8. Leases

Lessee

At the inception of an arrangement, the Company determines whether the arrangement contains a lease. This includes arrangements with goods and services to determine if there is an embedded lease. An arrangement containing a lease would allow the Company the right to control an implicitly or explicitly identified asset. If there is a lease in an arrangement, the classification is determined at inception of the arrangement. Certain leases may contain transfer of ownership or an option to purchase the underlying asset. The most relevant criterion for our lease classification is transfer of ownership, which if included in the arrangement makes the lease a finance lease rather than an operating lease.

The discount rate used to assess classification is the incremental borrowing rate at the commencement date due to the implicit rate not being readily determinable. The incremental borrowing rate is the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment. The lease term includes periods where we are reasonably certain we will exercise the renewal option. The Company has elected not to apply Subtopic ASC 842-25 to short-term leases, which are defined as a lease that has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. Therefore, there are no right-of-use assets or lease liabilities related to short-term leases in the Consolidated Balance Sheets and the lease payments are expensed on a straight-line basis over the lease term. Leases are typically not able to be terminated without penalty. None of our lease arrangements contain residual value guarantees, restrictions, or covenants. None of the Company’s current leases are with related parties. There are no lease arrangements that we have entered into as of March 31, 2020 that have not yet commenced.

Operating leases

The Company has operating leases for office space, data centers, and other information technology equipment under various leases. Operating lease right-of-use assets and liabilities are recognized at the commencement date using the present value of the fixed lease payments over the lease term. We do not have leases with variable consideration. The incremental borrowing rate is used in determining present value. Certain operating leases, primarily office space and IT equipment, have an option to extend the lease. Renewal periods related to certain lease agreements related to office buildings are included in the lease term for lease accounting.

The Company has operating lease agreements with lease components (e.g. fixed payments including rent, real estate taxes, and insurance costs) as well as nonlease components (e.g. common-area maintenance, colocation services). The Company has elected to account for lease and nonlease components as one single lease component for all classes of assets. Lease expense is recognized on a straight-line basis over the lease term.

Finance leases

The Company has finance leases for information technology equipment and subleases all this equipment (see Lessor section below for details). All finance leases transfer ownership to the Company, which meets the criterion to be a finance lease. Due to our finance leases being subleases, there is no finance right-of-use assets. However, there is a net investment in lease in the Consolidated Balance Sheets.

Lessor

The Company is a lessor, but only as a sublessor. The process for identifying and classifying a lease is similar to the process described above in the lessee section. Additionally, the most relevant criteria to classification is transfer of ownership and present value of the total lease payments in relation to fair value of the underlying asset. The Company as a lessor has both sales-type and direct financing leases. The Company as a lessor does not have operating leases. All the Company’s sublease agreements are bundled agreements containing managed services, software, and other services. The fixed payments under bundled agreements are allocated based on the relative standalone selling prices of the lease and non-lease deliverables are consistent with ASC 606. The allocation of the fixed payments may be calculated using a budgeted cost-plus margin approach if there are other services in addition to managed services. Due to the complex nature of these contracts, there is significant judgment in allocating the fixed payments. There is no variable consideration in these agreements. The discount rate used as a lessor pertaining to the lease component is the implicit rate. As sublessor, lease agreements contain an option to purchase the underlying asset or transfers ownership at the end of the lease. The leases typically do not have any residual value to the Company. In the Company’s sublessor agreements, the payments allocated to the lease component cannot be terminated. There were no new agreements where the Company was a lessor for the six months ended March 31, 2020.

