Commitments and Contingencies

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies

Commitments and Contingencies

Note 10. Commitments and Contingencies

Lease Obligations

We lease property and equipment under operating leases, typically with terms greater than 12 months, and determine if an arrangement contains a lease at inception. In general, an arrangement contains a lease if there is an identified asset and we have the right to direct the use of and obtain substantially all of the economic benefit from the use of the identified asset. We record an operating lease liability at the present value of lease payments over the lease term on the commencement date. The related ROU operating lease asset reflects rental escalation clauses, as well as renewal options and/or termination options. The exercise of lease renewal and/or termination options are at our discretion and are included in the determination of the lease term and lease payment obligations when it is deemed reasonably certain that the option will be exercised. When available, we use the rate implicit in the lease to discount lease payments to present value; however, certain leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement.

We classify our leases as buildings, vehicles or computer and office equipment and do not separate lease and nonlease components of contracts for any of the aforementioned classifications. In accordance with

applicable guidance, we do not record leases with terms that are less than one year on the Condensed Consolidated Balance Sheet.

None of our lease agreements contain material restrictive covenants or residual value guarantees.

Buildings

We lease certain office and warehouse space at various locations in the United States where we provide services. These leases are typically greater than one year with fixed, escalating rents over the noncancelable terms and, therefore, ROU operating lease assets and operating lease liabilities are recorded on the Condensed Consolidated Balance Sheet, with rent expense to be recognized on a straight-line basis over the term of the lease. The remaining lease terms vary from approximately one to ten years as of September 30, 2019.

In March 2008, we entered into a noncancelable operating lease agreement for building space for our previous corporate headquarters that provides for monthly rent, real estate taxes and operating expenses that was subsequently extended to July 31, 2021. This space is included in our ROU operating lease assets and operating lease liabilities. We are in the process of negotiating a buy-out of the lease for these premises due to our move in September to our new headquarters.

We entered into a lease (“initial lease”) in October 2018 for approximately 80,000 square feet of office space for our new corporate headquarters in Minneapolis, Minnesota. In December 2018, we amended the initial lease to add 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with ASC 842. The initial and second leases expire in February 2030. The portion of the space under the initial lease was placed in service in September 2019. This portion was recognized as an operating lease and included in the ROU operating lease assets and operating lease liabilities on the Condensed Consolidated Balance Sheet.  The portion of the space covered under the second lease is expected to be occupied and commence in the second half of 2020.

Vehicles

We lease vehicles for certain members of our field sales organization under a vehicle fleet program whereby the initial, noncancelable lease is for a term of 367 days, thus more than one year. Subsequent to the initial term, the lease becomes a month-to-month, cancelable lease. As of September 30, 2019, we had approximately 75 vehicles with agreements within the initial, noncancelable lease term that are recorded as ROU operating lease assets and operating lease liabilities. In addition to monthly rental fees specific to the vehicle, there are fixed monthly nonlease components that have been included in the ROU operating lease assets and operating lease liabilities. The nonlease components are not significant.

Computer and Office Equipment

We also have operating lease agreements for certain computer and office equipment. The remaining lease terms at the ASC 842 adoption date of January 1, 2019, ranged from less than one year to approximately five years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities. The leases provide an option to purchase the related equipment at fair market value at the end of the lease. The lease will automatically renew as a month-to-month rental at the end of the lease if the equipment is not purchased or returned.

Lease Position, Undiscounted Cash Flow and Supplemental Information

The table below presents information related to our ROU operating lease assets and operating lease liabilities that we have recorded:

(In thousands)	At September 30, 2019
Right of use operating lease assets	$	15,204
Operating lease liabilities:
Current	$	1,990
Non-current		13,399
Total	$	15,389
Operating leases:
Weighted average remaining lease term		8.8 years
Weighted average discount rate (1)		5.10%
	Nine Months Ended
	September 30, 2019
Supplemental cash flow information for our operating leases:
Cash paid for operating lease liabilities	$	1,147
Non-cash right of use assets obtained in exchange for new operating lease obligations	$	16,296

(1) Discount rates were established as of January 1, 2019, the adoption date of ASC 842, and as of September 16, 2019 the commencement date of the initial lease for our new headquarters.

The table below reconciles the undiscounted cash flows under the operating lease liabilities recorded on the Condensed Consolidated Balance Sheet for the periods presented:

(In thousands)
2019 (October 1 - December 31)	$	766
2020		2,666
2021		2,137
2022		1,894
2023		1,852
Thereafter		9,974
Total minimum lease payments		19,289
Less: Amount of lease payments representing interest		(3,900)
Present value of future minimum lease payments		15,389
Less: Current obligations under operating lease liabilities		(1,990)
Non-current obligations under operating lease liabilities	$	13,399

As of September 30, 2019, we have additional lease commitments of $5.2 million related to the second lease of our new headquarters. As the lessee we are involved in providing guidance to the lessor for related improvements, however these improvements are managed and owned by the lessor.

Operating lease costs accounted for under ASC 842 were $0.6 million and $1.3 million for the three and nine months ended September 30, 2019, respectively. Rent expense accounted for under ASC 840 was $0.4 million and $1.2 million for the three and nine months ended September 30, 2018, respectively.

Major Vendors

We had purchases from two major vendors that accounted for 42% and 37% of our total purchases for the three and nine months ended September 30, 2019, respectively. We had purchases from two major vendors that accounted for 45% and 41% of our total purchases for the three and nine months ended September 30, 2018, respectively.

Purchase Commitments

We issued purchase orders prior to September 30, 2019, totaling $35.1 million for goods that we expect to receive within the next year.

Retirement Plan

We maintain a 401(k) retirement plan for our employees in which eligible employees can contribute a percentage of their pre-tax compensation. Discretionary contributions to the 401(k) plan totaled $0.1 million for each of the three months ended September 30, 2019 and 2018, and $0.2 million for each of the nine months ended September 30, 2019 and 2018.