##### 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 April 30, 2011
 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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 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 April 30, 2011 and October 31, 2010
    
    
    3Consolidated Statements of Operations for the three months ended April 30, 2011 and 2010
    
    
    4Consolidated Statements of Operations for the six months ended April 30, 2011 and 2010
    
    
    5Consolidated Statements of Cash Flows for the six months ended April 30, 2011 and 2010
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    42Item 4. Controls and Procedures
    
    
    43PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    44Item 1A. Risk Factors
    
    
    44Item 6. Exhibits
    
    
    44Signature
    
    
    45EX-10.70EX-10.75EX-10.80EX-31.1EX-31.2EX-32.1EX-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)
 April 30,
    
    
    October 31,2011
    
    
    2010ASSETSCurrent assets:Cash and cash equivalents
    
    $
    36,980
    
    
    $
    20,467Investments  U.S. treasury securities
    
    
    18,067
    
    
    
    25,019Accounts receivable, net
    
    
    19,879
    
    
    
    18,066Inventories, net
    
    
    36,199
    
    
    
    33,404Other current assets
    
    
    7,395
    
    
    
    5,253Total current assets
    
    
    118,520
    
    
    
    102,209Property, plant and equipment, net
    
    
    24,289
    
    
    
    26,679Investments  U.S. treasury securities
    
    
    
    
    
    
    9,071Investment in and loans to affiliate
    
    
    9,779
    
    
    
    9,837Other assets, net
    
    
    5,941
    
    
    
    2,733Total assets
    
    $
    158,529
    
    
    $
    150,529LIABILITIES AND EQUITYCurrent liabilities:Current portion of long-term debt and other liabilities
    
    $
    4,017
    
    
    $
    976Accounts payable
    
    
    11,764
    
    
    
    10,267Accounts payable due to affiliate
    
    
    275
    
    
    
    575Accrued liabilities
    
    
    26,335
    
    
    
    16,721Deferred revenue
    
    
    31,218
    
    
    
    25,499Preferred stock obligation of subsidiary
    
    
    8,992
    
    
    
    Total current liabilities
    
    
    82,601
    
    
    
    54,038Long-term deferred revenue
    
    
    7,500
    
    
    
    8,042Long-term preferred stock obligation of subsidiary
    
    
    14,564
    
    
    
    Long-term debt and other liabilities
    
    
    4,124
    
    
    
    4,056Total liabilities
    
    
    108,789
    
    
    
    66,136Redeemable preferred stock of subsidiary
    
    
    
    
    
    
    16,849Redeemable preferred stock (liquidation preference of
$64,020 at April 30, 2011 and October 31, 2010)
    
    
    59,857
    
    
    
    59,857Total (Deficit) Equity:Shareholders (deficit) equityCommon stock ($.0001 par value); 225,000,000
shares authorized; 126,692,525 and 112,965,725
shares issued and outstanding at April 30, 2011
and October 31, 2010, respectively
    
    
    12
    
    
    
    11Additional paid-in capital
    
    
    677,157
    
    
    
    663,951Accumulated deficit
    
    
    (686,517
    )
    
    
    (655,623
    )Accumulated other comprehensive income
    
    
    15
    
    
    
    11Treasury stock, Common, at cost (5,679 shares at
April 30, 2011 and October 31, 2010)
    
    
    (53
    )
    
    
    (53
    )Deferred compensation
    
    
    53
    
    
    
    53Total shareholders (deficit) equity
    
    
    (9,333
    )
    
    
    8,350Noncontrolling interest in subsidiaries
    
    
    (784
    )
    
    
    (663
    )Total (deficit) equity
    
    
    (10,117
    )
    
    
    7,687Total liabilities and (deficit) equity
    
    $
    158,529
    
    
    $
    150,529
   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 EndedApril 30,2011
    
    
    2010Revenues:Product sales and revenues
    
    $
    26,673
    
    
    $
    13,007Research and development contracts
    
    
    1,934
    
    
    
    3,580Total revenues
    
    
    28,607
    
    
    
    16,587Costs and expenses:Cost of product sales and revenues
    
    
    37,460
    
    
    
    19,120Cost of research and development contracts
    
    
    2,017
    
    
    
    3,267Administrative and selling expenses
    
    
    4,454
    
    
    
    4,547Research and development expenses
    
    
    4,498
    
    
    
    5,089Total costs and expenses
    
    
    48,429
    
    
    
    32,023Loss from operations
    
    
    (19,822
    )
    
    
    (15,436
    )Interest expense
    
    
    (928
    )
    
    
    (45
    )Income (loss) from equity investment
    
    
    143
    
    
    
    (245
    )Interest and other income, net
    
    
    634
    
    
    
    364Loss before redeemable preferred stock of subsidiary
    
    
    (19,973
    )
    
    
    (15,362
    )Accretion of redeemable preferred stock of subsidiary
    
    
    
    
    
    
    (603
    )Loss before provision for income taxes
    
    
    (19,973
    )
    
    
    (15,965
    )Provision for income taxes
    
    
    (35
    )
    
    
    (13
    )Net loss
    
    
    (20,008
    )
    
    
    (15,978
    )Net loss attributable to noncontrolling interest
    
    
    52
    
    
    
    96Net loss attributable to FuelCell Energy, Inc.
    
