NOTE 7 – COMMITMENTS

Leases

Management determines if a contract is or contains a lease at inception or upon modification of the contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. The Company has made the election, as permitted by the new standard, not to apply the new accounting to those leases with terms of twelve (12) months or less and that do not include options to purchase the underlying assets that the Company is reasonably certain to exercise. In addition, the Company has chosen not to separate non-lease components from their related lease components. Finally, the Company elected to utilize the package of permitted practical expedients that, upon adoption of ASC Topic 842, allows entities to not reassess whether any existing contracts are or contain leases.

The Company's operating leases primarily cover office space that expire on various dates through May 2024; it has no finance leases. Certain leases contain renewal options. Renewal periods are included in the expected lease term if they are reasonably certain of being exercised by the Company. None of the Company’s operating leases include significant amounts for incentives, rent holidays, penalties, or price escalations. Under certain lease agreements, the Company is obligated to pay property taxes, insurance, and maintenance costs.

Operating lease right-of-use assets and associated lease liabilities are recognized in the balance sheet at the lease commencement date based on the present value of future minimum lease payments over the expected lease term. As the implicit rate is not determinable in most of the Company’s leases, management uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The expected lease term includes an option to extend or to terminate the lease when it is reasonably certain the Company will exercise such option. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term. Operating lease expense for the six months ended July 31, 2019 was $0.3 million. For operating leases as of July 31, 2019, the weighted average lease term was 42 months and the weighted average discount rate was 4.5%. The following is a schedule of future minimum lease payments for the operating leases that were recognized in the condensed consolidated balance sheet as of July 31, 2019:


Year ending January 31,
Remainder of 2020	$	266
2021		283
2022		210
2023		187
2024		113
Thereafter		30
Total lease payments		1,089
Less interest portion		55
Present value of lease payments		1,034
Less current portion (included in accrued expenses)		418
Non-current portion	$	616

The Company also uses equipment and occupies other facilities under cancelable or short-term rental agreements. Rent expense amounts incurred under operating leases and short-term rental agreements (including a portion of the lease expense amount disclosed above) and included in costs of revenues for the three and six months ended July 31, 2019 were $1.3 million and $2.3 million, respectively. Rent expense amounts incurred under these types of arrangements (including a portion of the lease expense amount disclosed above) and included in selling, general and administrative expenses for the three and six months ended July 31, 2019 were $0.2 million and $0.4 million, respectively. Rent expense amounts incurred on construction projects and included in the costs of revenues for the three and six months ended July 31, 2018 were approximately $3.4 million and $8.2 million, respectively. Rent expense amounts included in selling, general and administrative expenses for the three and six months ended July 31, 2018 were $0.1 million and $0.3 million, respectively.

Performance Bonds and Guarantees

In the normal course of business, the Company may be required to obtain surety or performance bonding, to cause the issuance of letters of credit, or to provide parent company guarantees (or some combination thereof) in order to provide performance assurances and guarantees to clients on behalf of its wholly-owned subsidiaries on various major projects. As these subsidiaries are wholly-owned, any liability is ordinarily reflected in the financial statement account balances determined pursuant to the Company’s accounting for contracts with customers. Any amounts that may be required to be paid in excess of the estimated costs to complete contracts in progress are not estimable. Argan has provided a parent company performance guarantee and has caused the Bank to issue certain letters of credit (see Note 6) to Técnicas Reunidas (“TR”), the engineering, procurement and construction services (“EPC”) contractor on the TeesREP Biomass Power Station Project, on behalf of APC, a major subcontractor to TR on this project.

Warranties

The Company generally provides assurance-type warranties for work performed under its construction contracts which do not represent separate performance obligations. The warranties cover defects in equipment, materials, design or workmanship, and most warranty periods typically run from nine to twenty-four months after the completion of construction on a particular project. Because of the nature of the Company’s projects, including project owner inspections of the work both during construction and prior to substantial completion, the Company has not experienced material unexpected warranty costs in the past. Warranty costs are estimated based on the Company’s experience with the type of work and any known risks relative to each completed project. The accruals of liabilities which are established to cover estimated future warranty costs are recorded over the terms of the related contracts and they are included in the amounts of accrued expenses in the condensed consolidated balances sheets. The corresponding liabilities are periodically adjusted to reflect changes in the amounts of estimated expected warranty claims.