Leases

12 Months Ended

Sep. 30, 2020

Leases [Abstract]

Leases

Leases

ADDvantage adopted ASU No. 2016-02, Topic 842 (ASC 842) - Leases, effective October 1, 2019. This ASU requires lessees to recognize an operating lease or right-of-use ("ROU") asset and liability on the balance sheet for all right-of-use leases with an initial lease term greater than twelve months.

ASU 2018-11 Leases – Targeted Improvements, allows for a practical expedient wherein all periods previously reported under ASC 840 will continue to be reported under ASC 840, and periods beginning October 1, 2019 and after are reported under ASC 842. ADDvantage elected to adopt this practical expedient along with the package of practical expedients, which allows the Company to combine lease and non-lease costs.

Under this transition option, ADDvantage will continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented and will make only annual disclosures for the comparative periods because ASC 840 does not require interim disclosures. Prior period amounts have not been adjusted and continue to be reflected in accordance with ADDvantage historical accounting. The adoption of this standard on October 1, 2019, had no impact on the Company's consolidated statement of shareholders' equity or consolidated statement of operations.

As a lessee, ADDvantage leases its corporate office headquarters in Carrollton, Texas, and conducts its business operations through various regional offices located throughout the United States. These operating locations typically

include regional offices, storage and maintenance facilities sufficient to support its operations in the area. ADDvantage leases these properties under either non-cancelable term leases many of which contain renewal options that can extend the lease term from one to five years and some of which contain escalation clauses, or month-to-month operating leases. Options to renew these leases are generally not considered reasonably certain to be exercised. Therefore, the periods covered by such optional periods are not included in the determination of the term of the lease. ADDvantage may lease equipment under cancellable short-term or contracts which are less than 30 days. Due to the nature of the Company's business, any option to renew these short-term leases is generally not considered reasonably certain to be exercised. Therefore, the periods covered by such optional periods are not included in the determination of the term of the lease, and the lease payments during these periods are similarly excluded from the calculation of right-of-use lease asset and lease liability balances.

ROU lease expense consists of rent expense related to leases that were included in ROU assets under ASC 842. ADDvantage recognizes right-of-use lease expense on a straight-line basis, except for certain variable expenses that are recognized when the variability is resolved, typically during the period in which they are paid. Variable right-of-use lease payments typically include charges for property taxes and insurance, and some leases contain variable payments related to non-lease components, including common area maintenance and usage of facilities or office equipment (for example, copiers).

As a result of adopting ASC 842, on the effective date, the Company recognized right-of-use assets and liabilities of $4.6 million, and financing lease assets and liabilities of $1.4 million. Right-of-use leases are included in right-of-use assets and current or long-term right-of-use obligations on the consolidated balance sheets. Finance leases are included in net property and equipment, and current or long-term finance lease obligations in the consolidated balance sheets.

Right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses a discount rate that approximates the rate of interest for a

collateralized loan over a similar term as the discount rate for present value of lease payments when the rate implicit in the contract is not readily determinable.

Impairment of right-of-use asset - The Company has a right-of-use for a building in Jessup, Maryland for Nave Communications. The Company ceased operations in Jessup, Maryland in May 2020, and vacated the Jessup, Maryland building. The building was partially subleased during fiscal year 2020. During the third quarter of 2020, the Company determined that the right-of-use asset was not recoverable and used an income approach to estimate its fair value, determining that the carrying value was partially impaired. Therefore, the Company recorded $0.7 million of impairment charges related to the lease in the Telco segment during the year ended September 30, 2020.

The components of lease expense were as follows for the year ended September 30, 2020, in thousands:
	September 30, 2020
Right-of-use lease cost
Impairment of right-of-use asset	$	660
Right-of-use lease cost	1,586
Total right-of-use lease cost	$	2,246
Finance lease costs
Amortization assets under finance leases	$	335
Interest on finance lease liabilities	59
Total finance lease cost	$	394

Supplemental cash flow information related to leases are as follows for the year ended September 30, 2020, in thousands:
	September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from right-of-use leases	$	1,586
Operating cash flows from finance leases	$	59
Financing cash flows from finance leases	$	387

Supplemental balance sheet information related to leases are as follows, in thousands:
	September 30, 2020
Right-of-use leases
Right-of-use lease assets	$	3,758
Right-of-use lease obligations - current	$	1,275
Right-of-use lease obligations	3,310
Total right-of-use lease liabilities	$	4,585
Finance leases
Property and equipment, gross	$	1,463
Accumulated depreciation	(393)
Property and equipment, net	$	1,070
Financing lease obligations - current	$	285
Financing lease obligations	791
Total finance lease liabilities	$	1,076
Weighted Average Remaining Lease Term
Right-of-use leases	3.75 years
Finance leases	3.88 years
Weighted Average Discount Rate
Right-of-use leases	5.00%
Finance leases	4.96%

Maturities of lease liabilities are as follows for the year ending September 30, 2020, in thousands:

	Right-of-Use Leases		Finance Leases
2021	$	1,441	$	325
2022	1,341		292
2023	1,328		278
2024	802		234
2025	150		44
Total lease payments	5,062		1,173
Less imputed interest	477		98
Total lease obligations	$	4,585	$	1,075

Leases

Leases

ADDvantage adopted ASU No. 2016-02, Topic 842 (ASC 842) - Leases, effective October 1, 2019. This ASU requires lessees to recognize an operating lease or right-of-use ("ROU") asset and liability on the balance sheet for all right-of-use leases with an initial lease term greater than twelve months.

