-of-use assets	$	24,160
Accumulated amortization	(1,199)
Operating lease right-of-use assets, net	$	22,961

Current maturities of operating leases	$	4,982
Non-current maturities of operating lease	19,902
Total operating lease liabilities	$	24,884

Finance leases:
Property and equipment, at cost	$	7,530
Accumulated amortization	(1,075)
Property and equipment, net	$	6,455

Current maturities of finance leases	$	678
Non-current maturities of finance leases	5,690
Total finance lease liabilities	$	6,368

Weighted average remaining lease term (in years):
Operating leases	6.2
Finance leases	11.2

Weighted average discount rate:
Operating leases	5.5%
Finance leases	2.0%

Current maturities of finance leases are included as a component of Accrued Expenses and Other and non-current maturities of finance leases are included as a component of Other Long-Term Liabilities on our Summary Consolidated Balance Sheets. A summary of lease expenses for our finance and operating leases included in General, Administrative, and Marketing Expenses on our Summary Consolidated Statements of Operations and Comprehensive (Loss) Income are as follows (in thousands):


	Three Months Ended
	March 31, 2019
Amortization of property and equipment	$	211
Interest expense on finance leases		32
Total finance lease expense		243
Operating lease expense		1,550
Short-term lease expense		-
Sublease income		(228)
Total lease expense	$	1,565

A summary of our supplemental cash flow information is as follows (in thousands):


	Three Months Ended
Cash paid for amounts included in the measurement of lease liabilities:	March 31, 2019
Operating cash flows for finance leases	$	32
Operating cash flows for operating leases		1,636
Financing cash flows for finance leases		172

Future minimum lease payments and sublease rental income are as follows (in thousands):


	Finance		Operating		Sublease
	Leases		Leases		Income
Remainder of 2019	$	627	$	4,396	$	684
2020		675		6,046		921
2021		628		5,607		930
2022		575		3,343		380
2023		575		2,321		--
Thereafter		4,023		7,382		--
Total minimum lease payments	$	7,103	$	29,095	$	2,915
Less amount representing interest		(735)		(4,211)
Present value of net minimum lease payments		6,368		24,884
Less current maturities		(678)		(4,982)
Lease liabilities, less current maturities	$	5,690	$	19,902