Note 6 - Leases

12 Months Ended

Jan. 31, 2022

Notes to Financial Statements

Lessee, Operating and Finance Leases [Text Block]

Note 6 - Leases

The Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheet. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities short-term, and operating lease liabilities long-term in the Company's consolidated balance sheets. Finance leases are included in property, plant and equipment, current maturities of long-term debt, and long-term debt less current maturities in the Company's consolidated balance sheets. 

ROU 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 calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate.  Lease liabilities are increased by interest and reduced by payments each period, and the ROU asset is amortized over the lease term.  For operating leases, interest on the lease liability and the amortization of the ROU asset result in straight-line rent expense over the lease term.  For finance leases, interest on the lease liability and the amortization of the ROU asset results in front-loaded expense over the lease term.  Variable lease expenses are recorded when incurred. ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term.

As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment.

In calculating the ROU asset and lease liability, the Company elects to combine lease and non-lease components.  The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over the lease term. 

Operating Leases. In  August 2020, the Company entered into a new lease in Abu Dhabi, U.A.E. for land upon which the Company intends to build a facility. The annual payments are initially expected to be approximately 1.2 million U.A.E. Dirhams (approximately $0.3 million at  October 31, 2020), inclusive of rent and common charges, with escalation clauses in the agreement. Rent payments are deferred until  August 2022. The lease expires in  August 2050.

Finance Leases. In 2019, the Company obtained two finance leases for CAD 1.1 million (approximately USD $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases were 8.0% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature in August 2023. In 2017, the Company obtained three finance leases for CAD 1.1 million (approximately USD $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases range from 4.0% to 7.8% per annum with monthly principal and interest payments of less than $0.1 million. Two of these leases matured in  April 2021 and new leases have been entered into in  May 2021 to replace the matured leases. The remaining lease matures in  September 2022.

The Company has several significant operating lease agreements, with lease terms of one to 30 years, which consist of real estate, vehicles and office equipment leases. These leases do not require any contingent rental payments, impose any financial restrictions or contain any residual value guarantees.  Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and ROU assets as the Company is not reasonably certain to exercise the options.  Variable expenses generally represent the Company’s share of the landlord’s operating expenses.  The Company does not have any arrangements where it acts as a lessor, other than one sub-lease arrangement. 

At  January 31, 2022, the Company had total operating lease liabilities of $12.8 million and operating ROU assets of $11.2 million, which are reflected in the consolidated balance sheet. At January 31, 2022, the Company also had finance lease liabilities of $0.5 million included in current maturities of long-term debt and long-term debt less current maturities, and finance ROU assets of $0.7 million which were included in property plant and equipment, net of accumulated depreciation in the consolidated balance sheet.

Supplemental balance sheet information related to leases follows (in thousands):

Operating and Finance leases:	January 31, 2022			January 31, 2021
Finance leases assets:
Property and Equipment - gross	$	1,221		$	879
Accumulated depreciation and amortization		(490	)		(96	)
Property and Equipment - net	$	731		$	783
Finance lease liabilities:
Finance lease liability short-term	$	357		$	300
Finance lease liability long-term		173			401
Total finance lease liabilities	$	530		$	701
Operating lease assets:
Operating lease ROU assets	$	11,213		$	13,384
Operating lease liabilities:
Operating lease liability short-term	$	1,496		$	1,402
Operating lease liability long-term		11,270			13,174
Total operating lease liabilities	$	12,766		$	14,576

Total lease costs consist of the following (in thousands):

Lease costs	Consolidated Statements of Operations Classification	Year Ended January 31, 2022			Year Ended January 31, 2021
Finance Lease Costs
Amortization of ROU assets	Cost of sales	$	245		$	214
Interest on lease liabilities	Interest expense		53			69
Operating lease costs	Cost of sales, SG&A expenses		2,502			2,570
Short-term lease costs (1)	Cost of sales, SG&A expenses		591			398
Sub-lease income	SG&A expenses		(81	)		(81	)
Total Lease costs		$	3,310		$	3,170

(1) Includes variable lease costs, which are immaterial

Supplemental cash flow information related to leases is as follows (in thousands):

	Year Ended January 31, 2022		Year Ended January 31, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases	$	375	$	432
Operating cash flows from finance leases		53		69
Operating cash flows from operating leases		2,784		3,097

	Year Ended January 31, 2022
ROU Assets obtained in exchange for new lease obligations:
Finance leases liabilities	$	-
Operating leases liabilities		121

Weighted-average lease terms discount rates are as follows:

	January 31, 2022
Weighted-average remaining lease terms (in years):
Finance leases		1.5
Operating leases		13.5
Weighted-average discount rates:
Finance leases		9.1	%
Operating leases		7.4	%

On January 31, 2022, future minimum annual rental commitments under non-cancelable lease obligations were as follows (in thousands):

Year:	Operating Leases			Finance Leases
For the year ended January 31, 2023	$	2,367		$	386
For the year ended January 31, 2024		2,335			177
For the year ended January 31, 2025		1,525			-
For the year ended January 31, 2026		1,326			-
For the year ended January 31, 2027		1,333			-
Thereafter		12,322			-
Total lease payments		21,208			563
Less: amount representing interest		(8,442	)		(33	)
Total lease liabilities at January 31, 2022	$	12,766		$	530

Rental expense for operating leases was $3.1 million and $3.0 million in 2021 and 2020, respectively.

The Company has several significant operating lease agreements as follows:

• Office space of approximately 31,650 square feet in Niles, IL is leased until October 2023.

• Production facilities and office space of approximately 139,000 square feet in Lebanon, Tennessee is leased until December 31, 2035.

• Five acres of land in Louisiana is leased through March 2022.

• Twenty acres of land in Canada leased through December 2022.

• Nine acres of land in the Kingdom of Saudi Arabia is leased through April 2030.

• Production facilities in the U.A.E. of approximately 80,200 square feet on approximately 107,600 square feet of land is leased until June 2030.

• Office space of approximately 21,500 square feet and open land for production facilities of approximately 423,000 square feet in the U.A.E. is leased until July 2032.

• Production facilities in the U.A.E. of approximately 78,100 square feet is leased until December 2032.

• Approximately fourteen acres of land in the U.A.E. is leased through August 2050.