ASU 2018-11 Leases – Targeted Improvements, allows for a practical expedient wherein all periods previously reported under ASC 840 will continue to be reported under ASC 840, and periods beginning October 1, 2019 and after are reported under ASC 842. ADDvantage elected to adopt this practical expedient along with the package of practical expedients, which allows the Company to combine lease and non-lease costs.

Under this transition option, ADDvantage will continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented and will make only annual disclosures for the comparative periods because ASC 840 does not require interim disclosures. Prior period amounts have not been adjusted and continue to be reflected in accordance with ADDvantage historical accounting. The adoption of this standard on October 1, 2019, had no impact on the Company's consolidated statement of shareholders' equity or consolidated statement of operations.

As a lessee, ADDvantage leases its corporate office headquarters in Carrollton, Texas, and conducts its business operations through various regional offices located throughout the United States. These operating locations typically

include regional offices, storage and maintenance facilities sufficient to support its operations in the area. ADDvantage leases these properties under either non-cancelable term leases many of which contain renewal options that can extend the lease term from one to five years and some of which contain escalation clauses, or month-to-month operating leases. Options to renew these leases are generally not considered reasonably certain to be exercised. Therefore, the periods covered by such optional periods are not included in the determination of the term of the lease. ADDvantage may lease equipment under cancellable short-term or contracts which are less than 30 days. Due to the nature of the Company's business, any option to renew these short-term leases is generally not considered reasonably certain to be exercised. Therefore, the periods covered by such optional periods are not included in the determination of the term of the lease, and the lease payments during these periods are similarly excluded from the calculation of right-of-use lease asset and lease liability balances.

ROU lease expense consists of rent expense related to leases that were included in ROU assets under ASC 842. ADDvantage recognizes right-of-use lease expense on a straight-line basis, except for certain variable expenses that are recognized when the variability is resolved, typically during the period in which they are paid. Variable right-of-use lease payments typically include charges for property taxes and insurance, and some leases contain variable payments related to non-lease components, including common area maintenance and usage of facilities or office equipment (for example, copiers).

As a result of adopting ASC 842, on the effective date, the Company recognized right-of-use assets and liabilities of $4.6 million, and financing lease assets and liabilities of $1.4 million. Right-of-use leases are included in right-of-use assets and current or long-term right-of-use obligations on the consolidated balance sheets. Finance leases are included in net property and equipment, and current or long-term finance lease obligations in the consolidated balance sheets.

Right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses a discount rate that approximates the rate of interest for a

collateralized loan over a similar term as the discount rate for present value of lease payments when the rate implicit in the contract is not readily determinable.

Impairment of right-of-use asset - The Company has a right-of-use for a building in Jessup, Maryland for Nave Communications. The Company ceased operations in Jessup, Maryland in May 2020, and vacated the Jessup, Maryland building. The building was partially subleased during fiscal year 2020. During the third quarter of 2020, the Company determined that the right-of-use asset was not recoverable and used an income approach to estimate its fair value, determining that the carrying value was partially impaired. Therefore, the Company recorded $0.7 million of impairment charges related to the lease in the Telco segment during the year ended September 30, 2020.

The components of lease expense were as follows for the year ended September 30, 2020, in thousands:
	September 30, 2020
Right-of-use lease cost
Impairment of right-of-use asset	$	660
Right-of-use lease cost	1,586
Total right-of-use lease cost	$	2,246
Finance lease costs
Amortization assets under finance leases	$	335
Interest on finance lease liabilities	59
Total finance lease cost	$	394

Supplemental cash flow information related to leases are as follows for the year ended September 30, 2020, in thousands:
	September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from right-of-use leases	$	1,586
Operating cash flows from finance leases	$	59
Financing cash flows from finance leases	$	387

Supplemental balance sheet information related to leases are as follows, in thousands:
	September 30, 2020
Right-of-use leases
Right-of-use lease assets	$	3,758
Right-of-use lease obligations - current	$	1,275
Right-of-use lease obligations	3,310
Total right-of-use lease liabilities	$	4,585
Finance leases
Property and equipment, gross	$	1,463
Accumulated depreciation	(393)
Property and equipment, net	$	1,070
Financing lease obligations - current	$	285
Financing lease obligations	791
Total finance lease liabilities	$	1,076
Weighted Average Remaining Lease Term
Right-of-use leases	3.75 years
Finance leases	3.88 years
Weighted Average Discount Rate
Right-of-use leases	5.00%
Finance leases	4.96%

Maturities of lease liabilities are as follows for the year ending September 30, 2020, in thousands:

	Right-of-Use Leases		Finance Leases
2021	$	1,441	$	325
2022	1,341		292
2023	1,328		278
2024	802		234
2025	150		44
Total lease payments	5,062		1,173
Less imputed interest	477		98
Total lease obligations	$	4,585	$	1,075