Leases

3 Months Ended

Mar. 31, 2024

Leases [Abstract]

Leases

Leases

The Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. Instead, the short-term leases are recognized in expense on a straight-line basis over the lease term.

The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For the Company's leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with the Company's real estate leases, the Company uses quoted borrowing rates on its secured debt.

Related Party Lease Agreements. In conjunction with the closing of the Jake Marshall Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of JMLLC who became a full-time employee of the Company. The lease term is 10 years and includes an option to extend the lease for two successive periods of two years each through November 2035. Base rent for the term of the lease is $37,500 per month for the first five years with payment commencing on January 1, 2022. The fixed rent payment is escalated to $45,000 per month for years 6 through 10 of the lease term. Fixed rent payments for the extension term shall be increased from $45,000 by the percentage increase, if any, in the consumer price index from the lease commencement date. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses.

In conjunction with the closing of the ACME Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of ACME who became a full-time employee of the Company. The lease term of the lease runs through December 31, 2024 and includes an option to extend the lease for one successive period of one year through December 2025. Base rent for the term of the lease is $17,000 per month for the first six months with payment commencing on July 1, 2023. The fixed rent payment is escalated to $18,000 per month for the twelve month period ending December 31, 2024. Fixed rent payments for the extension term shall be increased to $19,000. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses.

In conjunction with the closing of the Industrial Air Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of Industrial Air who became a full-time employee of the Company. The lease term of the lease runs through August 31, 2026 and includes an option to extend the lease for two successive periods of three years each through August 2032. Base rent for the term of the lease is $26,500 per month for the first thirty-three months with payment commencing on November 1, 2023. The fixed rent payment is escalated to $27,563 per month for the first three year extension period ending August 31, 2029 and to $28,941 per month for the second three year extension period ending on August 31, 2032. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses.

Southern California Sublease. In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of 71,787 square feet. Under the terms of the sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $0.6 million per year, which is subject to a 3.0% annual rent increase, plus certain operating expenses and other costs. The initial lease term commenced in September 2021 and continues through April 30, 2027. As of March 31, 2024, the Company remains obligated under the original lease for such office space and, in the event the sublessee of such office space fails to satisfy its obligations under the sublease, the Company would be required to satisfy its obligations directly to the landlord under such original lease.

In addition, during the first quarter of 2022, the Company entered into an amendment to the aforementioned sublease agreement, which, among other things, expanded the sublease premises to include the entire second floor of its leased space in Southern California, consisting of 16,720 square feet. Under the terms of the amended sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $0.8 million per year, which is subject to a 3.0% annual rent increase, plus certain operating expenses and other costs. The amended sublease term commenced in March 2022 and continues through April 30, 2027. For both the three months ended March 31, 2024 and 2023, the Company recorded approximately $0.3 million of income in selling, general and administrative expenses related to this sublease agreement.

The following table summarizes the lease amounts included in the Company's condensed consolidated balance sheets:

(in thousands)	Classification on the Condensed Consolidated Balance Sheets	March 31, 2024		December 31, 2023
Assets
Operating	Operating lease right-of-use assets(1)(2)	$	20,749	$	19,727
Finance	Property and equipment, net(3)(4)	9,170		9,561
Total lease assets		$	29,919	$	29,288
Liabilities
Current
Operating	Current operating lease liabilities	$	3,678	$	3,627
Finance	Current portion of long-term debt	2,532		2,680
Noncurrent
Operating	Long-term operating lease liabilities	17,109		16,037
Finance	Long-term debt(5)	9,736		10,018
Total lease liabilities		$	33,055	$	32,362

(1)     Operating lease assets are recorded net of accumulated amortization of $14.8 million at March 31, 2024 and $13.6 million at December 31, 2023.

(2)    Includes approximately $1.0 million at both March 31, 2024 and December 31, 2023 related to a below-market lease recognized as a result of the Industrial Air Transaction, which was recorded as an increase to the Company’s operating lease right-of-use assets on its condensed consolidated balance sheet. The below-market lease will be amortized to amortization expense over the remaining lease term.

(3)    Finance lease vehicle assets are recorded net of accumulated amortization of $4.9 million at March 31, 2024 and $4.5 million at December 31, 2023.

