Note 6. Leases

The Company leases real estate for its regional sales offices, a research and development facility, and offices located at its international subsidiaries and branch locations. In addition, the Company leases an automobile fleet in the United States. The Company has also identified warehouse leases within certain third-party distribution center service contracts. All other leases are insignificant to the Company’s consolidated financial statements. To determine if a contract contains a lease, the Company assesses its contracts and determines if there is an identified asset for which the Company has obtained the right to control, as defined in ASC 842.

The Company records right-of-use assets and lease liabilities on its consolidated balance sheets for leases with an expected term greater than one year. The lease term includes the committed lease term, also taking into account early termination and renewal options that management is reasonably certain to exercise. For leases that do not have a readily determinable implicit rate, the Company uses its estimated secured incremental borrowing rate based on the information available at the lease commencement date to determine the present value of lease payments. The Company’s estimated secured incremental borrowing rate is determined using a portfolio approach based on the rate of interest the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses the unsecured borrowing rate and risk-adjusts that rate to approximate a collateralized rate in the currency of the lease. As of November 30, 2019, finance leases were not significant and all leases recorded on the Company’s consolidated balances sheets were operating leases. Residual value guarantees, restrictions, covenants, sublease income, net gains or losses from sale and leaseback transactions, and transactions with related parties associated with leases are also not significant. The Company has made the accounting policy election to use certain ongoing practical expedients made available by ASC 842 to: (i) not separate lease components from nonlease components for real estate – office buildings, machinery and equipment, lab equipment, office equipment, furniture and fixtures, and IT equipment; and (ii) exclude leases with an initial term of 12 months or less (“short-term” leases) from the consolidated balance sheets and will recognize related lease payments in the consolidated statements of operations on a straight-line basis over the lease term. However, the Company had no significant short-term leases as of November 30, 2019.

Upon adoption of ASC 842 on September 1, 2019, the Company’s total assets increased by $9.0 million and total liabilities increased $9.2 million in the Company’s consolidated balance sheets. The adoption of this standard did not have a material impact on retained earnings, the consolidated statements of operations or cash flows. The Company obtained no significant additional right-of-use assets in exchange for lease obligations during the three months ended November 30, 2019.

The Company recorded $0.5 million in lease expense included in selling, general and administrative expenses, and an insignificant amount of lease expense classified within cost of products sold for the three months ended November 30, 2019. During the three months ended November 30, 2019, the Company paid cash of $0.5 million related to lease liabilities. Variable lease expense under the Company’s lease agreements were not significant for the three months ended November 30, 2019. As of November 30, 2019, the weighted-average remaining lease term was 7.39 years and the weighted-average discount rate was 3.1% for the Company’s operating leases. There were no leases that had not yet commenced as of November 30, 2019 that will create additional significant rights and obligations for the Company.

Right-of-use assets and lease liabilities consisted of the following (in thousands):


	November 30,
	2019
Assets:
Operating lease right-of-use assets	$	8,734

Liabilities:
Current operating lease liabilities⁽¹⁾		1,714
Long-term operating lease liabilities		7,084
Total operating lease liabilities	$	8,798

(1)Current operating lease liabilities are classified in accrued liabilities on the Company’s consolidated balance sheets.

The Company’s maturities of its operating lease liabilities, including early termination and renewal options that management is reasonably certain to exercise, are as follows:


	Operating
(Dollars in thousands)	Leases
Remainder of fiscal year 2020	$	1,516
Fiscal year 2021		1,705
Fiscal year 2022		1,291
Fiscal year 2023		1,137
Fiscal year 2024		1,104
Thereafter		3,235
Total undiscounted future cash flows	$	9,988
Less: Interest		(1,190)
Present value of lease liabilities	$	8,798

Future fiscal year minimum payments under non-cancelable operating leases in accordance with ASC 840 as of August 31, 2019 were as follows:


	Operating
(Dollars in thousands)	Leases
Fiscal year 2020	$	1,988
Fiscal year 2021		1,470
Fiscal year 2022		827
Fiscal year 2023		348
Fiscal year 2024		975
Thereafter		932
Total undiscounted future cash flows	$	6,540