##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 1-14204
 FUELCELL ENERGY, INC.
  Delaware
    
    06-0853042(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)3 Great Pasture Road 
Danbury, Connecticut
    
    06813(Address of principal executive offices)
    
    (Zip Code)
 203) 825-6000
 Yes þ No o
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 Yes o No þ




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##### 



FUELCELL ENERGY, INC.
FORM 10-Q
 Table of Contents
 PagePART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements (unaudited)Consolidated Balance Sheets as of July 31, 2010 and October 31, 2009
    
    
    3Consolidated Statements of Operations for the three months ended July 31, 2010 and 2009
    
    
    4Consolidated Statements of Operations for the nine months ended July 31, 2010 and 2009
    
    
    5Consolidated Statements of Cash Flows for the nine months ended July 31, 2010 and 2009
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    40PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    41Item 1A. Risk Factors
    
    
    41Item 6. Exhibits
    
    
    41Signature
    
    
    42Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



FUELCELL ENERGY, INC.
 
 Consolidated Balance Sheets
 (Unaudited)
 (Amounts in thousands, except share and per share amounts)
 July 31,
    
    
    October 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,728
    
    
    $
    57,823Investments  U.S. treasury securities
    
    
    36,997
    
    
    
    7,004Accounts receivable, net
    
    
    13,897
    
    
    
    22,920Inventories, net
    
    
    30,574
    
    
    
    25,433Other current assets
    
    
    4,700
    
    
    
    6,499Total current assets
    
    
    101,896
    
    
    
    119,679Property, plant and equipment, net
    
    
    28,832
    
    
    
    32,394Investments  U.S. treasury securities
    
    
    15,113
    
    
    
    Investment in and loans to affiliate
    
    
    10,079
    
    
    
    10,064Other assets, net
    
    
    1,311
    
    
    
    551Total assets
    
    $
    157,231
    
    
    $
    162,688LIABILITIES AND EQUITYCurrent liabilities:Current portion of long-term debt and other liabilities
    
    $
    980
    
    
    $
    997Accounts payable
    
    
    8,574
    
    
    
    8,484Accounts payable due to affiliate
    
    
    560
    
    
    
    1,584Accrued liabilities
    
    
    15,639
    
    
    
    13,808Deferred revenue, royalty income and customer deposits
    
    
    22,576
    
    
    
    17,013Total current liabilities
    
    
    48,329
    
    
    
    41,886Long-term deferred revenue and royalty income
    
    
    8,436
    
    
    
    10,124Long-term debt and other liabilities
    
    
    4,132
    
    
    
    4,410Total liabilities
    
    
    60,897
    
    
    
    56,420Redeemable preferred stock of subsidiary
    
    
    16,246
    
    
    
    14,976Redeemable preferred stock (liquidation preference of
$64,020 at July 31, 2010 and $64,120 at October 31,
2009)
    
    
    59,857
    
    
    
    59,950Total Equity:Shareholders equityCommon stock ($.0001 par value); 150,000,000
shares authorized; 112,950,468 and 84,387,741
shares issued and outstanding at July 31, 2010
and October 31, 2009, respectively
    
    
    11
    
    
    
    8Additional paid-in capital
    
    
    663,979
    
    
    
    631,296Accumulated deficit
    
    
    (643,500
    )
    
    
    (599,960
    )Accumulated
other comprehensive income (loss)
    
    
    11
    
    
    
    (2
    )Treasury stock, Common, at cost (5,679 shares at
July 31, 2010 and October 31, 2009)
    
    
    (53
    )
    
    
    (53
    )Deferred compensation
    
    
    53
    
    
    
    53Total shareholders equity
    
    
    20,501
    
    
    
    31,342Noncontrolling interest in subsidiaries
    
    
    (270
    )
    
    
    Total equity
    
    
    20,231
    
    
    
    31,342Total liabilities and equity
    
    $
    157,231
    
    
    $
    162,688
   3




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##### Table of Contents



FUELCELL ENERGY, INC.
 
