Leases

6 Months Ended

Sep. 30, 2020

Leases [Abstract]

Leases

Leases

The Company leases warehouses, distribution centers, office space, retail space and equipment. Prior to the Restructuring Plan, the Company also leased 22 e.l.f. retail store locations. The majority of the Company's leases include one or more options to renew, with renewal terms that can extend the lease term for up to five years. The exercise of lease renewal options is at the Company's sole discretion and such renewal options are included in the lease term if they are reasonably certain to be exercised. Certain leases also include options to purchase the leased asset. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Most of the Company's equipment leases are finance leases of assets used to operate its distribution centers in Ontario, California and Columbus, Ohio.

Significant judgment is required to determine whether commercial contracts contain a lease for purposes of ASC 842. The discount rate used in measuring lease liabilities is generally based on the interest rate on the Company’s revolving line of credit, assuming sufficient unused capacity exists at the time the lease liability is measured.

A reconciliation of the balance sheet line items that were impacted or created as a result of the Company's adoption of ASC 842 as of September 30, 2020 and September 30, 2019 is as follows (in thousands):

	Classification	September 30, 2020		September 30, 2019
Assets
Operating lease assets (a)	Other assets	$	21,548	$	8,080
Finance lease assets (b)	Other assets	1,599		2,591
Total leased assets		$	23,147	$	10,671
Liabilities
Current
Operating (a)	Accrued expenses and other current liabilities	$	3,374	$	2,727
Finance	Current portion of long-term debt and finance lease obligations	812		791
Noncurrent
Operating (a)	Long-term operating lease obligations	19,185		5,846
Finance	Long-term debt and finance lease obligations	1,799		2,611
Total lease liabilities		$	25,170	$	11,975

_____________________

(a) In accordance with ASC 842, $15.7 million of ROU assets related to operating leases were derecognized in the three months ended March 31, 2019 in connection with the Restructuring Plan. Pursuant to ASC 842, each related lease liability is derecognized only after the Company is released from that liability. See Note 10, “Restructuring and other related costs” for further details on the Restructuring Plan and the gain recorded on lease liabilities derecognized in the three and six months ended September 30, 2019.

(b) Finance leases are recorded net of accumulated amortization of $3.4 million and $2.4 million as of September 30, 2020 and September 30, 2019, respectively.

For the three and six months ended September 30, 2020 and September 30, 2019, the components of operating and finance lease costs were as follows (in thousands):

		Three months ended September 30,				Six months ended September 30,
	Classification	2020		2019		2020		2019
Operating lease cost	Selling, general and administrative (“SG&A”) expenses	$	1,046	$	755	$	2,126	$	1,384
Gain from extinguishment of lease liabilities	Restructuring income	—		(5,096)		—		(7,733)
Finance lease cost
Amortization of leased assets	SG&A expenses	247		249		495		499
Interest on lease liabilities	Interest expense, net	36		46		74		94
Total lease cost (gain)		$	1,329	$	(4,046)	$	2,695	$	(5,756)

As of September 30, 2020, the aggregate future minimum lease payments under non-cancellable leases presented in accordance with ASC 842 are as follows (in thousands):

	Operating leases		Finance leases		Total
Remainder of Fiscal 2021	$	1,896	$	475	$	2,371
2022	4,239		908		5,147
2023	3,973		1,208		5,181
2024	4,073		234		4,307
2025	3,673		—		3,673
Thereafter	7,063		—		7,063
Total lease payments	24,917		2,825		$	27,742
Less: Interest	2,358		214
Present value of lease liabilities	$	22,559	$	2,611

For leases commencing prior to January 1, 2019, minimum lease payments exclude payments to landlords for real estate taxes and common area maintenance. These payments can be either fixed or variable, depending on the lease.

As of September 30, 2020 and September 30, 2019, the weighted-average remaining lease term (in years) and discount rate were as follows:

	September 30, 2020		September 30, 2019
Weighted-average remaining lease term
Operating leases	6.5 years		3.5 years
Finance leases	2.8 years		3.8 years
Weighted-average discount rate
Operating leases	2.8	%	4.6	%
Finance leases	5.2	%	5.2	%

Operating cash outflows from operating leases for the six months ended September 30, 2020 and September 30, 2019 were $1.8 million and $9.0 million, respectively.