    
    (19,956
    )
    
    
    (15,882
    )Adjustment for modification of redeemable preferred
stock of subsidiary
    
    
    (8,987
    )
    
    
    Preferred stock dividends
    
    
    (800
    )
    
    
    (800
    )Net loss to common shareholders
    
    $
    (29,743
    )
    
    $
    (16,682
    )Loss per share basic and diluted:Net loss per share to common shareholders
    
    $
    (0.24
    )
    
    $
    (0.20
    )Basic and diluted weighted average shares outstanding
    
    
    125,009,180
    
    
    
    84,515,979
   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)
 Six Months EndedApril 30,2011
    
    
    2010Revenues:Product sales and revenues
    
    $
    52,433
    
    
    $
    25,815Research and development contracts
    
    
    4,254
    
    
    
    5,388Total revenues
    
    
    56,687
    
    
    
    31,203Costs and expenses:Cost of product sales and revenues
    
    
    65,519
    
    
    
    37,133Cost of research and development contracts
    
    
    4,354
    
    
    
    5,363Administrative and selling expenses
    
    
    8,504
    
    
    
    8,703Research and development expenses
    
    
    8,744
    
    
    
    9,709Total costs and expenses
    
    
    87,121
    
    
    
    60,908Loss from operations
    
    
    (30,434
    )
    
    
    (29,705
    )Interest expense
    
    
    (982
    )
    
    
    (108
    )Loss from equity investment
    
    
    (55
    )
    
    
    (393
    )Interest and other income, net
    
    
    1,034
    
    
    
    683Loss before redeemable preferred stock of subsidiary
    
    
    (30,437
    )
    
    
    (29,523
    )Accretion of redeemable preferred stock of subsidiary
    
    
    (525
    )
    
    
    (1,160
    )Loss before provision for income taxes
    
    
    (30,962
    )
    
    
    (30,683
    )Provision for income taxes
    
    
    (53
    )
    
    
    (13
    )Net loss
    
    
    (31,015
    )
    
    
    (30,696
    )Net loss attributable to noncontrolling interest
    
    
    121
    
    
    
    182Net loss attributable to FuelCell Energy, Inc.
    
    
    (30,894
    )
    
    
    (30,514
    )Adjustment for modification of redeemable preferred
stock of subsidiary
    
    
    (8,987
    )
    
    
    Preferred stock dividends
    
    
    (1,600
    )
    
    
    (1,602
    )Net loss to common shareholders
    
    $
    (41,481
    )
    
    $
    (32,116
    )Loss per share basic and diluted:Net loss per share to common shareholders
    
    $
    (0.35
    )
    
    $
    (0.38
    )Basic and diluted weighted average shares outstanding
    
    
    119,963,394
    
    
    
    84,459,926
   5




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##### Table of Contents



FUELCELL ENERGY, INC.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 (Amounts in thousands)
 Six Months EndedApril 30,2011
    
    
    2010Cash flows from operating activities:Net loss
    
    $
    (31,015
    )
    
    $
    (30,696
    )Adjustments to reconcile net loss to net cash used in operating
activities:Share-based compensation
    
    
    1,608
    
    
    
    1,377Loss from equity investment
    
    
    55
    
    
    
    393Accretion of redeemable preferred stock of subsidiary
    
    
    525
    
    
    
    1,160Interest receivable on loan to affiliate
    
    
    (86
    )
    
    
    (34
    )Loss on derivatives
    
    
    78
    
    
    
    30Depreciation
    
    
    3,185
    
    
    
    3,772Amortization of bond premium
    
    
    42
    
    
    
    32Provision for doubtful accounts
    
    
    235
    
    
    
    40(Increase) decrease in operating assets:Accounts receivable
    
    
    (2,048
    )
    
    
    4,770Inventories
    
    
    (2,795
    )
    
    
    (4,851
    )Other assets
    
    
    (5,260
    )
    
    
    1,865Increase (decrease) in operating liabilities:Accounts payable
    
    
    1,197
    
    
    
    (3,492
    )Accrued liabilities
    
    
    10,268
    
    
    
    2,001Deferred revenue
    
    
    5,177
    
    
    
    7,137Net cash used in operating activities
    
    
    (18,834
    )
    
    
    (16,496
    )Cash flows from investing activities:Capital expenditures
    
    
    (700
    )
    
    
    (1,685
    )Convertible loan to affiliate
    
    
    
    
    
    
    (600
    )Treasury notes matured
    
    
    49,000
    
    
    
    7,000Treasury notes purchased
    
    
    (33,019
    )
    
    
    (19,670
    )Net cash provided by (used in) investing activities
    
    
    15,281
    
    
    
    (14,955
    )Cash flows from financing activities:Repayment of debt
    
    
    (65
    )
    
    
    (205
    )Proceeds from revolving line of credit
    
    
    3,000
    
    
    