 Consolidated Statements of Operations
 (Unaudited)
 (Amounts in thousands, except share and per share amounts)
 Three Months EndedJuly 31,2010
    
    
    2009Revenues:Product sales and revenues
    
    $
    16,218
    
    
    $
    18,738Research and development contracts
    
    
    2,655
    
    
    
    4,279Total revenues
    
    
    18,873
    
    
    
    23,017Costs and expenses:Cost of product sales and revenues
    
    
    20,050
    
    
    
    26,269Cost of research and development contracts
    
    
    2,579
    
    
    
    2,978Administrative and selling expenses
    
    
    4,185
    
    
    
    4,107Research and development expenses
    
    
    4,618
    
    
    
    4,150Total costs and expenses
    
    
    31,432
    
    
    
    37,504Loss from operations
    
    
    (12,559
    )
    
    
    (14,487
    )Interest expense
    
    
    (10
    )
    
    
    (65
    )Loss from equity investment
    
    
    (183
    )
    
    
    (15
    )Interest and other income, net
    
    
    296
    
    
    
    185Loss before redeemable preferred stock of subsidiary
    
    
    (12,456
    )
    
    
    (14,382
    )Accretion of redeemable preferred stock of subsidiary
    
    
    (603
    )
    
    
    (533
    )Loss before provision for income taxes
    
    
    (13,059
    )
    
    
    (14,915
    )Provision for income taxes
    
    
    (55
    )
    
    
    Net loss
    
    
    (13,114
    )
    
    
    (14,915
    )Net loss attributable to noncontrolling interest
    
    
    88
    
    
    
    Net loss attributable to FuelCell Energy, Inc.
    
    
    (13,026
    )
    
    
    (14,915
    )Preferred stock dividends
    
    
    (799
    )
    
    
    (802
    )Net loss to common shareholders
    
    $
    (13,825
    )
    
    $
    (15,717
    )Net loss per share to common shareholdersBasic
    
    $
    (0.15
    )
    
    $
    (0.21
    )Diluted
    
    $
    (0.15
    )
    
    $
    (0.21
    )Weighted average shares outstandingBasic
    
    
    93,512,868
    
    
    
    73,493,470Diluted
    
    
    93,512,868
    
    
    
    73,493,470
   4




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##### Table of Contents



FUELCELL ENERGY, INC.
 
 Consolidated Statements of Operations
 (Unaudited)
 (Amounts in thousands, except share and per share amounts)
 Nine Months EndedJuly 31,2010
    
    
    2009Revenues:Product sales and revenues
    
    $
    42,033
    
    
    $
    57,077Research and development contracts
    
    
    8,043
    
    
    
    10,527Total revenues
    
    
    50,076
    
    
    
    67,604Costs and expenses:Cost of product sales and revenues
    
    
    57,183
    
    
    
    83,820Cost of research and development contracts
    
    
    7,942
    
    
    
    8,053Administrative and selling expenses
    
    
    12,888
    
    
    
    13,108Research and development expenses
    
    
    14,327
    
    
    
    14,940Total costs and expenses
    
    
    92,340
    
    
    
    119,921Loss from operations
    
    
    (42,264
    )
    
    
    (52,317
    )Interest expense
    
    
    (118
    )
    
    
    (191
    )Loss from equity investment
    
    
    (576
    )
    
    
    (577
    )Interest and other income, net
    
    
    979
    
    
    
    730Loss before redeemable preferred stock of subsidiary
    
    
    (41,979
    )
    
    
    (52,355
    )Accretion of redeemable preferred stock of subsidiary
    
    
    (1,763
    )
    
    
    (1,559
    )Loss before provision for income taxes
    
    
    (43,742
    )
    
    
    (53,914
    )Provision for income taxes
    
    
    (68
    )
    
    
    Net loss
    
    
    (43,810
    )
    
    
    (53,914
    )Net loss attributable to noncontrolling interest
    
    
    270
    
    
    
    Net loss attributable to FuelCell Energy, Inc.
    