Information related to both lessee and lessor

The following table specifies where the right-of-use assets and lease liabilities are within the Consolidated Balance Sheets as of March 31, 2020 and October 1, 2019 (adoption date):


	Consolidated Balance Sheets Location	March 31, 2020		October 1, 2019
		(Amounts in thousands)		(Amounts in thousands)
Assets
Operating leases	Operating lease right-of-use assets	$	2,131	$	2,448

Lease receivable - current	Investment in lease, net-current portion	$	399	$	367
Lease receivable - noncurrent	Investment in lease, net-less current portion		207		417
Total lease receivable		$	606	$	784

Liabilities
Current operating lease liabilities	Accounts payable and accrued expenses	$	667	$	746
Non-current operating lease liabilities	Operating lease liabilities - noncurrent portion		1,529		1,783
Total operating lease liabilities		$	2,196	$	2,529

Current finance lease liabilities	Accounts payable and accrued expenses	$	343	$	333
Non-current finance lease liabilities	Other noncurrent liabilities		152		326
Total finance lease liabilities		$	495	$	659

The components of lease costs for three and six months ended March 31, 2020 are as follows:


		Three months ended		Six months ended
Consolidated Statements of Operations Location	Consolidated Statements of Operations Location		March 31, 2020	March 31, 2020
		(Amounts in thousands)		(Amounts in thousands)
Finance Lease:
Interest on lease liabilities	Selling, general, and administrative	$	12	$	25
Operating Lease:
Operating lease cost	Selling, general, and administrative		181		361
Short-term lease cost	Selling, general, and administrative		3		6
Total lease costs		$	196	$	392
Less sublease interest income	Revenue		(23)		(49)
Total lease costs, net of sublease interest income		$	173	$	343

Future lease payments under our non-cancellable leases and payments to be received as a sublessor as of March 31, 2020 are in the following table:


	Operating lease		Finance lease		Sublease
Fiscal year ending September 30:	Costs		Costs		Payments received
	(Amounts in thousands)
2020 (remaining 6 months)	$	383	$	181	$	224
2021		619		285		356
2022		520		51		67
2023		439		5		12
2024		240		—		3
Thereafter		182		—		—
Total	$	2,383	$	522	$	662
Less Imputed interest		(187)		(27)		(56)
Total	$	2,196	$	495	$	606

Supplemental cash flow information related to leases for the six months ended March 31, 2020 is below:


	Three months ended		Six months ended
	March 31, 2020		March 31, 2020
	(Amounts in thousands)		(Amounts in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	191	$	379
Operating cash flows from short-term leases		10		19
Operating cash flows from finance leases		12		25
Financing cash flows from finance leases		79		157
Lease assets obtained in exchange for new lease liabilities
Operating leases		—		4
Cash received from subleases		112		225

Information related to weighted averages of lease term and discount rate as of March 31, 2020 is below:


Weighted-average remaining lease term (years)	March 31, 2020
Operating leases	4.0
Finance leases	2.3

Weighted-average discount rate	March 31, 2020
Operating leases	4.0%
Finance leases	6.2%

Below are ASC 840 disclosures as previously reported in our Form 10-K for the year ended September 30, 2019:

Lessee

Operating Leases

The Company was obligated under non-cancelable operating leases with an initial term in excess of one year as follows:


Fiscal year ending September 30:	(Amounts in thousands)
2020 (full year)	$	475
2021		173
2022		58
2023		43
Total	$	749

Capital leases

The Company was obligated under non-cancelable capital leases as follows:


Fiscal year ending September 30:	(Amounts in thousands)
2020 (full year)	$	363
2021		285
2022		51
2023		5
Minimum lease payments including interest	$	704
Amount representing interest		(46)
Minimum lease payments excluding interest	$	658

Lessor

A summary of components for the Company’s investment in lease, net is as follows:


	September 30, 2019
	(Amounts in thousands)
Investment in lease, gross	$	889
Unearned income		(105)
Total investment in lease, net	$	784
Current portion	$	367
Noncurrent portion	$	417

The schedule of future minimum lease payments receivable is as follows:


Fiscal year ending September 30:	(Amounts in thousands)
2020 (full year)	$	451
2021		356
2022		67
2023		12
2024		3
Minimum lease payments including interest	$	889
Amount representing interest		(105)
Minimum lease payments excluding interest	$	784