Leases | NOTE 12. LEASES At the inception of a contract, the Company assesses whether the contract is, or contains, a lease. Leases are classified as either finance leases or operating leases based on criteria in Accounting Standards Codification (“ASC”) 842. Operating leases are included in ROU assets-Operating lease, Current Operating Lease liabilities and Operating lease liabilities, finance leases are included in Property and Equipment and Other Liabilities in the condensed Consolidated Balance Sheet. Right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the lease did not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in China market. ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases, consisting of lease payments, is recognized on a straight-line basis over the lease term. Lease expense for finance leases consists of the amortization of the ROU asset on a straight-line basis over the asset’s estimated useful life and interest expense is calculated using the amortized cost basis. As of October 31, 2020, the Company has multiple operating leases for office spaces and a finance lease of land and hotel building. Our operating leases have remaining lease terms ranging from two years to six years, with various term extensions available. Our finance lease has remaining lease term of thirty-one years. The Company has elected not to recognize ROU assets and lease liabilities for short-term operating leases that have a term of twelve months or less. On June 2018 and January 2019, HFSH and HF Int’l Education entered two lease agreements with Shanghai Longjin Corporate Management Co., Ltd (the “Sublessor”) to lease office spaces (the “Subleases”). HFSH and HF Int’l Education received Notices of Lease Termination from the Sublessor for late payments on April 13, 2020 and filed a civil lawsuit against the Sublessor on July 10, 2020 (see Note 15). And the original lease agreement entered between the Sublessor and the landlord of the office building (the “Landlord”) was terminated by the Landlord on June 1, 2020 due to payment default. The two sublease agreements entered with the Sublessor was terminated on June 1, 2020 and approximately $921,000 ROU and $891,000 lease liability associated with the two Subleases as of May 31, 2020 were eliminated and $29,000 other expenses was recognized as a result. HF Int’l Education entered a new lease agreement with the Landlord on June 1, 2020 for the same office spaces with a five-year term. On September 1, 2020, Gelinke entered a five-year new lease agreement at the same location upon the completion of the acquisition. Approximately $1.21 million ROU and $1.26 million lease liability were recorded associated with the new lease as of October 31, 2020. The finance lease was obtained through HZLJ acquisition on March 22, 2019. On October 1, 2010, HZLJ took over the lease of the land and hotel building for 41 years. Finance lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease-related assets and liabilities on October 31, 2020 and July 31, 2020 were as follows: October 31, 2020 July 31, 2020 (unaudited) Assets Finance lease right-of-use assets, cost $ 280,735 $ 269,304 Less: accumulated amortization (69,043 ) (64,589 ) Finance lease right-of-use assets, net 211,692 204,715 ROU assets-Operating lease 5,696,692 4,499,693 Total Lease ROU assets $ 5,908,384 $ 4,704,408 Liabilities Current Operating Lease liabilities $ 1,033,849 $ 739,352 Operating lease liabilities, noncurrent 4,888,686 3,916,259 Finance lease liabilities, noncurrent 336,076 336,791 Total Lease liabilities $ 6,258,611 $ 4,992,402 The components of lease cost for the three months ended October 31, 2020 and 2019 was as follows: Three months ended October 31, 2020 2019 (unaudited) (unaudited) Operating lease cost $ 345,713 $ 203,570 Finance leases: Amortization of ROU assets 1,712 1,627 Interest on finance lease liabilities 6,661 6,242 Finance lease cost 8,373 7,869 Total lease cost $ 354,086 $ 211,439 Supplemental cash flow information for leases for the three months ended October 31, 2020 and 2019 was as follows: Three months ended October 31, 2020 2019 (unaudited) (unaudited) Operating cash flows paid for operating leases $ 54,230 $ 122,782 Financing cash flows paid for finance leases 21,257 19,739 The weighted-average remaining lease term and weighted-average discount rate for operating and finance leases at October 31, 2020 was as follows: Operating Leases Finance Leases Weighted-average remaining lease term (years) 4.8 30.8 Weighted-average discount rate 8 % 8 % The following table reconciles the undiscounted future minimum lease payments for operating and finance leases executed at October 31, 2020: Operating Leases Finance Leases 2021 (excluding the three-month ended October 31, 2020) $ 1,080,361 $ - 2022 1,549,358 22,418 2023 1,528,805 23,165 2024 1,483,184 23,912 2025 1,399,269 24,659 2026 and thereafter 112,468 948,260 Total lease payments $ 7,153,445 $ 1,042,414 Less interest (1,230,910 ) (706,338 ) Present value of future lease payments $ 5,922,535 $ 336,076 Current Lease liabilities 1,033,849 - Noncurrent Lease liabilities 4,888,686 336,076 |