    Payment of preferred dividends and return of capital
    
    
    (4,406
    )
    
    
    (1,917
    )Proceeds from sale of common stock, net of registration fees
    
    
    21,533
    
    
    
    Common stock issued for stock plans and related expenses
    
    
    
    
    
    
    (151
    )Net cash provided by (used in) financing activities
    
    
    20,062
    
    
    
    (2,273
    )Effects on cash from changes in foreign currency rates
    
    
    4
    
    
    
    13Net increase (decrease) in cash and cash equivalents
    
    
    16,513
    
    
    
    (33,711
    )Cash and cash equivalents-beginning of period
    
    
    20,467
    
    
    
    57,823Cash and cash equivalents-end of period
    
    $
    36,980
    
    
    $
    24,112Supplemental cash flow disclosures:Cash interest paid
    
    $
    66
    
    
    $
    108Noncash financing and investing activity:Common stock issued in settlement of prior year bonus obligation
    
    $
    707
    
    
    $
    673Common stock issued for Employee Stock Purchase Plan in
settlement of prior year accrued employee contributions
    
    $
    58
    
    
    $
    109Adjustment
for modification of redeemable preferred stock of subsidiary
    
    $
    8,987
    
    
    
    
   6




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FUELCELL ENERGY, INC.
 
  (Unaudited)
  Note 1. Nature of Business and Basis of Presentation
  Basis of Presentation
   Use of Estimates
  Concentrations
   7




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
 Subsequent Events
  Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2011
    
    
    2010
    
    
    2011
    
    
    2010Net loss
    
    $
    (20,008
    )
    
    $
    (15,978
    )
    
    $
    (31,015
    )
    
    $
    (30,696
    )Foreign currency translation adjustments
    
    
    2
    
    
    
    5
    
    
    
    4
    
    
    
    13Comprehensive loss
    
    $
    (20,006
    )
    
    $
    (15,973
    )
    
    $
    (31,011
    )
    
    $
    (30,683
    )
 Note 2. Recent Accounting Pronouncements
 Recently Adopted Accounting Guidance
     8




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
  Recent Accounting Guidance Not Yet Effective
  Note 3. Equity investments
     9




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
 Note 4. Investments in U.S. Treasury Securities
  Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealizedcost
    
    
    gains
    
    
    gains (losses)
    
    
    Fair valueU.S. government obligationsAs of April 30, 2011
    
    $
    18,067
    
    
    $
    47
    
    
    $
    
    
    
    $
    18,114As of October 31, 2010
    
    $
    34,090
    
    
    $
    74
    
    
    $
    
    
    
    $
    34,164
  WeightedaverageAmortized
    
    
    
    
    
    
    yield tocost
    
    
    Fair value
    
    
    maturityDue within one year
    
    $
    18,067
    
    
    $
    18,114
    
    
    
    1.2
    %Due after one year
    
    
    
    
    
    
    
    
    
    
    Total investments
    
    $
    18,067
    
    
    $
    18,114
    
    
    
    1.2
    %
 Note 5. Inventories
  April 30,
    
    
    October 31,2011
    
    
    2010Raw materials
    
    $
    17,805
    
    
    $
    15,509Work-in-process
    
    
    20,540
    
    
    
    22,786Gross Inventory
    
    $
    38,345
    
    
    $
    38,295Less amount to reduce certain
inventories to lower of cost or market
    
    
    (2,146
    )
    
    
    (4,891
    )Net inventory
    
    $
    36,199
    
    
    $
    33,404
   10




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
 Note 6. Accounts Receivable
  April 30,
    
    
    October 31,2011
    
    
    2010U.S. Government:Amount billed
    
    $
    323
    
    
    $
    223Unbilled recoverable costs
    
    
    988
    
    
    
    6051,311
    
    
    
    828Commercial Customers:Amount billed
    
    
    7,531
    
    
    
    9,718Unbilled recoverable costs
    
    
    11,037
    
    
    
    7,52018,568
    
    
    
    17,238$
    19,879
    
    
    $
    18,066
  Note 7. Accrued Liabilities
  April 30,
    
    
    October 31,2011
    
    
    2010Accrued payroll and employee benefits(1)
    
    $
    3,660
    
    
    $
    3,430Accrued contract and operating costs(2)
    
    
    1,077
    
    
    
    2,126Reserve for product warranty cost(3)
    
    
    682
    
    
    
    696Reserve for long-term service agreement costs(4)
    
    
    10,457
    
    
    
    7,742Reserve for B1200 repair and upgrade program(4)
    
    
    8,752
    
    
    
    Accrued taxes, legal, professional and other(5)
    
    
    1,707
    
    
    
    2,727$
    26,335
    
    
    $
    16,721
 
 (1)
    
    Balance relates to amounts owed to employees for compensation and benefits as of the
end of the period.(2)
    
    Balance includes estimated losses accrued on product sales contracts and amounts
estimated as owed to customers related to contract performance.(3)
    
