Leases

6 Months Ended

Jun. 30, 2022

Leases [Abstract]

Leases

Note 8: LEASES

The Company has operating leases for its facilities where the Company conducts its operations. These leases have remaining lease terms ranging from 1 year to 19.2 years.

All real estate leases are recorded on the balance sheet. Equipment and other non-real estate leases with an initial term of twelve months or less are not recorded on the balance sheet. Lease agreements for some locations provide for rent escalations and renewal options. Many leases include one or more options to renew the lease at the end of the initial term. The Company considered renewals in its right-of-use assets and operating lease liabilities. Certain real estate leases require payment for taxes, insurance and maintenance which are considered non-lease components. The Company accounts for real estate leases and the related fixed non-lease components together as a single component.

The Company determines if an arrangement is a lease at inception. The Company must consider whether the contract conveys the right to control the use of an identified asset. Certain arrangements require significant judgment to determine if an asset is specified in the contract and if the Company directs how and for what purpose the asset is used during the term of the contract.

There are no material residual guarantees associated with any of the Company’s leases, and there are no significant restrictions or covenants included in the Company’s lease agreements. Certain leases include variable payments related to common area maintenance and property taxes, which are billed by the landlord, as is customary with these types of charges for office space.

The Company’s lease agreements occasionally provide an implicit borrowing rate. When implicit borrowing rates are provided, the Company utilizes these implicit borrowing rates to calculate right-of-use assets and liabilities at the end of each reporting period. The Company may enter into leases that do not provide an implicit borrowing rate. When an implicit borrowing rate is not provided, the Company uses a benchmark approach to derive an appropriate imputed discount rate. The Company will benchmark itself against other companies of similar credit ratings and compare quality and derive an imputed rate, which was used in a portfolio approach to discount its lease liabilities.

For the three months ended June 30, 2022 and 2021 the Company recorded $2,595 and $2,400 in operating lease expense, respectively. For the six months ended six months ended June 30, 2022 and 2021 the Company recorded $7,417 and $4,868 in operating lease expense, respectively.

(a) The Company as a Lessee

The following table summarizes the Company’s operating leases:

	Classification - Consolidated Balance Sheet	June 30, 2022		December 31, 2021
Assets
Operating lease assets	Operating Lease Assets	$	106,406	$	100,519
Liabilities
Current
Operating	Current portion of operating lease liabilities		4,121		3,629
Noncurrent
Operating	Operating lease liabilities		101,380		93,111
Total lease liabilities		$	105,501	$	96,740

The components of lease expense are included in cost of goods sold, general and administrative expenses, and selling and marketing expenses, based on the underlying use of the right-of-use asset.

Maturities of lease liabilities for third-party operating leases as of June 30, 2022 were as follows:

	Operating Leases
2022	$	8,329
2023		16,987
2024		17,491
2025		17,633
2026		18,056
2027		18,076
2028 and Thereafter		234,359
Total undiscounted cash flows	$	330,931
Less discounting		(225,430	)
Total lease payments	$	105,501

The Company has right-of-use assets and lease liabilities for leased real estate for dispensaries, cultivation and production facilities and office space. The incremental borrowing rate used for leases for 2022 was 10.25 - 18% and was 10.25 - 17% for 2021.

(b) The Company as a Lessor:

The Company leases a building in Elma, Washington that is subleased by the Company to a third party. This sublease is classified as a finance lease with a long term lease receivable balance of $6,541 and a short term lease receivable balance of $3,405 as of June 30, 2022 compared to a long term lease receivable balance of $6,748 and a short term lease receivable balance of $3,630 as of December 31, 2021. This lease generated $676 of the $2,951 and $570 of the $2,669 in real estate income for the three months ended June 30, 2022 and 2021, respectively. This lease generated $1,368 of the $5,916 and $1,361 of the $5,559 in real estate income for the six months ended June 30, 2022 and 2021, respectively.

The Company owned buildings in Olympia, Washington that were leased to a third party. This lease was classified as a finance lease. On December 17, 2020, the Company sold the Olympia building and other assets as part of a sale and leaseback transaction and this lease was cancelled. The Company applied ASC 842 to a new sublease to the same third party and classified the new sublease as an operating lease. The lease receivable was sold to the purchaser of the assets as part of the sale and leaseback transaction. This lease generated $2,275 of the $2,951 and $2,099 of the $2,669 in real estate income for the three months ended June 30, 2022 and 2021, respectively. This lease generated $4,548 of the $5,916 and $4,198 of the $5,559 in real estate income for the six months ended June 30, 2022 and 2021, respectively.

The following table summarizes changes in the Company’s lease receivables:

	June 30, 2022			December 31, 2021
Balance, beginning of the year	$	10,378		$	11,045
Interest		1,368			2,783
Lease payments received		(1,800	)		(3,450	)
Balance, end of the period	$	9,946		$	10,378
Less current portion		(3,405	)		(3,630	)
Long-term lease receivables	$	6,541		$	6,748

Future minimum lease payments receivable (principal and interest) on the leases are as follows:

	Operating Leases
2022	$	1,830
2023		1,575
2024		—
2025		—
2026		—
Thereafter		—
Total minimum lease payments		3,405
Effect of discounting		(431	)
Present value of minimum lease payments		2,974
Present value of residual value of leased property		6,972
Total lease receivable		9,946
Current portion lease receivable		(3,405	)
Long-term lease receivable	$	6,541