(4)    Includes approximately $2.5 million and $2.4 million of net property assets associated with the Company's Pontiac Facility as of March 31, 2024 and December 31, 2023, respectively.

(5)    Includes approximately $5.4 million associated with the Company's sale and leaseback financing transaction. See Note 6 for further detail.

The following table summarizes the lease costs included in the Company's condensed consolidated statements of operations for the three months ended March 31, 2024 and 2023:

		Three Months Ended March 31,
(in thousands)	Classification on the Condensed Consolidated Statement of Operations	2024		2023
Operating lease cost	Cost of revenue(1)	$	588	$	561
Operating lease cost	Selling, general and administrative(1)	726		645
Finance lease cost
Amortization	Cost of revenue(2)	740		631
Interest	Interest expense, net(2)	119		66
Total lease cost		$	2,173	$	1,903

(1)    Operating lease costs recorded in cost of revenue included $0.1 million of variable lease costs for both the three months ended March 31, 2024 and 2023, respectively. In addition, $0.1 million of variable lease costs are included in selling, general and administrative for both the three months ended March 31, 2024 and 2023, respectively. These variable costs consist of the Company's proportionate share of operating expenses, real estate taxes and utilities.

(2)     Finance lease costs recorded in cost of revenue include variable lease costs of $1.0 million and $0.9 million for the three months ended March 31, 2024 and 2023, respectively. These variable lease costs consist of fuel, maintenance, and sales tax charges.

The future undiscounted minimum finance lease payments, as reconciled to the discounted minimum lease obligation indicated on the Company’s condensed consolidated balance sheets within current and long-term debt, less interest, and under current and long-term operating leases, less imputed interest, as of March 31, 2024 were as follows (in thousands):

	Finance Lease Obligations						Operating Lease Obligations
Year ending:	Vehicles		Pontiac Facility		Total Finance		Non-Related Party		Related Party(1)		Total Operating		Sublease Receipts(2)
Remainder of 2024	$	2,269	$	387	$	2,656	$	2,860	$	736	$	3,596	$	688
2025	2,331		528		2,859		3,703		765		4,468		939
2026	1,815		542		2,357		3,614		770		4,384		967
2027	927		555		1,482		2,556		871		3,427		326
2028	180		569		749		1,621		871		2,492		—
Thereafter	117		13,733		13,850		1,467		4,997		6,464		—
Total minimum lease payments	7,639		16,314		23,953		15,821		9,010		24,831		$	2,920
Financing Component (3)	(722)		(10,963)		(11,685)		(1,965)		(2,079)		(4,044)
Net present value of minimum lease payments	6,917		5,351		12,268		13,856		6,931		20,787
Less: current portion of finance and operating lease obligations	(2,532)		—		(2,532)		(3,104)		(574)		(3,678)
Long-term finance and operating lease obligations	$	4,385	$	5,351	$	9,736	$	10,752	$	6,357	$	17,109

(1)    Associated with the aforementioned related party leases entered into with former members of JMLLC, ACME and Industrial Air.

(2)    Associated with the aforementioned third party sublease.

(3)     The financing component for finance lease obligations represents the interest component of finance leases that will be recognized as interest expense in future periods. The financing component for operating lease obligations represents the effect of discounting the lease payments to their present value.

The following is a summary of the lease terms and discount rates as of:

	March 31, 2024		December 31, 2023
Weighted average lease term (in years):
Operating	6.46		6.54
Finance (1)	3.05		3.10
Weighted average discount rate:
Operating	5.61	%	6.74	%
Finance (1)	6.75	%	5.33	%

(1)     Excludes the weighted average lease term and weighted average discount rate associated with the aforementioned sale-leaseback financing transaction, which has a Primary Term of 25 years and utilized an implicit rate of 11.11%. See Note 6 for further detail.

The following is a summary of other information and supplemental cash flow information related to finance and operating leases:

	Three months ended March 31,
(in thousands)	2024		2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,250	$	1,164
Operating cash flows from finance leases	121		66
Financing cash flows from finance leases	695		639
Right-of-use assets exchanged for lease liabilities:
Operating leases	2,097		742
Finance leases	308		1,402
Right-of-use assets disposed or adjusted modifying finance leases liabilities	$	(41)	(1)

Leases

Leases

The Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. Instead, the short-term leases are recognized in expense on a straight-line basis over the lease term.

