Summary of Significant Accounting Policies (Policies)

3 Months Ended

Sep. 30, 2020

Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“U.S. GAAP”) applicable to interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements, although the Condensed Consolidated Balance Sheet at June 30, 2020 was derived from the audited Consolidated Balance Sheet at that date. In the opinion of management, all adjustments (which include all significant normal and recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The accompanying results of operations are not necessarily indicative of the operating results that may be expected for the entire fiscal year ending June 30, 2021, particularly in light of the pandemic caused by the novel strain of coronavirus (COVID-19). The Company believes its business is essential, which allows it to continue to serve customers that remain operational. However, if the Company is required to close a certain number of its locations or a number of its employees cannot work because of illness or otherwise, its business could be materially adversely affected in a rapid manner. Similarly, if customers experience adverse business consequences due to the COVID-19 pandemic, including being required to shut down their operations, demand for the Company’s services and products could also be materially adversely affected in a rapid manner. The impact of the COVID-19 pandemic is fluid, continues to evolve and, therefore, at this time it cannot be reasonably predicted to what extent the Company’s consolidated results of operations and financial condition will ultimately be impacted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes thereto of the Company, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 filed with the Securities and Exchange Commission (“SEC”).

Unless otherwise indicated, references to “FY 2020” and “FY 2021” are to the quarter ended September 30, 2019 and 2020, respectively.

Principles of Consolidation

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes include assumptions used in assigning value to identifiable intangible assets at the acquisition date, the assessment for impairment of goodwill, the assessment for impairment of other intangible assets, the allowance for doubtful accounts, share-based compensation expense, residual value of the lease fleet, derivative liability valuation and deferred tax assets and liabilities. Assumptions and factors used in the estimates are evaluated on an annual basis or whenever events or changes in circumstances indicate that the previous assumptions and factors have changed. The results of the analysis could result in adjustments to estimates. The COVID-19 pandemic and the efforts to contain it have, among other things, negatively impacted the global economy and created significant volatility and disruption of financial markets. In addition, the COVID-19 pandemic has significantly increased economic and demand uncertainty. The Company believes the estimates and assumptions underlying the accompanying consolidated financial statements are reasonable and supportable based on the information available at the time the financial statements were prepared. However, uncertainty over the impact COVID-19 will have on the global economy and the Company’s business in particular makes many of the estimates and assumptions reflected in these consolidated financial statements inherently less certain. Therefore, actual results may ultimately differ from those estimates to a greater degree than historically.

Inventories

Inventories

Inventories are comprised of the following (in thousands):

	June 30,		September 30,
	2020		2020
Finished goods	$	17,347	$	16,239
Work in progress		1,161		1,639
Raw materials		2,420		2,314
	$	20,928	$	20,192

Property, Plant and Equipment

Property, Plant and Equipment

Property, plant and equipment consist of the following (in thousands):

	Estimated		June 30,		September 30,
	Useful Life		2020		2020
Land		—	$	2,168	$	2,168
Building and improvements		10 — 40 years		4,899		4,899
Transportation and plant equipment (including finance lease assets - see Note 9)		3 — 20 years		50,497		51,522
Furniture, fixtures and office equipment		3 — 10 years		14,583		14,910
				72,147		73,499
Less accumulated depreciation and amortization				(47,751)		(49,435)
			$	24,396	$	24,064

Depreciation expense on property, plant and equipment totaled $1,586,000 and $1,637,000 for FY 2020 and FY 2021, respectively.

Lease Fleet

Lease Fleet

The Company has a fleet of storage, portable building, office and portable liquid storage tank containers, mobile offices, modular buildings and steps that it primarily leases to customers under operating lease agreements with varying terms. Units in the lease fleet are also available for sale. The cost of sales of a unit in the lease fleet is recognized at the carrying amount at the date of sale. At June 30, 2020 and September 30, 2020, the gross costs of the lease fleet were $613,358,000 and $618,643,000, respectively. Depreciation expense on lease fleet totaled $6,959,000 and $6,755,000 for FY 2020 and FY 2021, respectively.

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

The purchase consideration of acquired businesses have been allocated to the assets and liabilities acquired based on the estimated fair values on the respective acquisition dates (see Note 4). Based on these values, the excess purchase consideration over the fair value of the net assets acquired was allocated to goodwill. The Company accounts for goodwill in accordance with FASB ASC Topic 350, Intangibles — Goodwill and Other. FASB ASC Topic 350 prohibits the amortization of goodwill and intangible assets with indefinite lives and requires these assets be reviewed for impairment. The Company operates two reportable geographic areas and the vast majority of goodwill recorded was in the acquisitions of Royal Wolf, Pac-Van, Southern Frac and Lone Star. The Company assesses the potential impairment of goodwill on an annual basis or if a determination is made based on a qualitative assessment that it is more likely than not (i.e., greater than 50%) that the fair value of the reporting unit is less than its carrying amount. The Company’s annual impairment assessment at June 30, 2019 concluded that the fair value of the goodwill of each of its reporting units was greater than their respective carrying amounts.

