LEASES

12 Months Ended

Dec. 30, 2023

LEASES

LEASES

NOTE 8 – LEASES

The Company leases land, office space and equipment. Arrangements are assessed at inception to determine if a lease exists and right-of-use (“ROU”) assets and lease liabilities are recognized based on the present value of lease payments over the lease term. Because the Company’s leases do not provide an implicit rate of return, the Company uses its incremental borrowing rate at the inception of a lease to calculate the present value of lease payments. The Company has elected to apply the short-term lease exception for all asset classes, excluding lease liabilities from the balance sheet and recognizing the lease payments in the period they are incurred.

The components of lease expense are as follows (amounts in thousands):

	Financial Statement Classification	Year ended December 30, 2023		Year ended December 31, 2022
Finance leases:
Amortization expense	SG&A Expense	$	237	$	204
Interest expense	Interest expense, net		52		44
		$	289	$	248
Operating leases:
Operating costs	Operating costs		762		491
Selling, general and administrative expenses	SG&A Expense		3,948		2,218
		$	4,710	$	2,709
Total lease expense		$	4,999	$	2,957

Supplemental balance sheet information related to leases are as follows (amounts in thousands):

	Financial Statement Classification	December 30, 2023		December 31, 2022
ROU Assets:
Operating leases	Right of Use asset	$	5,079	$	8,072
Finance leases	Property and equipment, net		795		761
Total ROU Assets:		$	5,874	$	8,833
Lease liabilities:
Current liabilities
Operating leases	Current portion of operating leases	$	1,726	$	1,638
Finance leases	Current portion of finance leases		263		211
Noncurrent Liabilities:
Operating leases	Long Term operating leases		5,761		6,669
Finance leases	Long Term finance leases		548		548
Total lease liabilities		$	8,298	$	9,066

The weighted average remaining lease term and weighted average discount rate are as follows:

	December 30, 2023			December 31, 2022
Weighted average remaining lease term (years)
Operating leases		6.6			7.3
Finance leases		3.1			3.7
Weighted average discount rate
Operating leases		10.2	%		11.0	%
Finance leases		9.1	%		8.2	%

Maturities of operating lease liabilities as of December 30, 2023 are as follows (dollars in thousands):

	Operating leases			Finance leases			Total
2024	$	1,919		$	305		$	2,224
2025		1,395			268			1,663
2026		920			239			1,159
2027		951			65			1,016
2028 and thereafter		3,157			14			3,171
Total lease payments		8,342			891			9,233
Less: imputed interest		(855	)		(80	)		(935	)
Total lease liabilities	$	7,487		$	811		$	8,298

ROU assets recorded on a lessee’s balance sheet under ASC 842 are subject to the ASC 360-10 impairment guidance applicable to long-lived assets. When events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable (i.e., impairment indicators exist), the asset group is tested to determine whether an impairment exists. In 2023, the Company ceased operations at its fabrication facility in Brookshire, Texas and facility in Monahans, Texas.  The method used to measure the impairment loss was the held and use model under ASC 360-10-35. Under the held-and-used impairment model, there are two steps after a trigger is identified. The first step is referred to as the recoverability test, which involves comparing the carrying amount of the asset group to the undiscounted future expected cash flows of the asset group. If the carrying amount of the asset group is less than the undiscounted cash flows for the asset group, the lessee has passed the recoverability test, and no impairment charge should be recognized.

Under Step 2 of the held-and-used impairment model, the lessee compares the carrying amount of the asset group to its fair value. An asset group’s undiscounted cash flows used in the recoverability test (i.e., Step 1) and fair value used in Step 2 will be different amounts. Undiscounted cash flows do not take the time value of money into consideration, whereas fair value does take the time value of money into consideration. In addition, undiscounted cash flows are estimated using an entity-specific perspective, while fair value is estimated using a market-participant perspective. When the carrying amount of the asset group is higher than its fair value, an impairment loss exists. When the carrying amount of the asset group is lower than its fair value, an impairment loss does not exist.

During the third quarter of 2023, we determined the carrying amount of the ROU asset located in Monahans, Texas was no longer recoverable and wrote the balance down to its estimated fair value. Additionally, during the fourth quarter of 2023, we determined the carrying amount of the ROU asset located in Brookshire, Texas exceeded its  fair value by $1.6 million. The total impairment loss of $1.8 million was reported within the SG&A section of the Commercial segment on the Consolidate Statement of Operations. The discount rate used to measure the fair value of the ROU asset in Brookshire, Texas was 7.71%, which was based on the average WACC for market participants in the same industry since we believe this is the highest and best use of the facility.