    
    (43,540
    )
    
    
    (53,914
    )Preferred stock dividends
    
    
    (2,401
    )
    
    
    (2,406
    )Net loss to common shareholders
    
    $
    (45,941
    )
    
    $
    (56,320
    )Net loss per share to common shareholdersBasic
    
    $
    (0.52
    )
    
    $
    (0.80
    )Diluted
    
    $
    (0.52
    )
    
    $
    (0.80
    )Weighted average shares outstandingBasic
    
    
    87,510,734
    
    
    
    70,629,631Diluted
    
    
    87,510,734
    
    
    
    70,629,631
   5




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##### Table of Contents



FUELCELL ENERGY, INC.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 (Amounts in thousands)
 Nine Months EndedJuly 31,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (43,810
    )
    
    $
    (53,914
    )Adjustments to reconcile net loss to net cash used in operating activities:Share-based compensation
    
    
    2,168
    
    
    
    3,684Loss from equity investment
    
    
    576
    
    
    
    577Accretion of redeemable preferred stock of subsidiary
    
    
    1,763
    
    
    
    1,559Interest receivable on loan to affiliate
    
    
    (111
    )
    
    
    (107
    )Loss on derivatives
    
    
    6
    
    
    
    255Depreciation
    
    
    5,581
    
    
    
    6,542Amortization of bond premium
    
    
    74
    
    
    
    788Provision (recovery) for doubtful accounts
    
    
    52
    
    
    
    (47
    )(Increase) decrease in operating assets:Accounts receivable
    
    
    8,971
    
    
    
    (1,152
    )Inventories
    
    
    (5,141
    )
    
    
    (510
    )Other assets
    
    
    1,150
    
    
    
    917Increase (decrease) in operating liabilities:Accounts payable and accounts payable due to affiliate
    
    
    (934
    )
    
    
    (6,674
    )Accrued liabilities
    
    
    2,680
    
    
    
    2,703Deferred revenue, royalty income and customer deposits
    
    
    3,875
    
    
    
    (7,351
    )Net cash used in operating activities
    
    
    (23,100
    )
    
    
    (52,730
    )Cash flows from investing activities:Capital expenditures
    
    
    (2,012
    )
    
    
    (2,066
    )Convertible loan to affiliate
    
    
    (600
    )
    
    
    (600
    )Treasury notes matured
    
    
    10,500
    
    
    
    28,000Treasury notes purchased
    
    
    (55,680
    )
    
    
    Net cash (used in) provided by investing activities
    
    
    (47,792
    )
    
    
    25,334Cash flows from financing activities:Repayment of debt
    
    
    (299
    )
    
    
    (176
    )Proceeds from debt
    
    
    
    
    
    
    436Payment of preferred dividends
    
    
    (2,897
    )
    
    
    (2,829
    )Net proceeds from sale of common stock
    
    
    32,131
    
    
    
    24,612Common stock issued (repurchased) for stock plans and related expenses
    
    
    (151
    )
    
    
    273Net cash provided by financing activities
    
    
    28,784
    
    
    
    22,316Effects on cash from changes in foreign currency rates
    
    
    13
    
    
    
    (5
    )Net decrease in cash and cash equivalents
    
    
    (42,095
    )
    
    
    (5,085
    )Cash and cash equivalents-beginning of period
    
    
    57,823
    
    
    
    38,043Cash and cash equivalents-end of period
    
    $
    15,728
    
    
    $
    32,958Supplemental cash flow disclosures:Cash interest paid
    
    $
    118
    
    
    $
    191Noncash operating activity:Stock issued in settlement of prior year bonus obligation
    
    $
    673
    
    
    $
    926
   6




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##### Table of Contents



FUELCELL ENERGY, INC.
 
  (Unaudited)
  Note 1. Nature of Business and Summary of Significant Accounting Policies
  Basis of Presentation
  Form 10-Q
 Use of Estimates
  Revenue Recognition
   7




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FUELCELL ENERGY, INC.   (Unaudited)
     Warranty and Service Expense Recognition
     8




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
  Inventories and Advance Payments to Vendors
   Concentrations
   9




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
  Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2010
    
    
    2009
    
    
    2010
    
    
    2009POSCO
    
    
    46
    %
    
    
    74
    %
    
    
    57
    %
    
    
    68
    %Pacific Gas and Electric Company
    
    
    29
    %
    
    
    
    
    