The North American oil and gas market has been, and the Company expects it to continue to be, highly cyclical, generally fluctuating in correlation with the price of West Texas Intermediate Crude (“WTI”). The decrease in demand caused by, among other things, the COVID-19 pandemic resulted in a substantial decline in WTI prices and drilling activity which is likely to continue longer than previously anticipated. Specifically impacting the Company is a reduction in drilling activity of oil wells located in the Permian and Eagle Ford shales basins in Texas, the two primary basins in which it operates. At June 30, 2020, the Company’s annual impairment test for Lone Star, which does its business in the Permian and Eagle Ford shales basins, determined that the implied value of goodwill at Lone Star, based on a discounted cash flow basis, was less than its carrying value and, as a result, a $14,160,000 impairment charge was recorded. The Company’s annual impairment assessment at June 30, 2020 for its other operating units concluded that the fair value of the goodwill for each of them was greater than their respective carrying amounts.

At September 30, 2020, the Company determined that qualitative factors in its North American leasing operations pertaining to conditions in the oil and gas market did not change significantly since June 30, 2020 and, as a result, a quantitative impairment analysis for Lone Star was not required.

Determining the fair value of a reporting unit requires judgment and involves the use of significant estimates and assumptions. The Company based its fair value estimates on assumptions that it believes are reasonable but are uncertain and subject to changes in market conditions.

Other intangible assets include those with indefinite lives (trademark and trade name) and finite lives (primarily customer base and lists, non-compete agreements and deferred financing costs), as follows (in thousands):

	June 30, 2020						September 30, 2020
	Gross						Gross
	Carrying		Accumulated		Net Carrying		Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount		Amount		Amortization		Amount
Trademark and trade name	$	5,486	$	(453)	$	5,033	$	5,486	$	(453)	$	5,033
Customer base and lists		31,691		(19,612)		12,079		31,712		(20,286)		11,426
Non-compete agreements		8,651		(8,226)		425		8,669		(8,286)		383
Deferred financing costs		3,643		(2,769)		874		3,643		(2,893)		750
Other		2,828		(2,468)		360		2,948		(2,620)		328
	$	52,299	$	(33,528)	$	18,771	$	52,458	$	(34,538)	$	17,920

Amortization expense related to amortizable intangible assets, other than deferred financing costs, totaled $967,000 and $773,000 for FY 2020 and FY 2021, respectively. Amortization expense, which is included in interest expense, related to deferred financing costs recorded as amortizable intangible assets totaled $116,000 and $124,000 for FY 2020 and FY 2021, respectively.

Revenue from Contracts with Customers

Revenue from Contracts with Customers

The Company leases and sells new and used storage, office, building and portable liquid storage tank containers, modular buildings and mobile offices to its customers, as well as provides other ancillary products and services. The Company recognizes revenue in accordance with two accounting standards. The rental revenue portions of the Company’s revenues that arise from lease arrangements are accounted for in accordance with Topic 842, Leases. Revenues determined to be non-lease related, including sales of lease inventories and fleet, sales of manufactured units and rental-related services, are accounted for in accordance with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).

Our portable storage and modular space rental customers are generally billed in advance for services, which generally includes fleet pickup. Liquid containment rental customers are typically billed in arrears monthly and sales transactions are generally billed upon transfer of the sold items. Payments from customers are generally due upon receipt or 30-day payment terms. Specific customers have extended terms for payment, but no terms are greater than one year from the invoice date.

Leasing Revenue

Typical rental contracts include the direct rental of fleet, which is accounted for under Topic 842. Rental-related services include fleet delivery and fleet pickup, as well as other ancillary services, which are primarily accounted for under Topic 606. The total amounts of rental-related services related to Topic 606 recognized during FY 2020 and FY 2021 were $13,510,000 and $10,922,000, respectively. A small portion of the rental-related services, include subleasing, special events leases and other miscellaneous streams, are accounted for under Topic 842. For contracts that have multiple performance obligations, revenue is allocated to each performance obligation in the contract based on the Company’s best estimate of the standalone selling prices of each distinct performance obligation. The standalone selling price is determined using methods and assumptions developed consistently across similar customers and markets generally applying an expected cost plus an estimated margin to each performance obligation. The Company did not elect the practical expedient for lessor accounting.

Rental contracts are based on a monthly rate for our portable storage and modular space fleet and a daily rate for our liquid containment fleet. Rental revenue is recognized ratably over the rental period. The rental continues until the end of the initial term of the lease or when cancelled by the customer or the Company. If equipment is returned prior to the end of the contractual lease period, customers are typically billed a cancellation fee, which is recorded as rental revenue upon the return of the equipment. Customers may utilize our equipment transportation services and other on-site services in conjunction with the rental of equipment, but are not

required to do so. Given the short duration of these services, equipment transportation services and other on-site services revenue of a rented unit is recognized in leasing revenue upon completion of the service.

Non-Lease Revenue

Non-lease revenues consist primarily of the sale of new and used units, and to a lesser extent, sales of manufactured units are all accounted for under Topic 606. Sales contracts generally have a single performance obligation that is satisfied at the time of delivery, which is the point in time control over the unit transfers and the Company is entitled to consideration due under the contract with its customer.

