Leases

12 Months Ended

Oct. 31, 2021

Leases

Leases

Note 13. Leases

The Company adopted ASC 842 and its related amendments (collectively, the “Standard”) effective November 1, 2019 and elected the modified retrospective approach in which results and disclosures for periods before November 1, 2019 were not adjusted for the new standard and the cumulative effect of the change in accounting, if applicable, is recognized through accumulated deficit at the date of adoption.

The Standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the Consolidated Balance Sheets for all leases. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statement of Operations.

The Standard provides entities with several practical expedient elections. Among them, the Company elected the package of practical expedients that permits the Company to not reassess prior conclusions related to its leasing arrangements, lease classifications and initial direct costs. In addition, the Company has elected the practical expedients to not separate lease and non-lease components, to use hindsight in determining the lease terms and impairment of ROU assets, and to not apply the Standard’s recognition requirements to short-term leases with a term of 12 months or less.

The adoption of the Standard did not have a material effect on the Company’s Consolidated Statements of Operations and Comprehensive Loss or Consolidated Statement of Cash Flows. Upon adoption, the Company recorded a $10.3 million operating lease ROU asset and a $10.1 million operating lease liability. The adoption of the New Lease Accounting Standard had no impact on accumulated deficit.

The Company enters into operating and finance lease agreements for the use of real estate, vehicles, information technology equipment, and certain other equipment. We determine if an arrangement contains a lease at inception, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations. The impacts of accounting for operating leases are included in Operating lease right-of-use assets, Operating lease liabilities, and Long-term operating lease liabilities in the Company’s Consolidated Balance Sheets. Finance leases are not considered significant to the Company’s Consolidated Balance Sheets or Consolidated Statements of Operations and Comprehensive Loss. Finance lease ROU assets at October 31, 2021 and 2020 of $0.1 million and $0.04 million, respectively, are included in Property, plant and equipment, net in the Company’s Consolidated Balance Sheets. Finance lease liabilities at October 31, 2021 and 2020 of $0.1 million and $0.04 million, respectively, are included in Current portion of long-term debt and Long-term debt and other liabilities in the Company’s Consolidated Balance Sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the present value of the Company’s obligation to make lease payments arising from the lease over the lease term at the commencement date of the lease (or November 1, 2019 for leases existing upon the adoption of ASC 842). As most of the Company’s leases do not provide an implicit rate, the Company estimated the incremental borrowing rate based on the information available at the date of adoption in determining the present value of lease payments and used the implicit rate when readily determinable. The Company determined incremental borrowing rates through market sources for secured borrowings including relevant industry rates. The Company’s operating lease ROU assets also include any lease pre-payments and exclude lease incentives. Certain of the Company’s leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. The Company excludes variable payments from lease ROU assets and lease liabilities to the extent not considered in-substance fixed, and instead, expenses variable payments as incurred. Variable lease expense and lease expense for short term contracts are not material components of lease expense. The Company’s leases generally have remaining lease terms of 1 to 26 years, some of which include options to extend leases. The exercise of lease renewal options is at the Company’s sole discretion and the Company’s lease ROU assets and liabilities reflect only the options the Company is reasonably certain that it will exercise. We do not have leases with residual value guarantees or similar covenants.

Operating lease costs for the years ended October 31, 2021 and 2020 was $1.5 million. As of October 31, 2021, the weighted average remaining lease term (in years) was approximately 20 years and the weighted average discount rate was 8.15%. Lease payments made during the years ended October 31, 2021 and 2020 totaled $1.2 million and $1.0 million, respectively.

Rent expense for operating leases of computer and office equipment and the manufacturing facilities in Torrington and Danbury, Connecticut under previous accounting guidance for leases was $1.0 million for the year ended October 31, 2019.