    Activity in the reserve for product warranty costs during the six months ended April
30, 2011 included additions for estimates of potential future warranty obligations of $0.2
million on contracts in the warranty period and reserve reductions related to actual
warranty spend and reversals to income of $0.2 million as contracts progress through the
warranty period or are beyond the warranty period.(4)
    
    Refer to description below.(5)
    
    Balance includes accrued sales, use and payroll taxes as well as estimated legal,
professional and other expense estimates as of the end of the period. Reserve for long-term service agreement costs (LTSA )
   11




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FUELCELL ENERGY, INC.   (Unaudited)
 Reserve for B1200 repair and upgrade program
  Note 8. Revolving Credit Facility
  Note 9. Share-Based Compensation Plans
   12




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FUELCELL ENERGY, INC.   (Unaudited)
  Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2011
    
    
    2010
    
    
    2011
    
    
    2010Cost of product sales and revenues
    
    $
    260
    
    
    $
    168
    
    
    $
    403
    
    
    $
    392Cost of research and development contracts
    
    
    52
    
    
    
    38
    
    
    
    71
    
    
    
    77General and administrative expense
    
    
    485
    
    
    
    372
    
    
    
    891
    
    
    
    566Research and development expense
    
    
    29
    
    
    
    156
    
    
    
    241
    
    
    
    341Total share-based compensation
    
    $
    826
    
    
    $
    734
    
    
    $
    1,606
    
    
    $
    1,376
  WeightedNumber of
    
    
    averageoptions
    
    
    option price ($)Outstanding at October 31, 2010
    
    
    5,118,201
    
    
    
    10.15Granted
    
    
    216,657
    
    
    
    1.98Cancelled
    
    
    (421,925
    )
    
    
    23.03Outstanding at April 30, 2011
    
    
    4,912,933
    
    
    
    8.69
    13




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
 Note 10. Shareholders Equity
 Registered Direct Offering
   Common Stock Sales
  Changes in shareholders (deficit) equity
  TotalShareholders
    
    
    Noncontrolling
    
    
    Total(Deficit) Equity
    
    
    interest
    
    
    (Deficit) EquityBalance at October 31, 2010
    
    $
    8,350
    
    
    $
    (663
    )
    
    $
    7,687Sale of Common Stock and related fees
    
    
    21,533
    
    
    
    
    
    
    
    21,533Share-based compensation
    
    
    1,608
    
    
    
    
    
    
    
    1,608Common stock issued in settlement of prior
year bonus obligation
    
    
    707
    
    
    
    
    
    
    
    707Stock issued under benefit plans, net of
taxes paid upon vesting of restricted
stock awards
    
    
    (54
    )
    
    
    
    
    
    
    (54
    )Preferred dividends  Series B
    
    
    (1,600
    )
    
    
    
    
    
    
    (1,600
    )FuelCell Ltd. (adjustment from Series 1
modification)
    
    
    (8,987
    )
    
    
    
    
    
    
    (8,987
    )Effect of foreign currency translation
    
    
    4
    
    
    
    
    
    
    
    4Net loss
    
    
    (30,894
    )
    
    
    (121
    )
    
    
    (31,015
    )Balance at April 30, 2011
    
    $
    (9,333
    )
    
    $
    (784
    )
    
    $
    (10,117
    )
  14




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
 Note 11. Loss Per Share
  Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2011
    
    
    2010
    
    
    2011
    
    
    2010NumeratorNet loss
    
    $
    (20,008
    )
    
    $
    (15,978
    )
    
    $
    (31,015
    )
    
    $
    (30,696
    )Net loss attributable to noncontrolling interest
    
    
    52
    
    
    
    96
    
    
    
    121
    
    
    
    182Adjustment for modification of redeemable
preferred stock of subsidiary
    
    
    (8,987
    )
    
    
    
    
    
    
    (8,987
    )
    
    
    Preferred stock dividend
    
    
    (800
    )
    
    
    (800
    )
    
    
    (1,600
    )
    
    
    (1,602
    )Net loss to common shareholders
    
    $
    (29,743
    )
    
    $
    (16,682
    )
    
    $
    (41,481
    )
    
    $
    (32,116
    )DenominatorWeighted average basic common shares
    
    
    125,009,180
    
    
    
    84,515,979
    
    
    
    119,963,394
    
    
    
    84,459,926Effect of dilutive securities (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average diluted common shares
    
    
    125,009,180
    
    
    
    84,515,979
    
    
    
    119,963,394
    
    
    
    84,459,926Basic loss per share
    
    $
    (0.24
    )
    
    $
    (0.20
    )
    
    $
    (0.35
    )
    
    $
    (0.38
    )Diluted loss per share (1)
    
    $
    (0.24
    )
    
    $
    (0.20
    )
    
    $
    (0.35
    )
    
    $
    (0.38
    )
 
 (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 April 30, 2011 and 2010,
there were options to purchase 4.9 million and 5.3 million shares of common stock,
respectively. There were outstanding warrants of 10.2 million as of April 30, 2011 and there
were no warrants outstanding as of April 30, 2010. Refer to our Annual Report on Form 10-K
for the year ended October 31, 2010 for information on our convertible preferred stock. Note 12. Commitments and Contingencies
  Note 13. Redeemable Preferred Stock
 Series 1 Preferred Share Obligation
    15




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FUELCELL ENERGY, INC.   (Unaudited)
       16




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
  Significant Terms of the Series 1 Preferred Shares
  
    
    Voting Rights -The holders of the Series 1 Preferred Shares are not entitled to any
voting rights or to receive notice of or to attend any meeting of the shareholders of FCE
Ltd, but shall be entitled to receive notice of meetings of shareholders of FCE Ltd.
called for the purpose of authorizing the dissolution or sale of its assets or a
substantial part thereof.
 
