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Leases

6 Months Ended

Mar. 31, 2020

14. 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 operations (see Note 5) 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 $0 and $19,500 for the three and six months ended March 31, 2020, respectively, and $19,500 and $39,000 for the three and six months ended March 31, 2019. 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 operations. Under ASC 840, we recorded lease expense amounting to $957,000 and $2.0 million during the three and six months ended March 31, 2019.

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 operations.

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 4.

Future maturities of lease liabilities as of March 31, 2020 are as follows (in thousands):

	Principal Payments		Interest Payments		Total Payments
April 2020 – March 2021	$	1,552	$	1,641	$	3,193
April 2021 – March 2022		1,692		1,543		3,235
April 2022 – March 2023		1,728		1,438		3,166
April 2023 – March 2024		1,706		1,336		3,042
April 2024 – March 2025		1,860		1,229		3,089
Thereafter		19,289		5,992		25,281
	$	27,827	$	13,179	$	41,006

Total lease expense, under ASC 842, was included in selling, general and administrative expenses in our unaudited condensed consolidated statement of operations, except for sublease income which was included in other revenue, for the three and six months ended March 31, 2020 as follows (in thousands):

	Three Months Ended March 31, 2020			Six Months Ended March 31, 2020
Operating lease expense – fixed payments	$	838		$	1,680
Variable lease expense		65			130
Short-term equipment and other lease expense (includes $145 and $291 recorded in advertising and marketing, and $100 and $225 recorded in repairs and maintenance for the three and six months ended March 31, 2020, respectively; see Note 5)		365			759
Sublease income		(4	)		(6	)
Total lease expense, net	$	1,264		$	2,563

Other information:
Operating cash outflows from operating leases	$	1,207		$	2,462
Weighted average remaining lease term					13 years
Weighted average discount rate					6.1	%