As of October 31, 2021, undiscounted maturities of operating lease and finance lease liabilities are as follows (in thousands):

	Operating Leases		Finance Leases
2021	$	1,528	$	54
2022		1,179		49
2023		867		12
2024		795		—
2025		767		—
Thereafter		14,194		—
Total undiscounted lease payments		19,330		115
Less imputed interest		(10,205)		(13)
Total discounted lease payments	$	9,125	$	102

San Bernardino Fuel Cell, LLC Sale-Leaseback Transaction

On August 25, 2021, an indirect wholly-owned subsidiary of the Company, San Bernardino Fuel Cell, LLC (“SBFC”), entered into a Purchase and Sale Agreement (the “San Bernardino Purchase Agreement”) and an Equipment Lease Agreement (the “San Bernardino Lease”) with Crestmark Equipment Finance (“Crestmark”). Under these agreements, SBFC sold the 1.4 MW biogas fueled fuel cell power plant (the “San Bernardino Plant”) located at the San Bernardino wastewater treatment plant in San Bernardino, California to Crestmark for a purchase price of $10.2 million and then leased the San Bernardino Plant back from Crestmark. SBFC sells the power produced by the San Bernardino Plant to a third party under a twenty-year PPA (the “San Bernardino PPA”).

The San Bernardino Lease has an initial term of ten years but may be extended at the option of SBFC. An initial rental down payment and one quarter’s rent totaling $2.2 million was paid using the proceeds from the sale of the San Bernardino Plant. Lease payments are expected to be funded with proceeds from the sale of power under the San Bernardino PPA on a quarterly basis. As a result of the sale-leaseback transaction, the remaining lease payments due over the term of the San Bernardino Lease were approximately $5.3 million immediately following the transaction and as of October 31, 2021.

Reserves covering debt service and future module replacement totaling $2.5 million were also deducted from the proceeds from the sale of the San Bernardino Plant and will be classified as restricted cash of the Company until such time as it meets its performance obligations (such as servicing the San Bernardino Plant and providing module exchanges) under the Long Term Service Agreement for the San Bernardino Plant. The Company’s net unrestricted cash proceeds from the transaction totaled approximately $5.3 million, which is the purchase price less the initial rent payments, debt and module reserves, and taxes and transaction fees.

In addition, SBFC and Crestmark entered into an Assignment Agreement on August 25, 2021 (the “San Bernardino Assignment Agreement”) and FuelCell Finance (a wholly-owned subsidiary of the Company and the direct parent of SBFC) and Crestmark entered into a Pledge Agreement on August 25, 2021 (the “San Bernardino Pledge Agreement”) pursuant to which agreements collateral was provided to Crestmark to secure SBFC’s obligations under the San Bernardino Lease which includes a security interest in (i) certain agreements relating to the sale-leaseback transaction, (ii) the revenues with respect to the San Bernardino Plant, (iii) a cash module replacement reserve for the San Bernardino Plant, and (iv) FuelCell Finance’s equity interest in SBFC. SBFC and the Company also entered into a Technology License and Access Agreement with Crestmark on August 25, 2021, which provides Crestmark with certain intellectual property license rights to have access to the Company’s proprietary fuel cell technology, but only for the purpose of maintaining and servicing the San Bernardino Plant in certain circumstances in which the Company is not satisfying its obligations under its service agreement with regard to the maintenance and servicing of the San Bernardino Plant.

Pursuant to the San Bernardino Lease, SBFC has an obligation to indemnify Crestmark for the amount of any actual reduction in the U.S. investment tax credit (“ITC”) anticipated to be realized by Crestmark in connection with this sale-leaseback transaction. Such obligation would arise as a result of reductions to the value of the underlying fuel cell project as assessed by the U.S. Internal Revenue Service (“IRS”). The Company does not believe that any such obligation is probable based on the facts known as of October 31, 2021. The maximum potential future payments that SBFC could be required to make as a result of this obligation would depend on the difference between the fair value of the fuel cell project sold or financed and the value the IRS would determine as the fair value of the project for purposes of claiming the ITC.

The value of the ITC in the sale-leaseback agreements is based on guidelines provided by regulations from the IRS. The Company and Crestmark used a fair value determined with the assistance of an independent third-party appraisal.

The San Bernardino Purchase Agreement and the San Bernardino Lease contain representations and warranties, affirmative and negative covenants, and events of default that entitle Crestmark to cause SBFC’s indebtedness under the San Bernardino Lease to become immediately due and payable.