    
    Dividends and Return of Capital- On the last day of each Calendar Quarter starting on
March 31, 2011 and ending on December 31, 2020, the Corporation shall make (i) a return
of capital payment to the holders of the Class A Preferred Shares in an aggregate amount
equal to Cdn. $187,500, and (ii) a dividend payment to the holders of the Class A
Preferred Shares equal to Cdn. $125,000 in the aggregate.
 On the last day of each Calendar Quarter starting on March 31, 2011 and ending on December
31, 2011, the Corporation shall make (i) a return of capital payment to the holders of the
Class A Preferred Shares equal to Cdn. $3.1 million in the aggregate (the 2010 Capital
Repayment), and (ii) a return of capital payment to the holders of the Class A Preferred
Shares at the rate of 9.8% per annum on the 2010 Capital Payment for the period from
January 10, 2011 to the date the 2010 Capital Payment is made.
 Dividend payments can be made in cash or common stock of the Company, at the option of FCE
Ltd., and if common stock is issued it may be unregistered. If FCE Ltd. elects to make
such payments by issuing common stock of the Company, the number of common shares is
determined by dividing the cash dividend obligation by 95 percent of the volume weighted
average price in US dollars at which board lots of the common shares have been traded on
NASDAQ during the 20 consecutive trading days preceding the end of the calendar quarter
for which such dividend in common shares is to be paid converted into Canadian dollars
using the Bank of Canadas noon rate of exchange on the day of determination.
 
    
    Redemption The Series 1 Preferred Shares are redeemable by FCE Ltd. for Cdn.$25 per
share less any amounts paid as a return of capital in respect of such share plus all
unpaid dividends and accrued interest. Holders of the Series 1 Preferred Shares do not
have any mandatory or conditional redemption rights.
  17




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
 
    
    Liquidation or Dissolution In the event of the liquidation or dissolution of FCE
Ltd., the holders of Series 1 Preferred Shares will be entitled to receive Cdn.$25 per
share less any amounts paid as a return of capital in respect of such share plus all
unpaid dividends and accrued interest. The Company has guaranteed any liquidation
obligations of FCE Ltd.
 
    
    Exhange Rights A holder of Series 1 Preferred Shares has the right to exchange such shares for fully paid and non-assessable common stock of the Company at the following
exchange prices:
 
    
    Cdn$129.46 per share of common stock after July 31, 2010 until July 31, 2015;
    
    Cdn$138.71 per share of common stock after July 31, 2015 until July 31, 2020;
and
    
    at any time after July 31, 2020, at a price equal to 95 percent of the then
current market price (in Cdn.$) of the Companys common stock at the time of
conversion.
 The exchange rates set forth above shall be adjusted if the Company: (i) subdivides or
consolidates the common stock; (ii) pays a stock dividend; (iii) issues rights, options or
other convertible securities to the Companys common stockholders enabling them to acquire
common stock at a price less than 95 percent of the then-current price; or (iv) fixes a
record date to distribute to the Companys common stockholders shares of any other class
of securities, indebtedness or assets.
 Note 14. Subsequent Events
 POSCO Power 70MW Order
   18




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 FORWARD-LOOKING STATEMENTS
    19




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##### Table of Contents



OVERVIEW AND RECENT DEVELOPMENTS
 Overview
 ® ®
  ® ®
       
    
    Near-zero pollutants;
 
    
    High efficiency;
 
    
    Ability to site units locally as distributed power generation;
  20




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##### Table of Contents




    
    Potentially lower cost power generation;
 
    
    High quality heat ideal for cogeneration applications;
 
    
    High efficiency and cogeneration reduce carbon emissions
 
    
    Reliable around-the-clock base load power;
 
    
    Quiet operation; and
 
    
    Fuel flexibility.
   Recent Developments
 POSCO Power 70MW Order
  Series 1 Preferred Share Obligation
    21




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##### Table of Contents



B1200 Repair and Upgrade Program
  RESULTS OF OPERATIONS
   Comparison of Three Months Ended April 30, 2011 and April 30, 2010
 Revenues and Costs of revenues
  Three Months EndedApril 30,
    
    
    Change2011
    
    
    2010
    
    
    $
    
    
    %Revenues:Product sales and revenues
    
    $
    26,673
    
    
    $
    13,007
    
    
    $
    13,666
    
    
    
    105Research and development contracts
    
    
    1,934
    
    
    
    3,580
    
    
    
    (1,646
    )
    