    
    11
    %
    
    
    U.S. Government
    
    
    14
    %
    
    
    19
    %
    
    
    16
    %
    
    
    16
    %Combined
    
    
    89
    %
    
    
    93
    %
    
    
    84
    %
    
    
    84
    %
  Subsequent Events
  Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net loss attributable to FuelCell
    
    $
    (13,026
    )
    
    $
    (14,915
    )
    
    $
    (43,540
    )
    
    $
    (53,914
    )Foreign currency translation adjustments
    
    
    
    
    
    
    (1
    )
    
    
    13
    
    
    
    (5
    )Comprehensive loss
    
    $
    (13,026
    )
    
    $
    (14,916
    )
    
    $
    (43,527
    )
    
    $
    (53,919
    )
 Liquidity
  Recently Adopted Accounting Guidance
   10




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FUELCELL ENERGY, INC.   (Unaudited)
        11




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FUELCELL ENERGY, INC.   (Unaudited)
 Recent Accounting Guidance Not Yet Effective
       12




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FUELCELL ENERGY, INC.   (Unaudited)
  Health Care Reform Acts
  Note 2. Investments
  Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealizedCost
    
    
    gains
    
    
    (losses)
    
    
    Fair ValueU.S. Government ObligationsAs of July 31, 2010
    
    $
    52,110
    
    
    $
    56
    
    
    $
    (1
    )
    
    $
    52,165As of October 31, 2009
    
    $
    7,004
    
    
    $
    40
    
    
    $
    
    
    
    $
    7,044
  WeightedAmortized
    
    
    
    
    
    
    average yieldCost
    
    
    Fair Value
    
    
    to maturityDue within one year
    
    $
    36,997
    
    
    $
    36,997
    
    
    
    0.2
    %Due after one year
    
    
    15,113
    
    
    
    15,168
    
    
    
    1.2
    %Total investments
    
    $
    52,110
    
    
    $
    52,165
    
    
    
    0.5
    %
  13




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
 Note 3. Accounts Receivable
  July 31,
    
    
    October 31,2010
    
    
    2009U.S. Government:Amount billed
    
    $
    1,013
    
    
    $
    574Unbilled recoverable costs
    
    
    650
    
    
    
    7761,663
    
    
    
    1,350Commercial Customers:Amount billed
    
    
    4,849
    
    
    
    5,439Unbilled recoverable costs
    
    
    7,385
    
    
    
    16,13112,234
    
    
    
    21,570$
    13,897
    
    
    $
    22,920
  Note 4. Inventories
  July 31,
    
    
    October 31,2010
    
    
    2009Raw materials
    
    $
    14,833
    
    
    $
    14,583Work-in-process
    
    
    22,478
    
    
    
    19,790Gross inventory
    
    
    37,311
    
    
    
    34,373Less amount to reduce certain inventories to
lower of cost or market
    
    
    (6,737
    )
    
    
    (8,940
    )Net inventory
    
    $
    30,574
    
    
    $
    25,433
  14




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
 Note 5. Property, Plant and Equipment
  July 31,
    
    
    October 31,
    
    
    Estimated2010
    
    
    2009
    
    
    Useful LifeLand
    
    $
    524
    
    
    $
    524
    
    
    
    Building and improvements
    
    
    7,000
    
    
    
    6,851
    
    
    10-26 yearsMachinery, equipment and software
    
    
    64,973
    
    
    
    59,860
    
    
    3-15 yearsFurniture and fixtures
    
    
    2,635
    
    
    
    2,604
    
    
    10 yearsPower plants for use under PPAs
    
    
    17,743
    
    
    
    17,743
    
    
    10 yearsConstruction in progress (1)
    
    
    3,435
    
    
    
    6,71096,310
    
    
    
    94,292Less, accumulated depreciation and amortization
    
    
    (67,478
    )
    
    
    (61,898
    )Property, plant and equipment, net
    
    $
    28,832
    
    
    $
    32,394
 
 (1)
    
    Included in construction in progress are costs of $0.9 million and $0.8 million at
July 31, 2010 and October 31, 2009, respectively, to build power plants that will service
power purchase agreement contracts.  Note 6. Investment in and Loans to Affiliate
     15




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FUELCELL ENERGY, INC.   (Unaudited)
 Note 7. Accrued Liabilities
  July 31,
    
