NOTE 5—LEASES

The Company adopted ASC 842 on May 1, 2019 using the modified retrospective transition method; and therefore, the comparative information has not been adjusted for the three and nine months ended January 31, 2019 or as of April 30, 2019. Upon transition to the new standard, the Company elected the package of practical expedients, which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.

The Company leases buildings and equipment under operating and finance leases. The majority of the Company’s operations are conducted in premises occupied under lease agreements with initial base terms ranging from 5 to 15 years, with certain leases containing options to extend the leases for up to an additional 10 years. The Company typically does not believe that exercise of the renewal options is reasonably assured at the inception of the lease agreements and, therefore, considers the initial base term as the lease term. Lease terms vary but generally the leases provide for fixed and escalating rentals or contingent escalating rentals based on the Consumer Price Index.

Operating lease ROU assets and lease liabilities were recognized at commencement date based on the present value of minimum lease payments over the remaining lease term. The minimum lease payments include base rent payments. The Company’s leases have remaining lease terms of approximately 1 year to 8 years, which may include the option to extend the lease when it is reasonably certain the Company will exercise that option. The present value of the lease payments is calculated using the incremental borrowing rate for operating leases, which was determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. Operating lease expense is recognized on a straight-line basis over the lease term.

The Company’s lease agreements do not contain any material residual value guarantees. The Company elected the practical expedient to not separate lease and non-lease components and also elected the short-term practical expedient for all leases that qualify. As a result, the Company will not recognize ROU assets or liabilities for short-term leases that qualify for the short-term practical expedient, but instead will recognize the lease payments as lease cost on a straight-line basis over the lease term.

As a result of adopting ASC 842, the Company’s consolidated balance sheet includes additional operating ROU lease assets and total operating lease liabilities of $2,075,000 and $2,340,000, respectively, at January 31, 2020. The initial measurement occurring on May 1, 2019, resulted in operating lease ROU assets of $2,267,000, finance lease ROU assets of $98,000, current operating lease liabilities of $380,000, current finance lease liabilities of $73,000, noncurrent operating lease liabilities of $2,093,000, and noncurrent finance lease liabilities of $25,000. The difference of $206,000 between the ROU assets and the lease liabilities results from a reclassification of deferred rent to the operating lease ROU asset of $206,000.

The following table provides the operating and finance ROU assets and lease liabilities:


	Balance Sheet Classification		January 31, 2020
Assets
Operating lease right-of-use assets	Operating right-of-use assets	$	2,075,000
Finance lease right-of-use assets	Property, plant and equipment, net		45,000
Total leased assets		$	2,120,000

Liabilities
Current
Operating lease liabilities	Current maturities of operating lease liabilities	$	395,000
Finance lease liabilities	Current maturities of finance lease liabilities		45,000
Noncurrent
Operating lease liabilities	Operating lease liabilities, less current maturities		1,945,000
Total lease liabilities		$	2,385,000

The components of lease expense were as follows:


	Three Months Ended		Nine Months Ended
		January 31, 2020		January 31, 2020

Operating lease expense	$	155,000	$	408,000
Finance lease expense
Amortization of right-of-use assets		11,000		34,000
Interest on lease liabilities		1,000		5,000
Total finance lease expense		12,000		39,000
Total lease expense	$	167,000	$	447,000

The supplemental components of cash flows were as follows:


	Nine Months Ended
		January 31, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	349,000
Financing cash flows from finance leases		53,000
Total cash paid for amounts included in the measurement of lease liabilities	$	402,000

The following table represents the weighted-average remaining lease term and discount rate as of January 31, 2020:


	January 31, 2020
	Weighted Average	Weighted Average
	Remaining	Discount
Lease Term and Discount Rate	Lease Term (years)	Rate
Operating leases	6.82	4.52%
Finance leases	0.67	5.43%

Future minimum lease payments on the amended operating lease and future minimum finance lease payments as of January 31, 2020 are as follows:


	Finance Lease		Operating Lease
Fiscal Years Ending April 30,	Payments		Payments
2020	$	18,000	$	122,000
2021		27,000		436,000
2022		—		448,000
2023		—		452,000
2024		—		452,000
2025		—		456,000
2026		—		467,000
2027		—		350,000
	$	45,000	$	3,183,000