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Leases

3 Months Ended

Dec. 31, 2019

13. Leases

The Company leases certain facilities and equipment under operating leases. Under ASC 840, lease expense for the Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded using the straight-line method over the initial lease term whereby an equal amount of lease expense is attributed to each period during the term of the lease, regardless of when actual payments are made. Generally, this results in lease expense in excess of cash payments during the early years of a lease and lease expense less than cash payments in the later years. The difference between lease expense recognized and actual lease payments is accumulated and included in other long-term liabilities in the consolidated balance sheets.

Included in lease expense in our unaudited condensed consolidated statements of income (see Note 4) were lease payments for a house that the Company’s CEO rented to the Company for corporate housing for its out-of-town Bombshells management and trainers, of which lease expense totaled $19,500 and $19,500 for the quarter ended December 31, 2019 and 2018, respectively. This lease terminated on December 31, 2019.

Undiscounted future minimum annual lease obligations as of September 30, 2019 are as follows (in thousands):

2020	$	3,237
2021		3,154
2022		3,057
2023		2,889
2024		2,850
Thereafter		21,038
Total future minimum lease obligations	$	36,225

Included in the future minimum lease obligations are billboard and outdoor sign leases. These leases were recorded as advertising and marketing expenses, and included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income. Under ASC 840, we recorded lease expense amounting to $1.0 million during the quarter ended December 31, 2018.

The Company adopted ASC 842 as of October 1, 2019. The Company’s adoption of ASC 842 included renewal or termination options for varying periods which we deemed reasonably certain to exercise. This determination is based on our consideration of certain economic, strategic and other factors that we evaluate at lease commencement date and reevaluate throughout the lease term.

Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance and tax payments. The variable portion of lease payments is not included in our right-of-use assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses recorded in selling, general and administrative expenses in our unaudited condensed consolidated statement of income.

We have elected to apply the short-term lease exception for all underlying asset classes, which mainly includes equipment leases. That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term. We do not include significant restrictions or covenants in our lease agreements, and residual value guarantees are generally not included within our operating leases.

Our adoption of ASC 842 did not have a material impact on our lease revenue accounting as a lessor. See Note 3.

Future maturities of lease liabilities as of December 31, 2019 are as follows (in thousands):

	Principal Payments		Interest Payments		Total Payments
January – December 2020	$	1,521	$	1,664	$	3,185
January – December 2021		1,658		1,568		3,226
January – December 2022		1,755		1,465		3,220
January – December 2023		1,674		1,361		3,035
January – December 2024		1,818		1,256		3,074
Thereafter		19,840		6,220		26,060
	$	28,266	$	13,534	$	41,800

Total lease expense, under ASC 842, was included in selling, general and administrative expenses in our unaudited condensed consolidated statement of income, except for sublease income which was included in other revenue, for the quarter ended December 31, 2019 as follows (in thousands):

Operating lease expense – fixed payments	$	842
Variable lease expense		65
Short-term equipment and other lease expense (includes $146 recorded in advertising and marketing, and $125 recorded in repairs and maintenance; see Note 4)		394
Sublease income		(2	)
Total lease expense, net	$	1,299

Other information:
Operating cash outflows from operating leases	$	1,255
Weighted average remaining lease term		13 years
Weighted average discount rate		6.1	%