    
    October 31,2010
    
    
    2009Accrued payroll and employee benefits
    
    $
    2,746
    
    
    $
    3,258Accrued contract and operating costs (1)
    
    
    4,970
    
    
    
    3,190Reserve for product warranty costs (2)
    
    
    501
    
    
    
    500Reserve for long-term service agreement costs
    
    
    5,515
    
    
    
    5,950Accrued taxes and other
    
    
    1,907
    
    
    
    910Total
    
    $
    15,639
    
    
    $
    13,808
 
 (1)
    
    Includes $2.3 million and $2.2 million at July 31, 2010 and October 31, 2009,
respectively, potentially owed to customers related to contract performance. In June 2010
the Company entered into an agreement with Marubeni Corporation to return certain advance
contract payments, resolve claims for services and repurchase surplus inventory items
previously sold to Marubeni Corporation. The agreement calls for payments of approximately
$1.9 million to Marubeni Corporation between June and December 2010 and a payment of $1.0
million upon title transfer of surplus inventory to FuelCell. As of July 31, 2010, $2.5
million was recorded in acrued expenses related to this agreement. The Company does not
expect to incur a charge to the consolidated statement of operations as a result of this
agreement and may record a gain in the range of $0.3 million to $1.3 million depending on
the valuation of inventory recovered. Terms of the agreement are expected to be completed
in December of 2010.(2)
    
    Activity in the reserve for product warranty costs during the nine months ended July
31, 2010 included additions for specific known warranty issues totaling $1.5 million,
other additions for estimates of potential future warranty obligations of $1.0 million on
contracts in the warranty period and reserve reductions related to actual warranty spend
and reversals to income of $2.5 million as contracts progress through the warranty period
or are beyond the warranty period. Note 8. Debt
  July 31,
    
    
    October 31,2010
    
    
    2009Connecticut Development Authority Note
    
    $
    3,874
    
    
    $
    4,000Connecticut Clean Energy Fund Note
    
    
    694
    
    
    
    650Capitalized lease obligations
    
    
    170
    
    
    
    321Total debt
    
    
    4,738
    
    
    
    4,971Less  current portion
    
    
    (980
    )
    
    
    (997
    )Long-term debt
    
    $
    3,758
    
    
    $
    3,974
   16




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FUELCELL ENERGY, INC.   (Unaudited)
   Note 9. Share-Based Compensation Plans
   Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Cost of product sales and revenues
    
    $
    191
    
    
    $
    263
    
    
    $
    583
    
    
    $
    777Cost of research and development contracts
    
    
    53
    
    
    
    43
    
    
    
    130
    
    
    
    145General and administrative expense
    
    
    408
    
    
    
    642
    
    
    
    974
    
    
    
    2,137Research and development expense
    
    
    139
    
    
    
    182
    
    
    
    480
    
    
    
    607Total share-based compensation
    
    $
    791
    
    
    $
    1,130
    
    
    $
    2,167
    
    
    $
    3,666
  Stock Options
    
    
    Restricted Stock AwardsWeighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    average
    
    
    Number of
    
    
    averageoptions
    
    
    price ($)
    
    
    RSAs
    
    
    price ($)Outstanding at October 31, 2009
    
    
    5,740,705
    
    
    
    10.86
    
    
    
    593,262
    
    
    
    2.88Granted
    
    
    171,139
    
    
    
    2.89
    
    
    
    749,849
    
    
    
    2.70Exercised / Vested
    
    
    
    
    
    
    
    
    
    
    (135,417
    )
    
    
    2.85Cancelled
    
    
    (673,743
    )
    
    
    11.69
    
    
    
    (21,372
    )
    
    
    2.85Outstanding at July 31, 2010
    
    
    5,238,101
    
    
    
    10.56
    
    
    
    1,186,322
    
    
    
    2.77
  17




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
  Number ofSharesBalance at October 31, 2009
    
    
    207,207Issued @ $2.70
    
    
    (39,858
    )Issued @ $2.34
    
    
    (39,646
    )Balance at July 31, 2010
    
    
    127,703
 Note 10. Conversion of Preferred Stock
  Note 11. Equity
  TotalShareholders
    
