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Note 7. Leases

3 Months Ended

Sep. 30, 2019

Management determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. Such assets are classified as ROU assets with a corresponding lease liability.

Finance and operating lease ROU assets and liabilities are recorded at commencement at the present value of future minimum lease payments over the expected lease term. As the implicit discount rate for the present value calculation is not determinable in most of the Company’s leases, management uses the Company’s incremental borrowing rate based on the information available at commencement of the lease. The expected lease terms include options to extend the lease when it is reasonably certain the Company will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term. Leases with an expected term of 12 months or less are not accounted for on the balance sheet and the related lease expense is recognized on a straight-line basis over the expected lease term.

The Company has operating and finance leases for various administrative, manufacturing, and distribution facilities and equipment. Most of the Company’s leases include one or more options to renew and extend the lease term 2 years to 5 years. The exercise of lease renewal options is typically at the Company's sole discretion, however, as a material economic incentive to exercise the option exists, the majority of renewals to extend the lease terms are included in the ROU assets and lease liabilities as they are reasonably certain of exercise. The Company’s lease agreements do not contain any material nonlease components, residual value guarantees, or material restrictive covenants.

Leases recorded on the balance sheet consist of the following:

Leases	Classification on the Balance Sheet	September 30, 2019

Assets
Operating lease assets	Property and equipment, net	$	3,534,949
Finance lease assets	Property and equipment, net	$	2,795,834

Liabilities
Current
Operating	Current portion of operating lease liability	$	897,209
Finance	Current portion of finance lease liability	$	299,421
Noncurrent
Operating	Operating lease liability, net of current portion	$	2,637,740
Finance	Finance lease liability, net of current portion	$	2,830,489

Other information related to lease term and discount rate is as follows:

	September 30, 2019
Weighted Average Remaining Lease Term
Operating leases	3.8 years
Finance leases	9.3 years

Weighted Average Discount Rate
Operating leases		4.6%
Finance leases		5.8%

The components of lease expense are as follows:

	Classification on the Statement of Operations	Three Months Ended September 30, 2019
Operating lease cost:
Operating lease cost	Cost of sales	$	70,515
Operating lease cost	Selling, general, and administrative expenses		187,401
Short term lease cost	Selling, general, and administrative expenses		15,750

Finance lease cost:
Amortization of finance lease assets	Cost of sales	$	35,670
Amortization of finance lease assets	Selling, general, and administrative expenses		48,857
Interest on finance lease liabilities	Interest expense, net		44,867
Total lease cost		$	403,060

Supplemental cash flow information related to leases is as follows:

	Three Months Ended September 30, 2019
ROU assets obtained in exchange for lease liabilities:
Operating leases	$	3,749,809
Finance leases	$	3,086

Future minimum lease payments are summarized as follows:

	Operating Leases		Finance Leases
Year ending June 30,
2020 (excluding the three months ended September 30, 2019)	$	486,000	$	341,250
2021		190,000		462,286
2022		-		469,536
2023		-		443,056
2024		-		384,754
Thereafter		-		2,113,348
Total future minimum lease payments	$	676,000	$	4,214,230

Imputed interest				904,615
Deferred rent				177,181

The Company leases office, manufacturing and warehouse facilities in Northvale, New Jersey; and Eagan, Minnesota from employees, shareholders, and entities controlled by shareholders, who were previously principals of businesses acquired by the Company. The combined expenses associated with these related-party transactions totaled $261,666 and $261,780 for the three months ended September 30, 2019 and 2018, respectively.