    
    (46
    )Total
    
    $
    28,607
    
    
    $
    16,587
    
    
    $
    12,020
    
    
    
    72Cost of revenues:Product sales and revenues
    
    $
    37,460
    
    
    $
    19,120
    
    
    $
    18,340
    
    
    
    96Research and development contracts
    
    
    2,017
    
    
    
    3,267
    
    
    
    (1,250
    )
    
    
    (38
    )Total
    
    $
    39,477
    
    
    $
    22,387
    
    
    $
    17,090
    
    
    
    76Gross Margin (GAAP):Gross margin from product sales and revenues
    
    $
    (10,787
    )
    
    $
    (6,113
    )
    
    $
    (4,674
    )
    
    
    76Gross margin from research and development
contracts
    
    
    (83
    )
    
    
    313
    
    
    
    (396
    )
    
    
    (127
    )Total
    
    $
    (10,870
    )
    
    $
    (5,800
    )
    
    $
    (5,070
    )
    
    
    87Product Sales Cost-to-revenue ratio (1)
    
    
    1.40
    
    
    
    1.47
    
    
    
    N/M
    
    
    
    (4
    )
 (1)
    
    Cost-to-revenue ratio is calculated as cost of product sales and revenues divided
by product sales and revenues.  22




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##### Table of Contents



Three Months EndedApril 30,
    
    
    Change2011
    
    
    2010
    
    
    $
    
    
    %Non-GAAP Adjustment to cost
of product sales and
revenues:B1200 Repair and Upgrade Cost
    
    $
    (8,752
    )
    
    $
    
    
    
    $
    (8,752
    )
    
    
    N/MGross Margin (non-GAAP):Gross margin from product sales and revenues
    
    $
    (2,035
    )
    
    $
    (6,113
    )
    
    $
    4,078
    
    
    
    67Gross margin from research and
development contracts
    
    
    (83
    )
    
    
    313
    
    
    
    (396
    )
    
    
    (127
    )Total
    
    $
    (2,118
    )
    
    $
    (5,800
    )
    
    $
    3,682
    
    
    
    63Product Sales Cost-to-revenue ratio
    
    
    1.08
    
    
    
    1.47
    
    
    
    N/M
    
    
    
    (27
    )
  Product sales and revenues
      23




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##### Table of Contents



Research and development contracts
  Administrative and selling expenses
  Research and development expenses
  Loss from operations
  Interest Expense
    24




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##### Table of Contents



Income (loss) from equity investment
  Interest and other income, net
  Accretion of Preferred Stock of Subsidiary
   Provision for income taxes
  Net loss attributable to noncontrolling interest
  Adjustment for modification of redeemable preferred stock of subsidiary
    25




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##### Table of Contents



Preferred Stock dividends
  Net loss to common shareholders and loss per common share
   Three Months EndedApril 30,2011
    
    
    2010Net loss to common shareholders (GAAP)
    
    $
    (29,743
    )
    
    $
    (16,682
    )Net loss per share to common shareholders (GAAP)Basic
    
    $
    (0.24
    )
    
    $
    (0.20
    )Diluted
    
    $
    (0.24
    )
    
    $
    (0.20
    )Non-GAAP AdjustmentsB1200 Repair and Upgrade Cost
    
    $
    (8,752
    )
    
    $
    Adjustment for modification of redeemable preferred stock of
Subsidiary
    
    $
    (8,987
    )
    
    $
    Total
    
    $
    (17,739
    )
    
    $
    Net loss to common shareholders (non-GAAP)
    
    $
    (12,004
    )
    
    $
    (16,682
    )Net loss per share to common shareholders (non-GAAP)Basic
    
    $
    (0.10
    )
    
    $
    (0.20
    )Diluted
    
    $
    (0.10
    )
    
    $
    (0.20
    )
  26




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##### Table of Contents



Comparison of Six Months Ended April 30, 2011 and April 30, 2010
 Revenues and Costs of revenues
  Six Months EndedApril 30,
    
    
    Change2011
    
    
    2010
    
    
    $
    
    
    %Revenues:Product sales and revenues
    
    $
    52,433
    
    
    $
    25,815
    
    
    $
    26,618
    
    
    
    103Research and development contracts
    
    
    4,254
    
    
    
    5,388
    
    
    
    (1,134
    )
    
    
    (21
    )Total
    
    $
    56,687
    
    
    $
    31,203
    
    
    $
    25,484
    
    
    
    82Cost of revenues:Product sales and revenues
    
    $
    65,519
    
    
    $
    37,133
    
    
    $
    28,386
    
    
    
    76Research and development contracts
    
    
    4,354
    
    
    
    5,363
    
    
    
    (1,009
    )
    
    
    (19
    )Total
    
    $
    69,873
    
    
    $
    42,496
    
    
    $
    27,377
    
    
    
    64Gross Margin:Gross margin from product sales and revenues
    
    $
    (13,086
    )
    
    $
    (11,318
    )
    
    $
    (1,768
    )
    
    
    16Gross margin from research and development
Contracts
    
    
    (100
    )
    
    
    25
    
    
    