The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For the Company's leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with the Company's real estate leases, the Company uses quoted borrowing rates on its secured debt.

Related Party Lease Agreements. In conjunction with the closing of the Jake Marshall Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of JMLLC who became a full-time employee of the Company. The lease term is 10 years and includes an option to extend the lease for two successive periods of two years each through November 2035. Base rent for the term of the lease is $37,500 per month for the first five years with payment commencing on January 1, 2022. The fixed rent payment is escalated to $45,000 per month for years 6 through 10 of the lease term. Fixed rent payments for the extension term shall be increased from $45,000 by the percentage increase, if any, in the consumer price index from the lease commencement date. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses.

In conjunction with the closing of the ACME Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of ACME who became a full-time employee of the Company. The lease term of the lease runs through December 31, 2024 and includes an option to extend the lease for one successive period of one year through December 2025. Base rent for the term of the lease is $17,000 per month for the first six months with payment commencing on July 1, 2023. The fixed rent payment is escalated to $18,000 per month for the twelve month period ending December 31, 2024. Fixed rent payments for the extension term shall be increased to $19,000. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses.

In conjunction with the closing of the Industrial Air Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of Industrial Air who became a full-time employee of the Company. The lease term of the lease runs through August 31, 2026 and includes an option to extend the lease for two successive periods of three years each through August 2032. Base rent for the term of the lease is $26,500 per month for the first thirty-three months with payment commencing on November 1, 2023. The fixed rent payment is escalated to $27,563 per month for the first three year extension period ending August 31, 2029 and to $28,941 per month for the second three year extension period ending on August 31, 2032. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses.

Southern California Sublease. In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of 71,787 square feet. Under the terms of the sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $0.6 million per year, which is subject to a 3.0% annual rent increase, plus certain operating expenses and other costs. The initial lease term commenced in September 2021 and continues through April 30, 2027. As of March 31, 2024, the Company remains obligated under the original lease for such office space and, in the event the sublessee of such office space fails to satisfy its obligations under the sublease, the Company would be required to satisfy its obligations directly to the landlord under such original lease.

In addition, during the first quarter of 2022, the Company entered into an amendment to the aforementioned sublease agreement, which, among other things, expanded the sublease premises to include the entire second floor of its leased space in Southern California, consisting of 16,720 square feet. Under the terms of the amended sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $0.8 million per year, which is subject to a 3.0% annual rent increase, plus certain operating expenses and other costs. The amended sublease term commenced in March 2022 and continues through April 30, 2027. For both the three months ended March 31, 2024 and 2023, the Company recorded approximately $0.3 million of income in selling, general and administrative expenses related to this sublease agreement.

The following table summarizes the lease amounts included in the Company's condensed consolidated balance sheets:

(in thousands)	Classification on the Condensed Consolidated Balance Sheets	March 31, 2024		December 31, 2023
Assets
Operating	Operating lease right-of-use assets(1)(2)	$	20,749	$	19,727
Finance	Property and equipment, net(3)(4)	9,170		9,561
Total lease assets		$	29,919	$	29,288
Liabilities
Current
Operating	Current operating lease liabilities	$	3,678	$	3,627
Finance	Current portion of long-term debt	2,532		2,680
Noncurrent
Operating	Long-term operating lease liabilities	17,109		16,037
Finance	Long-term debt(5)	9,736		10,018
Total lease liabilities		$	33,055	$	32,362

(1)     Operating lease assets are recorded net of accumulated amortization of $14.8 million at March 31, 2024 and $13.6 million at December 31, 2023.

(2)    Includes approximately $1.0 million at both March 31, 2024 and December 31, 2023 related to a below-market lease recognized as a result of the Industrial Air Transaction, which was recorded as an increase to the Company’s operating lease right-of-use assets on its condensed consolidated balance sheet. The below-market lease will be amortized to amortization expense over the remaining lease term.

(3)    Finance lease vehicle assets are recorded net of accumulated amortization of $4.9 million at March 31, 2024 and $4.5 million at December 31, 2023.

