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Leases | 6 Months Ended
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Apr. 30, 2020
Leases [Abstract] |
Leases | Note 11. Leases The Company adopted ASC 842 and its related amendments (collectively, the “New Lease Accounting Standard”) effective November 1, 2019 and elected the modified retrospective approach in which results and disclosures for periods before 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 New Lease Accounting Standard establishes a right-of-use model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet 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. In addition, this standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor does not convey risks and rewards or control, the lease is treated as operating. The New Lease Accounting 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 New Lease Accounting Standard’s recognition requirements to short-term leases with a term of 12 months or less. The adoption of the New Lease Accounting Standard did not have a material effect on the Company’s consolidated statement of operations or consolidated statement of cash flows. Upon adoption, the Company recorded a $10.1 million operating lease ROU asset and a $10.3 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 space, 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. 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 sheet. Finance leases are not considered significant to the Company’s consolidated balance sheet or consolidated statement of operations. Finance lease ROU assets at April 30, 2020 of $0.1 million are included in Property, plant and equipment, net in the Company’s consolidated balance sheet. Finance lease liabilities at April 30, 2020 of $0.1 million are included in Current portion of long-term debt and Long-term debt and other liabilities in the Company’s consolidated balance sheet. 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 expense for the three and six months ended April 30, 2020 was $0.1 million and $0.3 million, respectively. As of April 30, 2020, the weighted average remaining lease term (in years) was approximately 19 years and the weighted average discount rate was 6.2%. Lease payments made for the three and six months ended April 30, 2020 were $0.2 million and $0.5 million, respectively. Undiscounted maturities of operating lease and finance lease liabilities are as follows:
|  | Operating Leases |  |  | Finance Leases |
Due Year 1 |  | $ | 1,198 |  |  | $ | 69 |
Due Year 2 |  |  | 1,339 |  |  |  | 18 |
Due Year 3 |  |  | 1,292 |  |  |  | — |
Due Year 4 |  |  | 768 |  |  |  | — |
Due Year 5 |  |  | 693 |  |  |  | — |
Thereafter |  |  | 14,413 |  |  |  | — |
Total undiscounted lease payments |  |  | 19,703 |  |  |  | 87 |
Less imputed interest |  |  | (9,217 | ) |  |  | (4 | )
Total discounted lease payments |  | $ | 10,486 |  |  | $ | 83 |
Prior to the adoption of the New Lease Accounting Standard, rental commitments on an undiscounted basis were approximately $19.9 million under long-term non-cancelable operating leases and were payable as follows: $1.1 million in fiscal year 2020, $1.4 million in fiscal year 2021, $1.3 million in fiscal year 2022, $0.9 million in fiscal year 2023, $0.7 million in fiscal year 2024 and $14.6 million thereafter. Rent expense for the three and six months ended April 30, 2019 was $0.2 million and $0.5 million, respectively. Crestmark 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 “Purchase Agreement”) and an Equipment Lease Agreement (the “Lease”) with Crestmark. Under these agreements, CCFC2 sold the 2.8 MW biogas fueled fuel cell power plant (the “Plant”) located at the Tulare wastewater treatment plant in Tulare, California to Crestmark and then leased the Plant back from Crestmark through this sale-leaseback transaction. The Plant was designed, manufactured and installed by the Company, and commercial operations began on December 27, 2019. In operating the Plant, CCFC2 purchases biogas from the City of Tulare and sells the power produced by the Plant to Southern California Edison under a twenty-year PPA, which was separately entered into on April 20, 2018 (the “Tulare PPA”), under the California Bioenergy Market Adjusting Tariff. Under the terms of the Purchase Agreement, Crestmark paid CCFC2 an aggregate purchase price of $14.4 million. A portion of these proceeds were used by CCFC2 to make a down payment and an initial rental payment under the Lease to Crestmark totaling $2.9 million, to pay taxes and transaction costs and to fund a debt service reserve totaling approximately $1.0 million, resulting in net proceeds to CCFC2 of approximately $10.5 million. These net proceeds were allocated as follows:
| • | Approximately $6.5 million of the net proceeds were deposited into the Project Proceeds Account (restricted cash on the Company’s consolidated balance sheet) under the Orion Facility. These proceeds may be used to repay amounts outstanding under the Orion Facility or redeployed, subject to the approval of the lenders and the Agent under the Orion Facility, to other financing transactions for the Company’s projects. These net proceeds are classified as long-term restricted cash on the consolidated balance sheet.
| • | Approximately $1.2 million of the net proceeds were deposited into a module reserve account and debt services reserve account under the Orion Facility. These net proceeds are classified as long-term restricted cash on the consolidated balance sheet.
| • | The balance of the net proceeds, totaling $2.8 million, were used to fund the quarterly cash interest payment due to the lenders under the Orion Facility and the dividend payments on the Company’s Series B Preferred Stock (as defined below) and the dividend and return of capital payment on the Series 1 Preferred Shares (as defined below) of FCE Ltd. (as defined below) required to be paid in the second quarter of fiscal 2020.
The Lease has an initial term of ten years but may be extended at the option of CCFC2. As noted above, an initial rental down payment and one month’s rent totaling $2.9 million was paid using the proceeds from the sale of the 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. Following the sale-leaseback transaction, the remaining lease payments due over the term of the Lease total approximately $9.3 million. CCFC2 and Crestmark entered into an Assignment Agreement on February 11, 2020 (the “Assignment Agreement”) and FuelCell Energy Finance, LLC (“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 “Pledge Agreement”) pursuant to which collateral was provided to Crestmark to secure CCFC2’s obligations under the Lease. Specifically, CCFC2 and FuelCell Finance granted Crestmark a security interest in (i) certain agreements relating to the sale-leaseback transaction, (ii) the revenues CCFC2 receives with respect to the Plant, (iii) two fuel cell modules to be maintained by CCFC2 as replacement modules for the 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 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 Plant. Pursuant to the 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 U.S. Internal Revenue Service (“IRS”). The Company does not believe that any such obligation is likely based on the facts known as of April 30, 2020. 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 Purchase Agreement and the Lease contain representations and warranties, affirmative and negative covenants, and events of default that entitle Crestmark to cause CCFC2’s indebtedness under the Lease to become immediately due and payable. The Lease includes an end of term option for CCFC2 to repurchase the transferred assets at the then fair market value of the assets. As a result, a repurchase of the assets would preclude 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. Pursuant to a Guaranty Agreement executed on February 11, 2020 by the Company for the benefit of Crestmark (the “Guaranty”), the Company has guaranteed the payment and performance of CCFC2’s obligations under the Lease.

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