Contract Costs and Liabilities

The Company incurs commission costs to obtain rental contracts and for sales of new and used units. We expect the period benefitted by each commission to be less than one year. Therefore, we have applied the practical expedient for incremental costs of obtaining a contract and expense commissions as incurred.

When customers are billed in advance for rentals, end of lease services, and deposit payments, we defer revenue and reflect unearned rental revenue at the end of the period. As of June 30, 2020 and September 30, 2020, we had approximately $24,642,000 and $27,115,000, respectively, of unearned rental revenue included in unearned revenue and advance payments in the accompanying consolidated balance sheets. Revenues of $10,821,000 and $12,145,000, which were included in the unearned rental revenue balance at June 30, 2019 and 2020, were recognized during FY 2020 and FY 2021, respectively. The Company’s uncompleted contracts with customers have unsatisfied (or partially satisfied) performance obligations. For the future service revenues that are expected to be recognized within twelve months, the Company has elected to utilize the optional disclosure exemption made available regarding transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations. The transaction price for performance obligations that will be completed in greater than twelve months is generally variable based on the costs ultimately incurred to provide those services and therefore we are applying the optional exemption to omit disclosure of such amounts.

Sales taxes charged to customers are excluded from revenues and expenses.

Sales of new modular buildings not manufactured by the Company are typically covered by warranties provided by the manufacturer of the products sold. Certain sales of manufactured units are covered by assurance-type warranties and as of June 30, 2020 and September 30, 2020, the Company had $136,394 and $111,199, respectively, of warranty reserve included in trade payables and accrued liabilities in the accompanying consolidated balance sheets.

Disaggregated Rental Revenue

In the following tables, total revenue is disaggregated by revenue type for the periods indicated. The tables also include a reconciliation of the disaggregated rental revenue to the Company’s reportable segments (in thousands).

	Quarter Ended September 30, 2020
	North America
									Corporate and				Asia –
	Leasing								Intercompany				Pacific
	Pac-Van		Lone Star		Combined		Manufacturing		Adjustments		Total		Leasing		Consolidated
Non-lease:
Sales lease inventories and fleet	$	16,834	$	20	$	16,854	$	—	$	—	$	16,854	$	12,811	$	29,665
Sales manufactured units		—		—		—		1,625		(1,268)		357		—		357
Total non-lease revenues		16,834		20		16,854		1,625		(1,268)		17,211		12,811		30,022
Leasing:
Rental revenue		24,148		1,106		25,254		—		(83)		25,171		12,058		37,229
Rental-related services		10,271		1,215		11,486		—		—		11,486		3,623		15,109
Total leasing revenues		34,419		2,321		36,740		—		(83)		36,657		15,681		52,338
Total revenues	$	51,253	$	2,341	$	53,594	$	1,625	$	(1,351)	$	53,868	$	28,492	$	82,360

	Quarter Ended September 30, 2019
	North America
									Corporate and				Asia –
	Leasing								Intercompany				Pacific
	Pac-Van		Lone Star		Combined		Manufacturing		Adjustments		Total		Leasing		Consolidated
Non-lease:
Sales lease inventories and fleet	$	16,918	$	—	$	16,918	$	—	$	—	$	16,918	$	11,873	$	28,791
Sales manufactured units		—		—		—		3,506		(1,333)		2,173		—		2,173
Total non-lease revenues		16,918		—		16,918		3,506		(1,333)		19,091		11,873		30,964
Leasing:
Rental revenue		25,254		4,481		29,735		—		(318)		29,417		11,943		41,360
Rental-related services		10,348		3,902		14,250		—		—		14,250		3,323		17,573
Total leasing revenues		35,602		8,383		43,985		—		(318)		43,667		15,266		58,933
Total revenues	$	52,520	$	8,383	$	60,903	$	3,506	$	(1,651)	$	62,758	$	27,139	$	89,897

Net Income per Common Share

Net Income per Common Share

Basic net income per common share is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the periods. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, vested or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The potential dilutive securities (common stock equivalents) the Company had outstanding related to stock options, non-vested equity shares, restricted stock units and convertible debt. The following is a reconciliation of weighted average shares outstanding used in calculating earnings per common share:

	Quarter Ended September 30,
	2019	2020
Basic	30,205,248	29,693,856
Dilutive effect of common stock equivalents	1,135,184	823,871
Diluted	31,340,432	30,517,727

Potential common stock equivalents totaling 905,159 for FY 2020 and 1,086,238 for FY 2021 have been excluded from the computation of diluted earnings per share because the effect is anti-dilutive.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which prescribes that financial assets (or a group of financial assets) should be measured at amortized cost basis to be presented at the net amount expected to be collected based on relevant historical information from historical experience, adjusted for current conditions and reasonable and supportable forecasts that affect collectability.Trade receivables (excluding receivables arising from operating lease revenues, as prescribed in the guidance) are the only material financial asset the Company has that is impacted by this standard. The Company adopted this standard effective July 1, 2020 and the effect was not material to the Company's consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which is elective, and provides for optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Company is currently evaluating the impact of reference rate reform and potential impact of adoption of these elective practical expedients on its consolidated financial statements.