COMMITMENTS

3 Months Ended

Apr. 30, 2021

COMMITMENTS

COMMITMENTS

NOTE 7 – COMMITMENTS

Leases

The Company’s operating leases primarily cover office space that expire on various dates through January 2025 and certain equipment used by the Company in the performance of its construction services contracts. Some of these equipment leases are embedded in broader agreements with subcontractors or construction equipment suppliers. The Company has no material finance leases. None of the operating leases includes 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 recorded 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 (historically, LIBOR plus 2.0%) at the commencement date in determining the present value of future payments. The expected lease term includes any option to extend or to terminate the lease when it is reasonably certain the Company will exercise such option.

Operating lease expense amounts are recorded on a straight-line basis over the expected lease terms and were $0.8 million and $0.4 million for the three months ended April 30, 2021 and 2020, respectively. Operating lease payments for the three months ended April 30, 2021 and 2020 were $0.8 million and $0.4 million, respectively. For operating leases as of April 30, 2021, the weighted average lease term is 32 months and the weighted average discount rate is 3.0%.

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, 2021 and 2020 were $3.0 million and $0.6 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, 2021 and 2020 was $0.2 million for both periods.

The aggregate amounts of operating leases added during the three months ended April 30, 2021 and 2020 were $0.5 million and $0.4 million, respectively. 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, 2021.

Years Ending January 31,
Remainder of 2022	$	1,925
2023		967
2024		283
2025		132
2026		20
Total lease payments		3,327
Less interest portion		90
Present value of lease payments		3,237
Less current portion (included in accrued expenses)		1,997
Non-current portion	$	1,240

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 with a term extending through April 30, 2022.

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, 2021 are not estimable.

As of April 30, 2021, the value of the Company’s unsatisfied bonded performance obligations, covering all of its subsidiaries, was approximately $372 million. In addition, as of April 30, 2021, there were bonds outstanding in the aggregate amount of approximately $6.6 million covering other risks including warranty obligations related to projects completed by GPS; these bonds expire at various dates over the next twelve months. Not all of our projects require bonding.

On behalf of APC, Argan provided a parent company performance guarantee to APC’s customer, the EPC services contractor on the TeesREP project, which was supported by a performance bond issued on behalf of the customer which, in connection with the completion of subcontract construction activities, will be replaced by a warranty bond in the amount of approximately $4.2 million.

As of April 30, 2021, the Company has also provided a financial guarantee, subject to certain terms and conditions, on behalf of GPS to an original equipment manufacturer in the amount of $3.6 million in support of business development efforts. The Company believes that the fair value of this guarantee as of April 30, 2021 is not material.

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.

Solar Energy Projects

The Company has made equity investments in several solar energy projects which are accounted for using the equity method of accounting. Other than the Company making initial investment payments to a new solar energy fund in the amount of approximately $3.5 million during the three-month period ended April 30, 2021, the activities related to these projects during the period were not meaningful.  As of April 30, 2021, the Company has a remaining $1.5 million cash investment commitment to the new fund.