Leases

3 Months Ended

Mar. 31, 2019

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (“ASC 842”). The Company adopted ASC 842 on January 1, 2019, using the effective date transition method, under which the cumulative-effect adjustment was recorded to the opening balance sheet as of the effective date and prior periods were not restated. Upon adoption, the Company recorded leases with a duration of greater than 1 year on the balance sheet as right-of-use assets and lease liabilities. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification is based on criteria that are largely similar to those applied in previous lease accounting, but without explicit bright lines. The Company has made certain assumptions and judgments when applying ASC 842, as follows:


•	The Company elected the package of practical expedients available for transition which allows it to not reassess:


◦	Whether expired or existing contracts contain leases


◦	Lease classification for expired or existing leases; and


◦	Previously capitalized initial direct costs


•	For all asset classes, the Company elected to not recognize right-of-use assets and lease liabilities for leases with a term of 12 months or less; and


•	For all asset classes, the Company elected not to separate non-lease components from lease components to which they relate.

The Company’s leases primarily consist of operating leases for real estate. Additionally, the Company has various, less significant leases for equipment and automobiles. The Company’s current leases have terms of up to approximately 8 years, and generally include one or more options to renew. These renewal terms can extend the lease term from 1 to 5 years, and are included in the lease term when it is reasonably certain that the Company will exercise the option.

The Company’s operating leases assets, which represent the Company’s right to use the underlying asset for the lease term, and operating lease liabilities, which represent the Company’s obligation to make lease payments, are included in the Company's March 31, 2019 condensed consolidated balance sheet. On January 1, 2019, the Company recognized right-of-use assets and lease liabilities based on the present value of the lease payments for the remaining lease term of the Company's existing leases; the Company recorded right-of-use assets of approximately $9.1 million and operating lease liabilities of $11.6 million. No new right-of-use assets were obtained during the three months ended March 31, 2019.

The Company has entered into various short-term operating leases, primarily for corporate housing, office equipment and small office space, with an initial term of twelve months or less. These leases are not recorded on the Company's balance sheet and the related lease expense for these short-term leases is not material.

The Company’s applies a discount rate to the minimum lease payments within each lease agreement to determine the value of right-of-use assets and lease liabilities. Unless the rate implicit in each lease is determinable, ASC 842 requires the use of the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term for a similar amount to the lease payments in a similar economic environment. The Company noted that the implicit rate in each lease was not determinable and calculated its incremental borrowing rate primarily based on the Company’s existing secured line of credit rate, adjusted for varying lease terms.

In 2018, in connection with a contract manufacturer transition, the Company’s agreement with the contract manufacturer included a provision that met the lease definition criteria in reference to manufacturing equipment located at the contract manufacturer’s facility. Some of the terms of the equipment agreement have not yet been finalized; however, the Company anticipates that it will make even quarterly payments over 3 years, after which time title to the equipment will transfer to the Company. As of December 31, 2018, the arrangement was recorded as a capital lease. In connection with the adoption of ASC 842, as of March 31, 2019, the arrangement is now considered a finance lease; however, there were no changes to the accounting for this arrangement. The finance lease asset related to this arrangement is included in “property and equipment, net” in the Company’s condensed consolidated balance sheet. The finance lease liability related to this arrangement is recorded in “short-term borrowings and current portion of long-term debt” and “long-term debt, excluding current portion” in the Company’s condensed, consolidated balance sheet.

Information related to the Company’s leases for the three months ended March 31, 2019 follows (in thousands):



	Three Months Ended March 31,
	2019
Operating lease cost	$	382
Finance lease cost	159
Interest on finance lease	21

Operating cash flows from operating leases	723
Operating cash flows from finance lease	21
Financing cash flows from finance lease	232

Information related to the Company’s leases as of March 31, 2019 follows (in thousands):



	As of March 31,
	2019
Operating lease right-of-use assets	$	8,683
Operating lease liability, short-term	2,178
Operating lease liability, long-term	8,898
Weighted-average remaining lease term - operating leases	5.7 years
Weighted-average discount rate - operating leases	6.1		%

Finance lease right-of use asset	$	1,532
Finance lease liability, short-term	366
Finance lease liability, long-term	931
Weighted-average remaining lease term - finance lease	2.5 years
Weighted-average discount rate - finance lease	5.0		%

As of March 31, 2019, right-of-use assets of $8.7 million were recorded net of tenant improvement allowances of $0.9 million and a lease asset impairment of $0.4 million.

Future annual minimum lease payments and finance lease commitments as of March 31, 2019 were as follows (in thousands):



	Operating Leases			Finance Lease
2019 (excluding the three months ended March 31, 2019)	$	2,122		$	257
2020	2,705			687
2021	2,173			451
2022	2,202			—
2023	1,218			—
2024 and thereafter	2,814			—
Total minimum lease payments	13,234			1,395
Less imputed interest	(2,158		)	(98		)
Lease liability	$	11,076		$	1,297

Leases


•	The Company elected the package of practical expedients available for transition which allows it to not reassess:


◦	Whether expired or existing contracts contain leases


◦	Lease classification for expired or existing leases; and


◦	Previously capitalized initial direct costs


•	For all asset classes, the Company elected to not recognize right-of-use assets and lease liabilities for leases with a term of 12 months or less; and


•	For all asset classes, the Company elected not to separate non-lease components from lease components to which they relate.

Information related to the Company’s leases for the three months ended March 31, 2019 follows (in thousands):



	Three Months Ended March 31,
	2019
Operating lease cost	$	382
Finance lease cost	159
Interest on finance lease	21

Operating cash flows from operating leases	723
Operating cash flows from finance lease	21
Financing cash flows from finance lease	232

Information related to the Company’s leases as of March 31, 2019 follows (in thousands):



	As of March 31,
	2019
Operating lease right-of-use assets	$	8,683
Operating lease liability, short-term	2,178
Operating lease liability, long-term	8,898
Weighted-average remaining lease term - operating leases	5.7 years
Weighted-average discount rate - operating leases	6.1		%

Finance lease right-of use asset	$	1,532
Finance lease liability, short-term	366
Finance lease liability, long-term	931
Weighted-average remaining lease term - finance lease	2.5 years
Weighted-average discount rate - finance lease	5.0		%

As of March 31, 2019, right-of-use assets of $8.7 million were recorded net of tenant improvement allowances of $0.9 million and a lease asset impairment of $0.4 million.

Future annual minimum lease payments and finance lease commitments as of March 31, 2019 were as follows (in thousands):



	Operating Leases			Finance Lease
2019 (excluding the three months ended March 31, 2019)	$	2,122		$	257
2020	2,705			687
2021	2,173			451
2022	2,202			—
2023	1,218			—
2024 and thereafter	2,814			—
Total minimum lease payments	13,234			1,395
Less imputed interest	(2,158		)	(98		)
Lease liability	$	11,076		$	1,297