Pursuant to a Guaranty Agreement executed on August 25, 2021 by the Company for the benefit of Crestmark (the “San Bernardino Guaranty”), the Company has guaranteed the payment and performance of SBFC’s obligations under the San Bernardino Lease.

Central CA Fuel Cell 2, LLC Sale-Leaseback Transaction

On February 11, 2020, an indirect wholly-owned subsidiary of the Company, Central CA Fuel Cell 2, LLC (“CCFC2”), entered into a Purchase and Sale Agreement (the “Tulare Purchase Agreement”) and an Equipment Lease Agreement (the “Tulare Lease”) with Crestmark. Under these agreements, CCFC2 sold the 2.8 MW biogas fueled fuel cell power plant (the “Tulare Plant”) located at the Tulare wastewater treatment plant in Tulare, California to Crestmark for a purchase price of $14.4 million and then leased the Tulare Plant back from Crestmark. CCFC2 sells the power produced by the Tulare Plant to a third party under a twenty-year PPA (the “Tulare PPA”). The Tulare Lease includes an end of term option for CCFC2 to repurchase the transferred assets. The repurchase clause precluded sale accounting since there are no alternative assets substantially the same as the transferred assets readily available in the marketplace. As such, the transaction is a failed sale-leaseback transaction that is accounted for as a financing transaction.

The Tulare Lease has an initial term of ten years but may be extended at the option of CCFC2. An initial rental down payment and one month’s rent totaling $2.9 million was paid using the proceeds from the sale of the Tulare Plant. Lease payments are due on a monthly basis in the amount of $0.1 million. Lease payments are expected to be funded with proceeds from the sale of power under the Tulare PPA. As a result of the sale-leaseback transaction, the remaining lease payments due over the term of the Tulare Lease were approximately $9.3 million immediately following the transaction and $7.7 million and $8.6 million as of October 31, 2021 and 2020, respectively.

CCFC2 and Crestmark entered into an Assignment Agreement on February 11, 2020 (the “Tulare Assignment Agreement”) and FuelCell Finance, a wholly-owned subsidiary of the Company and the direct parent of CCFC2, and Crestmark entered into a Pledge Agreement on February 11, 2020 (the “Tulare Pledge Agreement”) pursuant to which agreements collateral was provided to Crestmark to secure CCFC2’s obligations under the Tulare Lease which includes a security interest in (i) certain agreements relating to the sale-leaseback transaction, (ii) the revenues with respect to the Tulare Plant, (iii) two fuel cell replacement modules for the Tulare Plant, and (iv) FuelCell Finance’s equity interest in CCFC2. CCFC2 and the Company also entered into a Technology License and Access Agreement with Crestmark on February 11, 2020, which provides Crestmark with certain intellectual property license rights to have access to the Company’s proprietary fuel cell technology, but only for the purpose of maintaining and servicing the Tulare Plant in certain circumstances where the Company is not satisfying its obligations under its service agreement with regard to the maintenance and servicing of the Tulare Plant.

Pursuant to the Tulare Lease, CCFC2 has an obligation to indemnify Crestmark for the amount of any actual reduction in the U.S. Investment Tax Credit anticipated to be realized by Crestmark in connection with the foregoing sale-leaseback transaction. Such obligations would arise as a result of reductions to the value of the underlying fuel cell project as assessed by the IRS. The Company does not believe that any such obligation is probable based on the facts known as of October 31, 2021. The maximum potential future payments that CCFC2 could have to make under these obligations would depend on the difference between the fair values of the fuel cell project sold or financed and the values the IRS would determine as the fair value for the system for purposes of claiming the Investment Tax Credit. The value of the Investment Tax Credit in the sale-leaseback agreements is based on guidelines provided by regulations from the IRS. The Company and Crestmark used fair values determined with the assistance of an independent third-party appraisal.

The Tulare Purchase Agreement and the Tulare Lease contain representations and warranties, affirmative and negative covenants, and events of default that entitle Crestmark to cause CCFC2’s indebtedness under the Tulare Lease to become immediately due and payable.

Pursuant to a Guaranty Agreement executed on February 11, 2020 by the Company for the benefit of Crestmark (the “Tulare Guaranty”), the Company has guaranteed the payment and performance of CCFC2’s obligations under the Tulare Lease.