    (125
    )
    
    
    (500
    )Total
    
    $
    (13,186
    )
    
    $
    (11,293
    )
    
    $
    (1,893
    )
    
    
    17Product Sales Cost-to-revenue ratio (1)
    
    
    1.25
    
    
    
    1.44
    
    
    
    N/M
    
    
    
    (13
    )
 (1)
    
    Cost-to-revenue ratio is calculated as cost of product sales and revenues divided
by product sales and revenues. Six Months EndedApril 30,
    
    
    Change2011
    
    
    2010
    
    
    $
    
    
    %Non-GAAP Adjustment to cost
of product sales and
revenues:B1200 Repair and Upgrade Cost
    
    $
    (8,752
    )
    
    $
    
    
    
    $
    (8,752
    )
    
    
    N/MGross Margin (non-GAAP):Gross margin from product sales and revenues
    
    $
    (4,334
    )
    
    $
    (11,318
    )
    
    $
    6,984
    
    
    
    62Gross margin from research and
development contracts
    
    
    (100
    )
    
    
    25
    
    
    
    (125
    )
    
    
    (500
    )Total
    
    $
    (4,434
    )
    
    $
    (11,293
    )
    
    $
    6,859
    
    
    
    61Product Sales Cost-to-revenue ratio
    
    
    1.08
    
    
    
    1.44
    
    
    
    N/M
    
    
    
    (25
    )
  Product sales and revenues
   27




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Research and development contracts
   28




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##### Table of Contents



Administrative and selling expenses
  Research and development expenses
  Loss from operations
  Interest Expense
  Loss from equity investment
  Interest and other income, net
  Accretion of Preferred Stock of Subsidiary
    29




---



##### Table of Contents



Provision for income taxes
  Net loss attributable to noncontrolling interest
  Adjustment for modification of redeemable preferred stock of subsidiary
    Preferred Stock dividends
  Net loss to common shareholders and loss per common share
   30




---



##### Table of Contents



Six Months EndedApril 30,2011
    
    
    2010Net loss to common shareholders (GAAP)
    
    $
    (41,481
    )
    
    $
    (32,116
    )Net loss per share to common shareholders (GAAP)Basic
    
    $
    (0.35
    )
    
    $
    (0.38
    )Diluted
    
    $
    (0.35
    )
    
    $
    (0.38
    )Non-GAAP AdjustmentsB1200 Repair and Upgrade Cost
    
    $
    (8,752
    )
    
    $
    Adjustment for modification of redeemable preferred stock of
Subsidiary
    
    $
    (8,987
    )
    
    $
    Total
    
    $
    (17,739
    )
    
    $
    Net loss to common shareholders (non-GAAP)
    
    $
    (23,742
    )
    
    $
    (32,116
    )Net loss per share to common shareholders (non-GAAP)Basic
    
    $
    (0.20
    )
    
    $
    (0.38
    )Diluted
    
    $
    (0.20
    )
    
    $
    (0.38
    )
 LIQUIDITY AND CAPITAL RESOURCES
      31




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Cash Flows
   Operating Activities
 Investing Activities
 Financing Activities
   32




---



##### Table of Contents



Sources and Uses of Cash and Investments
  Increasing annual order volume
  South Korea:
   California:
    33




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##### Table of Contents



Connecticut:
 United Kingdom:
  Cost reduction efforts
  
    
    engineering improvements;
    
    technology advances;
    
    supply chain management;
    
    production volume; and
    
    manufacturing process improvements.
  34




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Commitments and Significant Contractual Obligations
  Payments Due by PeriodLess
    
    
    
    
    
    
    
    
    
    
    Morethan
    
    
    1  3
    
    
    3  5
    
    
    thanTotal
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsPurchase commitments(1)
    
    $
    52,564
    
    
    $
    46,902
    
    
    $
    5,662
    
    
    $
    
    
    
    $
    Series 1 Preferred obligation(2)
    
    
    27,503
    
    
    
    11,646
    
    
    
    2,630
    
    
    
    2,630
    
    
    
    10,597Term loans (principal and interest)
    
    
    4,486
    
    
    
    909
    
    
    
    391
    
    
    
    433
    
    
    
    2,753Capital and operating lease commitments(3)
    
    
    3,532
    
    
    
    888
    
    
    
    1,653
    
    
    
    991
    
    
    
    Revolving Credit Facility(4)
    
    
    3,000
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    Series B Preferred dividends payable(5)Totals
    
    $
    91,085
    
    
    $
    63,345
    
    
    $
    10,336
    
    
    $
    4,054
    
    
    $
    13,350
 
 (1)
    
    Purchase commitments with suppliers for materials, supplies and services incurred in
the normal course of business.(2)
    