    
    NoncontrollingEquity
    
    
    interest
    
    
    Total EquityBalance at October 31, 2009
    
    $
    31,342
    
    
    $
    
    
    
    $
    31,342Share-based compensation
    
    
    2,168
    
    
    
    
    
    
    
    2,168Sale of common stock
    
    
    32,104
    
    
    
    
    
    
    
    32,104Stock issued under benefit plans
    
    
    722
    
    
    
    
    
    
    
    722Preferred dividends  Series B
    
    
    (2,401
    )
    
    
    
    
    
    
    (2,401
    )Conversion of Series B preferred
stock to common stock, net of
original issuance costs
    
    
    93
    
    
    
    
    
    
    
    93Effect of foreign currency translation
    
    
    13
    
    
    
    
    
    
    
    13Net loss
    
    
    (43,540
    )
    
    
    (270
    )
    
    
    (43,810
    )Balance at July 31, 2010
    
    $
    20,501
    
    
    $
    (270
    )
    
    $
    20,231
   18




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
 Note 12. Net Loss Per Share
  Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2010
    
    
    2009
    
    
    2010
    
    
    2009NumeratorNet loss
    
    $
    (13,114
    )
    
    $
    (14,915
    )
    
    $
    (43,810
    )
    
    $
    (53,914
    )Net loss attributable to noncontrolling interest
    
    
    88
    
    
    
    
    
    
    
    270
    
    
    
    Preferred stock dividend
    
    
    (799
    )
    
    
    (802
    )
    
    
    (2,401
    )
    
    
    (2,406
    )Net loss to common shareholders
    
    $
    (13,825
    )
    
    $
    (15,717
    )
    
    $
    (45,941
    )
    
    $
    (56,320
    )DenominatorWeighted average basic common shares
    
    
    93,512,868
    
    
    
    73,493,470
    
    
    
    87,510,734
    
    
    
    70,629,631Effect of dilutive securities (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average diluted common shares
    
    
    93,512,868
    
    
    
    73,493,470
    
    
    
    87,510,734
    
    
    
    70,629,631Basic loss per share
    
    $
    (0.15
    )
    
    $
    (0.21
    )
    
    $
    (0.52
    )
    
    $
    (0.80
    )Diluted loss per share (1)
    
    $
    (0.15
    )
    
    $
    (0.21
    )
    
    $
    (0.52
    )
    
    $
    (0.80
    )
 
 (1)
    
    Diluted loss per share was computed without consideration to potentially dilutive
instruments as their inclusion would have been antidilutive. Potentially dilutive instruments
include stock options, warrants and convertible preferred stock. At July 31, 2010 and 2009,
there were options to purchase 5.2 million and 5.8 million shares of common stock,
respectively. There were no outstanding warrants as of July 31, 2010 and 0.5 million
outstanding warrants at July 31, 2009. Refer to our Annual Report on Form 10-K for the year
ended October 31, 2009 for information on our convertible preferred stock. Note 13. Commitments and Contingencies
   19




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Caution concerning forward-looking statements.
 Overview.
 Results of operations.
 Liquidity and capital resources.
 Critical accounting policies and estimates.
 Recent accounting guidance.
 CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
  OVERVIEW
    20




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
    
    Near-zero toxic emissions;
 
    
    High fuel efficiency;
 
    
    Ability to site units locally as distributed power generation;
 
    
    Potentially lower cost power generation;
 
    
    Byproduct heat ideal for cogeneration applications;
 
    
    Reliable, 24/7 base load power;
 
    
    Quiet operation; and
 
    
    Fuel flexibility.
   21




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RESULTS OF OPERATIONS
  Comparison of Three Months Ended July 31, 2010 and July 31, 2009
 Revenues and Costs of revenues
  Three Months EndedJuly 31,
    
    
    Change2010
    
    
    2009
    
    
    $
    
    
    %Revenues:Product sales and revenues (1)
    
    $
    16,218
    
    
    $
    18,738
    
    
    $
    (2,520
    )
    
    
    (13
    )Research and development contracts
    
    
    2,655
    
    
    
    4,279
    
    
    
