NOTE 7 – COMMITMENTS

Leases

The Company 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 it 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 does not apply this 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.

The Company’s operating leases primarily cover office space that expire on various dates through May 2024; it has no finance leases. Most of the equipment used by the Company in the performance of its construction services contracts is rented, with periods of expected usage less than one year, or owned. Certain leases contain renewal options, which are included in expected lease terms if they are reasonably certain of being exercised by the Company. Other equipment leases are embedded in broader arrangements with subcontractors or construction equipment suppliers.

None of the operating leases include significant amounts for incentives, rent holidays 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 to be made 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 (LIBOR plus 2)% at the 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 that 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 amounts for the three months ended April 30, 2020 and 2019 were $0.4 million and $0.2 million, respectively. Operating lease payments for the three months ended April 30, 2020 and 2019 were $0.4 million and $0.2 million, respectively. For operating leases as of April 30, 2020, the weighted average lease term is 33 months and the weighted average discount rate is 4.0%.

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 April 30, 2020 , including operating leases added during the three months ended April 30, 2020 in the amount of approximately $0.4 million covering certain construction-site assets required by GPS:


Years Ending January 31,
Remainder of 2021	$	941
2022		790
2023		344
2024		178
2025		26
Total lease payments		2,279
Less interest portion		123
Present value of lease payments		2,156
Less current portion (included in accrued expenses)		1,593
Non-current portion	$	563

The future minimum lease payments presented above include amounts due under a long-term lease covering the primary offices and plant for TRC with the founder and current chief executive officer of TRC at an annual rate of $0.3 million through April 30, 2021, as well as amounts due under a long-term lease covering the primary offices for APC with several of its former executives at an annual rate of less than $0.1 million through December 31, 2023.

The Company also uses equipment and occupies other facilities under short-term rental agreements. Rent expense amounts incurred under operating leases and short-term rental agreements (including portions of the lease expense amounts disclosed above) and included in costs of revenues for the three months ended April 30, 2020 and 2019 were $0.6 million and $1.0 million, respectively. Rent expense incurred under these types of arrangements (including portions of the lease expense amounts disclosed above) and included in selling, general and administrative expenses for the three months ended April 30, 2020 and 2019, was $0.2 million for both periods.

Performance Bonds and Guarantees

In the normal course of business and for certain major projects, 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 to clients on behalf of its contractor subsidiaries. As these subsidiaries are wholly-owned, any actual liability is ordinarily reflected in the financial statement account balances determined pursuant to the Company’s accounting for contracts with customers. When sufficient information about claims on guaranteed or bonded projects would be available and monetary damages or other costs or losses would be determined to be probable, the Company would record such losses. Any amounts that may be required to be paid in excess of the estimated costs to complete contracts in progress as of April 30, 2020 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 the EPC services contractor on the TeesREP project, on behalf of APC, a major subcontractor on this project.

As of April 30, 2020, the Company has also provided a financial guarantee on behalf of GPS to an original equipment manufacturer in the amount of $3.6 million in support of business developmental efforts which did result in the award of an EPC services contract to GPS for the construction of a gas-fired plant project in March 2020. The fair value of this guarantee at April 30, 2020 is considered to be immaterial.

Warranties

The Company generally provides assurance-type warranties for work performed under its construction contracts. 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 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 as the contracted work is performed, and they are included in the amounts of accrued expenses in the condensed consolidated balances sheets.The liability amounts may be periodically adjusted to reflect changes in the estimated size and number of expected warranty claims.