(4)    Includes approximately $2.5 million and $2.4 million of net property assets associated with the Company's Pontiac Facility as of March 31, 2024 and December 31, 2023, respectively.

(5)    Includes approximately $5.4 million associated with the Company's sale and leaseback financing transaction. See Note 6 for further detail.

The following table summarizes the lease costs included in the Company's condensed consolidated statements of operations for the three months ended March 31, 2024 and 2023:

		Three Months Ended March 31,
(in thousands)	Classification on the Condensed Consolidated Statement of Operations	2024		2023
Operating lease cost	Cost of revenue(1)	$	588	$	561
Operating lease cost	Selling, general and administrative(1)	726		645
Finance lease cost
Amortization	Cost of revenue(2)	740		631
Interest	Interest expense, net(2)	119		66
Total lease cost		$	2,173	$	1,903

(1)    Operating lease costs recorded in cost of revenue included $0.1 million of variable lease costs for both the three months ended March 31, 2024 and 2023, respectively. In addition, $0.1 million of variable lease costs are included in selling, general and administrative for both the three months ended March 31, 2024 and 2023, respectively. These variable costs consist of the Company's proportionate share of operating expenses, real estate taxes and utilities.

(2)     Finance lease costs recorded in cost of revenue include variable lease costs of $1.0 million and $0.9 million for the three months ended March 31, 2024 and 2023, respectively. These variable lease costs consist of fuel, maintenance, and sales tax charges.

The future undiscounted minimum finance lease payments, as reconciled to the discounted minimum lease obligation indicated on the Company’s condensed consolidated balance sheets within current and long-term debt, less interest, and under current and long-term operating leases, less imputed interest, as of March 31, 2024 were as follows (in thousands):

	Finance Lease Obligations						Operating Lease Obligations
Year ending:	Vehicles		Pontiac Facility		Total Finance		Non-Related Party		Related Party(1)		Total Operating		Sublease Receipts(2)
Remainder of 2024	$	2,269	$	387	$	2,656	$	2,860	$	736	$	3,596	$	688
2025	2,331		528		2,859		3,703		765		4,468		939
2026	1,815		542		2,357		3,614		770		4,384		967
2027	927		555		1,482		2,556		871		3,427		326
2028	180		569		749		1,621		871		2,492		—
Thereafter	117		13,733		13,850		1,467		4,997		6,464		—
Total minimum lease payments	7,639		16,314		23,953		15,821		9,010		24,831		$	2,920
Financing Component (3)	(722)		(10,963)		(11,685)		(1,965)		(2,079)		(4,044)
Net present value of minimum lease payments	6,917		5,351		12,268		13,856		6,931		20,787
Less: current portion of finance and operating lease obligations	(2,532)		—		(2,532)		(3,104)		(574)		(3,678)
Long-term finance and operating lease obligations	$	4,385	$	5,351	$	9,736	$	10,752	$	6,357	$	17,109

(1)    Associated with the aforementioned related party leases entered into with former members of JMLLC, ACME and Industrial Air.

(2)    Associated with the aforementioned third party sublease.

(3)     The financing component for finance lease obligations represents the interest component of finance leases that will be recognized as interest expense in future periods. The financing component for operating lease obligations represents the effect of discounting the lease payments to their present value.

The following is a summary of the lease terms and discount rates as of:

	March 31, 2024		December 31, 2023
Weighted average lease term (in years):
Operating	6.46		6.54
Finance (1)	3.05		3.10
Weighted average discount rate:
Operating	5.61	%	6.74	%
Finance (1)	6.75	%	5.33	%

(1)     Excludes the weighted average lease term and weighted average discount rate associated with the aforementioned sale-leaseback financing transaction, which has a Primary Term of 25 years and utilized an implicit rate of 11.11%. See Note 6 for further detail.

The following is a summary of other information and supplemental cash flow information related to finance and operating leases:

	Three months ended March 31,
(in thousands)	2024		2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,250	$	1,164
Operating cash flows from finance leases	121		66
Financing cash flows from finance leases	695		639
Right-of-use assets exchanged for lease liabilities:
Operating leases	2,097		742
Finance leases	308		1,402
Right-of-use assets disposed or adjusted modifying finance leases liabilities	$	(41)	(1)