Note 15. Leases

We determine if a contract contains a lease at the inception of an arrangement. If so, ROU assets representing the right to use an underlying asset for the lease term and lease liabilities representing an obligation to make lease payments arising from the lease are included on the consolidated balance sheet.

We have operating and finance leases for facilities, vehicles, and equipment. Some leases include one or more options to renew, with renewal terms that can extend the lease term from five to ten years with exercise of lease renewal options being at the sole discretion of NCS as lessee. Certain leases also include options to purchase the leased property. Some leases may include an option to terminate the contract with notice. ROU assets and lease liabilities with a term of longer than 12 months are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, our interest rate under the senior secured revolving credit facility, adjusted on an annual basis, is used as an incremental borrowing rate applied to the present value calculation at the lease commencement date unless the implicit rate is readily determinable. Lease expense for operating leases is recognized on a straight-line basis over the lease term. We adopted ASU No. 2016-02, Leases (Topic 842) effective January 1, 2019. Upon adoption, ROU assets included any lease payments already made and excluded any initial direct costs.

Our lease agreements are from a lessee perspective and do not contain (i) any leases with variable lease payments (e.g., payments that depend on a percentage of sales of a lessee or payments that increase based upon an index such as a consumer price index), (ii) residual value guarantees probable of being paid, except leased fleet vehicles, or (iii) material restrictive covenants. Lease agreements with lease and non-lease components are generally accounted for separately when practical. For leases where the lease and non-lease component are comingled and the non-lease component is determined to be insignificant when compared to the lease component, the lease and non-lease components are treated as a single lease component for all asset classes.

In February 2020, we commenced an operating lease for our corporate headquarters in Houston, Texas and recorded a long-term asset totaling $2.4 million and a corresponding lease liability. The lease had an initial seven and a half year term with two renewal periods available for an additional five years each.

In May 2020, we commenced a finance lease for land and a building in Odessa, Texas and recorded a long-term asset totaling $4.0 million and a corresponding finance lease liability. The lease had an initial ten-year term with two renewal periods available for an additional five years each.

We also maintain a vehicle leasing arrangement with a fleet management company in order to lease light vehicles and trucks that meet the criteria to record as finance leases. Due to unfavorable market conditions during 2020 associated primarily with the COVID-19 pandemic, we returned many of these vehicles to the fleet management company for sale. During the year ended December 31, 2020, we retired lease vehicles with a historical cost of $3.1 million and accumulated depreciation of $1.9 million, or a net book value of $1.2 million, and an outstanding lease obligation totaling $0.8 million. The fleet management company sold the vehicles and we received proceeds of $1.0 million as of December 31, 2020. The surrender of the assets for sale and the retirement of the related lease obligations of $0.8 million has been included as a non-cash investing and financing activity in the accompanying consolidated statements of cash flows for the year ended December 31, 2020.

As of December 31, 2020, we do not have any lessor leases. Repeat Precision entered into an additional significant lease in Odessa, Texas that had not commenced as of December 31, 2020 in the amount of $2.6 million.

Supplemental balance sheet information related to leases are as follows (in thousands):


			December 31,		December 31,
Leases	Consolidated Balance Sheet Classification		2020		2019
Assets
Operating	Operating lease assets	$	5,170	$	5,071
Finance (1)	Property and equipment, net		5,851		3,379
Total leased right-of-use assets		$	11,021	$	8,450

Liabilities
Current
Operating	Operating lease liabilities	$	1,826	$	2,052
Finance	Current maturities of long-term debt		1,347		1,481

Noncurrent
Operating	Operating lease liabilities, long-term		3,989		3,487
Finance	Long-term debt, less current maturities		4,442		1,436
Total lease liabilities		$	11,604	$	8,456

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(1)

Finance lease right-of-use assets are recorded net of accumulated amortization of $2.2 million and $2.4 million as of December 31, 2020 and 2019, respectively.

The components of lease expense are as follows (in thousands):


		Year Ended December 31,
Lease Cost	Consolidated Statements of Operations Classification	2020		2019
Operating lease cost	Cost of sales; Selling, general and administrative expenses	$	2,193	$	2,891
Finance lease cost
Amortization of right-of-use assets	Depreciation		1,503		1,409
Interest on lease liabilities	Interest expense, net		300		257
Short-term lease cost	Cost of sales; Selling, general and administrative expenses		1,280		898
Total lease cost		$	5,276	$	5,455

Total lease expense charged to consolidated statements of operations for operating leases was $3.5 million, $3.8 million and $3.4 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Maturities of lease liabilities are as follows (in thousands):


Year Ending December 31,	Operating Leases		Finance Leases
2021	$	2,074	$	1,597
2022		1,335		1,274
2023		837		742
2024		744		493
2025		613		492
Thereafter		930		2,182
Total lease payments	$	6,533	$	6,780
Less: interest		718		991
Present value of lease liabilities	$	5,815	$	5,789

Lease term and discount rate consist of the following:


	December 31,			December 31,
Lease Term and Discount Rate	2020			2019
Weighted-average remaining lease term (years):
Operating leases		4.1			2.9
Finance leases		7.2			1.6
Weighted-average discount rate:
Operating leases		5.4	%		5.9	%
Finance leases		4.9	%		5.5	%

Supplemental cash flow and other information related to leases are as follows (in thousands):


	Year Ended		Year Ended
	December 31,		December 31,
Other Information	2020		2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	2,324	$	3,278
Operating cash flows from finance leases		300		257
Financing cash flows from finance leases		1,634		1,705