Note 10. Leases

The Company leases an 85,000 square foot facility at 7050 Winnetka Avenue North, Brooklyn Park, Minnesota consisting of corporate offices, manufacturing and warehouse space.  The lease term is ten years and two months, ending on February 28, 2025 and is renewable.   Upon proper notice and payment of a termination fee of approximately $249,000, the Company has a one-time option to terminate the lease effective as of the last day of the eighth year of the term after the Company commenced paying base rent. The renewal and termination options have not been included within the lease term because it is not reasonably certain that the Company will exercise either option.

On October 9, 2020, the Company entered into an indirect lease arrangement for its existing 46,000 square foot manufacturing facility in Tijuana, Mexico. The Company had previously been leasing this facility on a month to month basis after its three-year lease expired on July 31, 2020. The new lease term is three years. This lease contains an option to renew and rent payments that increase annually based on U.S. inflation for the preceding 12 months. The renewal option has not been included within the lease term because it is not reasonably certain that the Company will exercise the option.

On February 12, 2020, the Company entered into an indirect lease arrangement for an additional 52,000 square foot manufacturing facility in Tijuana, Mexico. The lease term was approximately 42 months and commenced on February 12, 2020. The lease contained options to renew for two additional consecutive periods of three years each. On October 28, 2021, the Company and landlord agreed to end the lease early on February 28, 2022, including a lease termination fee of $92,000.

In July 2021, the Company entered into an indirect lease arrangement for an approximately 318,000 square foot manufacturing facility that is currently being constructed in Tijuana, Mexico. The lease term is for 7 years of which 5 years are mandatory, commencing March 2022. The lease contains written options to renew for two additional consecutive periods of 5 years each. We expect to begin transitioning the current Mexico manufacturing operations into the newly leased facility in the second quarter of fiscal 2022. The lease calls for monthly rental payments of $162,000, increasing 2% annually. The renewal options have not been included within the lease term because it is not reasonably certain that the Company will exercise either option. Upon lease commencement, we will recognize an additional right of use asset and associated lease liability of approximately $9.4 million. As this lease has not yet commenced as of December 31, 2021, the future payments under this lease are not included in the future lease payments schedule below.

On November 19, 2021, the Company signed a lease for a 105,000 square foot warehouse being constructed in Brooklyn Park, MN. The lease term is five years beginning March 1, 2022 and ending on February 28, 2027, with rent payments increasing annually. The lease includes an option to extend the lease for an additional five years. The renewal option has not been included within the lease term because it is not reasonably certain that the Company will exercise the option. Upon lease commencement, we will recognize an additional right of use asset and associated lease liability of approximately $3.3 million. As this lease has not yet commenced as of December 31, 2021, the future payments under this lease are not included in the future lease payments schedule below.

         Right-of-use lease assets and lease liabilities are recognized as of the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods the Company is reasonably certain to exercise. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.

Operating lease expense included within cost of goods sold and selling, general and administrative expense was as follows for the three months ended:

Future maturities of lease liabilities were as follows as of December 31, 2021 (in thousands):

The weighted average term and weighted average discount rate for the Company’s leases as of December 31, 2021 were 2.82 years and 3.41%, respectively, compared to 3.56 years and 3.40%, respectively, as of December 31, 2020. For the three months ended December 31, 2021, the operating cash outflows from the Company’s leases was $312,000, compared to $240,000 for the three months ended December 31, 2020.