    (1,624
    )
    
    
    (38
    )Total
    
    $
    18,873
    
    
    $
    23,017
    
    
    $
    (4,144
    )
    
    
    (18
    )Cost of revenues:Product sales and revenues (2)
    
    $
    20,050
    
    
    $
    26,269
    
    
    $
    (6,219
    )
    
    
    (24
    )Research and development contracts
    
    
    2,579
    
    
    
    2,978
    
    
    
    (399
    )
    
    
    (13
    )Total
    
    $
    22,629
    
    
    $
    29,247
    
    
    $
    (6,618
    )
    
    
    (23
    )Gross Margin:Product sales and revenues
    
    $
    (3,832
    )
    
    $
    (7,531
    )
    
    $
    3,699
    
    
    
    49Research and development contracts
    
    
    76
    
    
    
    1,301
    
    
    
    (1,225
    )
    
    
    (94
    )Total
    
    $
    (3,756
    )
    
    $
    (6,230
    )
    
    $
    2,474
    
    
    
    40Product Sales Cost-to-revenue ratio
(3)
    
    
    1.24
    
    
    
    1.40
 (1)
    
    Product sales and revenues consist primarily of revenue from power plant products,
long-term service agreements and power purchase agreements.(2)
    
    Cost of product sales and revenues includes costs to manufacture and ship power
plants and power plant components, site engineering and construction costs where we are
responsible for power plant system installation, scrap, non-recurring engineering costs,
warranty expense, liquidated damages, costs of monitoring and maintenance services under
long-term service agreements (including stack replacement costs), operating costs for power
purchase agreements, inventory reserves and over capacity costs.(3)
    
    Cost-to-revenue ratio is calculated as cost of product sales and revenues divided
by product sales and revenues.    22




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Product sales and revenues
      23




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Research and development contracts
   Administrative and selling expenses
  Research and development expenses
  Loss from operations
  Loss from equity investment
  Interest and other income, net
   24




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Accretion of Preferred Stock of Subsidiary
  Provision for income taxes
   Net loss attributable to noncontrolling interest
  Preferred Stock dividends
  Net loss to common shareholders and loss per common share
   25




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Comparison of Nine Months Ended July 31, 2010 and July 31, 2009
 Revenues and Costs of revenues
  Nine Months EndedJuly 31,
    
    
    Change2010
    
    
    2009
    
    
    $
    
    
    %Revenues:Product sales and revenues
    
    $
    42,033
    
    
    $
    57,077
    
    
    $
    (15,044
    )
    
    
    (26
    )Research and development contracts
    
    
    8,043
    
    
    
    10,527
    
    
    
    (2,484
    )
    
    
    (24
    )Total
    
    $
    50,076
    
    
    $
    67,604
    
    
    $
    (17,528
    )
    
    
    (26
    )Cost of revenues:Product sales and revenues
    
    $
    57,183
    
    
    $
    83,820
    
    
    $
    (26,637
    )
    
    
    (32
    )Research and development contracts
    
    
    7,942
    
    
    
    8,053
    
    
    
    (111
    )
    
    
    (1
    )Total
    
    $
    65,125
    
    
    $
    91,873
    
    
    $
    (26,748
    )
    
    
    (29
    )Gross Margin:Product sales and revenues
    
    $
    (15,150
    )
    
    $
    (26,743
    )
    
    $
    11,593
    
    
    
    (43
    )Research and development contracts
    
    
    101
    
    
    
    2,474
    
    
    
    (2,373
    )
    
    
    (96
    )Total
    
    $
    (15,049
    )
    
    $
    (24,269
    )
    
    $
    9,220
    
    
    
    (38
    )Product Sales Cost-to-revenue ratio
    
    
    1.36
    
    
    
    1.47
   Product sales and revenues
    26




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Research and development contracts
  Administrative and selling expenses
  Research and development expenses
  Loss from operations
  Loss from equity investment
  Interest and other income, net
  Accretion of Preferred Stock of Subsidiary
  Provision for income taxes
   27




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Net loss attributable to noncontrolling interest
  Preferred Stock dividends
  Net loss to common shareholders and loss per common share
  LIQUIDITY AND CAPITAL RESOURCES
       28




