8. LEASES

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. For additional detail regarding these updates to Topic 842, please see below. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the Audited Consolidated Statements of Operations.

The new standard was effective for us on January 1, 2019, with early adoption permitted. We adopted the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We used the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

The new standard provides several optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess, under the new standard, our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight with respect to determining the lease term (i.e., considering the actual outcome and updated expectations of lease renewals, termination option and purchase options). We also did not elect the use of the practical expedient pertaining to land easements because we do not have any such easements.

The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for our leases.

This standard had a material effect on our Audited Consolidated Balance Sheets. Specifically, the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our factories in the Dominican Republic and Puerto Rico and various equipment leases, all currently accounted for as operating leases; and (2) providing significant new disclosures about our leasing activities. Adoption of the standard did not have a material impact on our Audited Consolidated Statements of Cash Flows. We do not expect a significant change in our leasing activities as a result of this standard. Many of our leases contain renewal options, most of which are not included in the measurement of the right-of-use asset as they are not considered reasonably certain of exercise (i.e. we do not currently have a significant economic incentive to exercise these options).

The operating ROU asset and operating lease liabilities as of December 31, 2019 and upon adoption of ASC 842 are as follows:


				(Upon ASC 842 Adoption)
		December 31,		January 1,
($ in thousands)		2019		2019	Financial Statement Line Item
Assets:
Operating ROU Assets	$	1,743	$	1,136	Leased assets

Liabilities:
Current
Operating	$	586	$	626	Other accrued expenses
Noncurrent
Operating		1,158		544	Long-term lease
Total leased liabilities	$	1,744	$	1,170

Maturity of our operating lease liabilities are as follows:


		Operating
($ in thousands)		Leases
2020		654
2021		534
2022		362
2023		255
2024		78
Total lease payments		1,883
Less: Interest		139
Present value of lease liabilities	$	1,744

For the twelve months ended December 31, 2019 the weighted average remaining lease term and discount rate were as follows:


		December 31,
		2019
Weighted-average remaining lease term (years)
Operating leases		2.2

Weighted-average discount rate
Operating leases		4.6%

For the twelve months ended December 31, 2019 the supplemental cash flow information is as follows:


		December 31,
($ in thousands)		2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	909

Right-of-use assets obtained in exchange for lease obligations
Operating leases	$	1,419

The breakdown of rent expense for our operating leases for the twelve months ended December 31, 2019 are as follows:


		Twelve Months Ended
		December 31,
($ in thousands)		2019	Financial Statement Line Item
Operating lease expenses - Manufacturing & Sourcing (1)	$	636	Cost of goods sold
Operating lease expenses (1)		367	Operating expenses
Total lease expenses	$	1,003

(1) Includes short-term lease expenses of approximately $126,000 for the twelve months ended December 31, 2019.