Leases

Leases

The Company leases warehouses, distribution centers, office space, retail space and equipment. Prior to the Restructuring Plan, the Company also leased 22 e.l.f. retail store locations. The majority of the Company's leases include one or more options to renew, with renewal terms that can extend the lease term for up to five years. The exercise of lease renewal options is at the Company's sole discretion and such renewal options are included in the lease term if they are reasonably certain to be exercised. Certain leases also include options to purchase the leased asset. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Most of the Company's equipment leases are finance leases of assets used to operate its distribution centers in Ontario, California and Columbus, Ohio.

Significant judgment is required to determine whether commercial contracts contain a lease for purposes of ASC 842. The discount rate used in measuring lease liabilities is generally based on the interest rate on the Company’s revolving line of credit, assuming sufficient unused capacity exists at the time the lease liability is measured.

A reconciliation of the balance sheet line items that were impacted or created as a result of the Company's adoption of ASC 842 as of September 30, 2020 and September 30, 2019 is as follows (in thousands):

	Classification	September 30, 2020		September 30, 2019
Assets
Operating lease assets (a)	Other assets	$	21,548	$	8,080
Finance lease assets (b)	Other assets	1,599		2,591
Total leased assets		$	23,147	$	10,671
Liabilities
Current
Operating (a)	Accrued expenses and other current liabilities	$	3,374	$	2,727
Finance	Current portion of long-term debt and finance lease obligations	812		791
Noncurrent
Operating (a)	Long-term operating lease obligations	19,185		5,846
Finance	Long-term debt and finance lease obligations	1,799		2,611
Total lease liabilities		$	25,170	$	11,975

_____________________

(a) In accordance with ASC 842, $15.7 million of ROU assets related to operating leases were derecognized in the three months ended March 31, 2019 in connection with the Restructuring Plan. Pursuant to ASC 842, each related lease liability is derecognized only after the Company is released from that liability. See Note 10, “Restructuring and other related costs” for further details on the Restructuring Plan and the gain recorded on lease liabilities derecognized in the three and six months ended September 30, 2019.

(b) Finance leases are recorded net of accumulated amortization of $3.4 million and $2.4 million as of September 30, 2020 and September 30, 2019, respectively.

For the three and six months ended September 30, 2020 and September 30, 2019, the components of operating and finance lease costs were as follows (in thousands):

		Three months ended September 30,				Six months ended September 30,
	Classification	2020		2019		2020		2019
Operating lease cost	Selling, general and administrative (“SG&A”) expenses	$	1,046	$	755	$	2,126	$	1,384
Gain from extinguishment of lease liabilities	Restructuring income	—		(5,096)		—		(7,733)
Finance lease cost
Amortization of leased assets	SG&A expenses	247		249		495		499
Interest on lease liabilities	Interest expense, net	36		46		74		94
Total lease cost (gain)		$	1,329	$	(4,046)	$	2,695	$	(5,756)

As of September 30, 2020, the aggregate future minimum lease payments under non-cancellable leases presented in accordance with ASC 842 are as follows (in thousands):

	Operating leases		Finance leases		Total
Remainder of Fiscal 2021	$	1,896	$	475	$	2,371
2022	4,239		908		5,147
2023	3,973		1,208		5,181
2024	4,073		234		4,307
2025	3,673		—		3,673
Thereafter	7,063		—		7,063
Total lease payments	24,917		2,825		$	27,742
Less: Interest	2,358		214
Present value of lease liabilities	$	22,559	$	2,611

For leases commencing prior to January 1, 2019, minimum lease payments exclude payments to landlords for real estate taxes and common area maintenance. These payments can be either fixed or variable, depending on the lease.

As of September 30, 2020 and September 30, 2019, the weighted-average remaining lease term (in years) and discount rate were as follows:

	September 30, 2020		September 30, 2019
Weighted-average remaining lease term
Operating leases	6.5 years		3.5 years
Finance leases	2.8 years		3.8 years
Weighted-average discount rate
Operating leases	2.8	%	4.6	%
Finance leases	5.2	%	5.2	%

Operating cash outflows from operating leases for the six months ended September 30, 2020 and September 30, 2019 were $1.8 million and $9.0 million, respectively.