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Cash Flows
    Operating Activities
  Investing Activities
 Financing Activities
  29




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Sources and Uses of Cash and Investments
  Increasing annual order volume
  South Korea:
 California:
  ®
  30




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Connecticut:
 ®
  Cost reduction efforts
  
    
    engineering improvements;
 
    
    technology advances;
 
    
    supply chain management;
 
    
    production volume; and
 
    
    manufacturing process improvements.
  Continued involvement in research and development contracts
  Solid Oxide Fuel Cell Development:
  31




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Advanced Hydrogen Programs
 Other Government Research:
 Commitments and Significant Contractual Obligations
  Payments Due by PeriodLess
    
    
    
    
    
    
    
    
    
    
    Morethan
    
    
    1  3
    
    
    3  5
    
    
    thanTotal
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsCapital and operating lease commitments(1)
    
    $
    3,975
    
    
    $
    1,076
    
    
    $
    1,493
    
    
    $
    1,257
    
    
    $
    149Term loans (principal and interest)
    
    
    5,778
    
    
    
    1,029
    
    
    
    730
    
    
    
    730
    
    
    
    3,289Purchase commitments(2)
    
    
    38,710
    
    
    
    30,459
    
    
    
    2,197
    
    
    
    6,054
    
    
    
    Series 1 Preferred dividends payable(3)
    
    
    23,916
    
    
    
    12,408
    
    
    
    2,423
    
    
    
    2,423
    
    
    
    6,662Series B Preferred dividends payable(4)Totals
    
    $
    72,379
    
    
    $
    44,972
    
    
    $
    6,843
    
    
    $
    10,464
    
    
    $
    10,100
 (1)
    
    Future minimum lease payments on capital and operating leases.(2)
    
    Purchase commitments with suppliers for materials, supplies and services incurred in
the normal course of business.(3)
    
    Annual dividends of Cdn.$1.25 million accrue on the Series 1 Preferred Stock. We have
agreed to pay a minimum of Cdn.$500,000 in cash or common stock annually through December
31, 2010. Interest accrues on unpaid dividends at an annual rate of 9 percent. Cumulative
unpaid dividends and accrued interest on July 31, 2010 was $11.6 million using a July 31,
2010 exchange rate of Cdn.$1.03 All cumulative unpaid dividends and accrued interest must
be paid by December 31, 2010 at which time the required annual dividend payment increases
to Cdn.$1.25 million. We have the option of paying these amounts in stock or cash.(4)
    
    We are currently paying $3.2 million in annual dividends on our Series B Preferred
Stock. We may, at our option, convert these shares into that number of shares of our common
stock that are issuable at the then prevailing conversion rate if the closing price of our
common stock exceeds 150 percent of the then prevailing conversion price ($11.75) for 20
trading days during any consecutive 30 trading day period. The $3.2 million annual
dividend payment has not been included as we cannot reasonably determine when and if we
will be able to convert the Series B Preferred Stock into shares of our common stock.    32




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Power purchase agreements
   Service and warranty agreements
  Research and development cost-share contracts
   33




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Health Care Reform Acts
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Revenue Recognition
   34




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Warranty and Service Expense Recognition
     35




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Inventories and Advance Payments to Vendors
   ACCOUNTING GUIDANCE UPDATE
 Recently Adopted Accounting Guidance
    36




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Recent Accounting Guidance Not Yet Effective
     37




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38




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Exposure
  Foreign Currency Exchange Risk
  Derivative Fair Value Exposure
 Series 1 Preferred Stock
 Warrants
  39




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Item 4. CONTROLS AND PROCEDURES
     40




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PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  
 Item 6. EXHIBITS
 ExhibitNo.
    
    Description31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  41




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SIGNATURE
  FUELCELL ENERGY, INC.(Registrant)September 9, 2010
    
    
    
    /s/ Joseph G. MahlerDate
    
    
    
    Joseph G. MahlerSenior Vice President, Chief FinancialOfficer, Treasurer and Corporate Secretary(Principal Financial Officer and PrincipalAccounting Officer)
  42




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INDEX OF EXHIBITS
 ExhibitNo.
    
    Description31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002