LEASES

3 Months Ended

Mar. 31, 2023

Leases

LEASES

NOTE 2: LEASES

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-02, Leases (“ASC Topic 842”). Under this guidance, lessees are required to recognize on the balance sheet a lease liability and a right-of-use (“ROU”) asset for all leases, except for short-term leases with terms of twelve months or less. The lease liability represents the lessee’s obligation to make lease payments arising from a lease and will initially be measured as the present value of the lease payments. The ROU asset represents the lessee’s right to use a specified asset for the lease term, and will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs.

ASC Topic 842 provides for certain practical expedients when adopting the guidance. The Company elected the package of practical expedients allowing the Company, for all leases that commenced prior to the adoption date, to not reassess whether any expired or existing contracts are, or contain, leases, the lease classification for any expired or existing leases, or initial direct costs for any expired or existing leases.

The Company utilizes the land easements practical expedient allowing the Company to not assess whether any expired or existing land easements are, or contain, leases if they were not previously accounted for as leases under the existing leasing guidance. Instead, the Company will continue to apply its existing accounting policies to historical land easements. The Company elects to apply the short-term lease exception; therefore, the Company will not record an ROU asset or corresponding lease liability for leases with an initial term of twelve months or less that are not reasonably certain of being renewed and instead will recognize a single lease cost allocated over the lease term, generally on a straight-line basis. The Company elects to apply the practical expedient to not separate lease components from non-lease components and instead account for both as a single lease component for all asset classes.

The Company elects to not capitalize any lease in which the estimated value of the underlying asset at the commencement date is less than the Company’s capitalization threshold. A lease would need to qualify for the low value exception based on various criteria.

ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at the lease commencement date. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and a portion is recorded in cost of sales, and the remainder is recorded in selling, general and administrative expenses. The accounting for some leases may require significant judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rate to utilize in our net present value calculation of lease payments for lease agreements which do not provide an implicit rate, and assessing the likelihood of renewal or termination options and impairment.

For the year ended December 31, 2022, the Company recorded impairment charges of $820 for the impairment of its ROU operating lease asset related to the remaining lease of its former operating facility. The impairment was the result of abandoning the former operating facility to move to the Company’s new operating facility in October 2022.

As of March 31, 2023, the Company does not have any subleases.

Operating Leases

	March 31, 2023		December 31, 2022
Assets:
Right-of-use operating lease assets	$	6,077	$	6,184
Liabilities:
Current operating lease liabilities		1,047		863
Non-current operating lease liabilities		6,406		6,518
Total operating lease liabilities	$	7,453	$	7,381

The components of our operating lease expense were as follows:

	Three Months Ended
	March 31,
	2023		2022
Operating lease expense included in cost of sales	$	183	$	313
Operating lease expense included in selling, general and administrative		56		34
Short term lease expense		68		91
Total lease expense	$	307	$	438

Remaining operating lease term and discount rate:

	March 31, 2023	December 31, 2022
Weighted-average remaining lease terms on operating leases (years)	8.31	8.40
Weighted-average discount rates on operating leases	6.250%	6.250%

Finance Lease

	March 31, 2023		December 31, 2022
Assets:
Right-of-use finance lease assets	$	191	$	275
Liabilities:
Current finance lease liabilities	$	195	$	277

The component of our finance lease expense was as follows:

	Three Months Ended
	March 31,
	2023		2022
Finance lease expense included in selling, general and administrative		87		–
Total lease expense	$	87	$	–

Remaining finance lease term and discount rate:

	March 31, 2023	December 31, 2022
Weighted-average remaining lease terms on finance lease (years)	0.02	0.03
Weighted-average discount rates on finance leases	8.230%	8.230%

During the three months ended March 31, 2023, the Company did not have any sale/leaseback transactions.

Present value of lease liabilities:

	Operating Leases			Finance Lease
April 1, 2023 - March 31, 2024	$	1,589		$	199
April 1, 2024 - March 31, 2025		972			–
April 1, 2025 - March 31, 2026		986			–
April 1, 2027 - March 31, 2028		1,003			–
Thereafter		5,977			–
Total lease payments	$	10,527		$	199
Less: Interest		(3,074	)		(4	)
Present value of lease liabilities	$	7,453		$	195