    Under the previous Series 1 preferred shares agreement, FCE Ltd. had an accrued and
unpaid dividend obligation of approximately Cdn. $12,500,000 representing the deferral of
dividends plus interest from the commencement of the agreement in May 2004 to present.
Payment was originally due to Enbridge as of December 31, 2010, but was subsequently
extended based on mutual consent. Under the modified terms, this obligation will be settled
as (i) equal quarterly returns of capital cash payments to the holders of the Series 1
preferred shares on the last day of each calendar quarter starting on March 31, 2011 and
ending on December 31, 2011 and (ii) additional return of capital payments, as
consideration for the one-year deferral, calculated at a 9.8 percent rate per annum on the
unpaid Cdn. $12,500,000 obligation. Under the previous Series 1 preferred shares
agreement, FCE Ltd. was to make annual dividend payments totaling Cdn. $1,250,000. The
terms of the Series 1 preferred share agreement were also modified to adjust these payments
to (i) an annual amount of Cdn$500,000 for dividends and (ii) an amount of Cdn.$750,000 as
return of capital payments payable in cash. These payments commenced on March 31, 2011 and
end on December 31, 2020. Additional dividends accrue on cumulative unpaid dividends at a
1.25 percent quarterly rate, compounded quarterly, until payment thereof. On December 31,
2020 the amount of all accrued and unpaid dividends on the Class A Preferred Shares and the
balance of the principal redemption price shall be paid to the holders of the Series 1
preferred shares. The Company has the option of making dividend payments in the form of
common stock or cash under terms outlined in the preferred share agreement. For purposes
of the above table, only the final balance of the unpaid dividends on December 31, 2020 is
assumed to be paid in the form of common stock.(3)
    
    Future minimum lease payments on capital and operating leases.(4)
    
    In January 2011, the Company entered into a $5.0 million revolving credit facility with
JPMorgan Chase Bank, N.A. and the Export-Import Bank of the United States. The credit
facility is to be used for working capital to finance the manufacture and production and
subsequent export sale of the Companys products or services. The agreement has a one year
term with renewal provisions. The outstanding principal balance of the facility will bear
interest, at the option of the Company of either the one-month LIBOR plus 1.5 percent or
the prime rate of JP Morgan Chase. The facility is secured by certain working capital
assets and general intangibles, up to the amount of the outstanding facility balance. At
April 30, 2011, the outstanding amount owed under this facility was $3.0 million.(5)
    
    We are currently paying $3.2 million in annual dividends on our Series B Preferred
Stock. The $3.2 million annual dividend payment has not been included in this table as we
cannot reasonably determine the period when or if we will be able to convert the Series B
Preferred Stock into shares of our common 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.
   35




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##### Table of Contents



Power purchase agreements
   Service and warranty agreements
  Research and development cost-share contracts
   36




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Revenue Recognition
       37




---



##### Table of Contents



Inventories and Advance Payments to Vendors
    Warranty and Service Expense Recognition
    38




---



##### Table of Contents



Share-Based Compensation
   39




---



##### Table of Contents



Income Taxes
     ACCOUNTING GUIDANCE UPDATE
 Recently Adopted Accounting Guidance
    40




---



##### Table of Contents



Recent Accounting Guidance Not Yet Effective
   41




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##### Table of Contents



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
   42




---



##### Table of Contents



Item 4.
    
    CONTROLS AND PROCEDURES
     43




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1.
    
    LEGAL PROCEEDINGS
  
 Item 1A.
    
    RISK FACTORS
  
 Item 6.
    
    EXHIBITS
 ExhibitNo.
    
    Description10.70
    
    
    *    Employment Agreement, dated February 8, 2011 between FuelCell Energy, Inc. and Arthur Bottone,
President and Chief Executive Officer.10.75
    
    
    *    Letter Agreement, dated February 22, 2011 between FuelCell Energy, Inc. and Joseph G. Mahler,
Chief Financial Officer, supplementing the employment agreement dated October 5, 1998 by and
between FuelCell Energy, Inc. and Joseph G. Mahler.10.80
    
    
    *    Change in Control Agreement, dated February 8, 2011 between FuelCell Energy, Inc. and Joseph G.
Mahler, Chief Financial Officer.31.1
    
    
    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
 *
    
    Management Contract or Compensatory Plan or Arrangement  44




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##### Table of Contents



SIGNATURE
  FUELCELL ENERGY, INC.(Registrant)June 9, 2011

Date
    
    
    
    /s/ Joseph G. Mahler

Joseph G. MahlerSenior Vice President, Chief FinancialOfficer, Treasurer and Corporate Secretary(Principal Financial Officer and Principal Accounting Officer)
  45




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##### Table of Contents



INDEX OF EXHIBITS
 ExhibitNo.
    
    Description10.70
    
    
    *    Employment Agreement, dated February 8, 2011 between FuelCell Energy, Inc. and Arthur Bottone,
President and Chief Executive Officer.10.75
    
    
    *    Letter Agreement, dated February 22, 2011 between FuelCell Energy, Inc. and Joseph G. Mahler,
Chief Financial Officer, supplementing the employment agreement dated October 5, 1998 by and
between FuelCell Energy, Inc. and Joseph G. Mahler.10.80
    
    
    *    Change in Control Agreement, dated February 8, 2011 between FuelCell Energy, Inc. and Joseph G.
Mahler, Chief Financial Officer.31.1
    
    
    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
 *
    
    Management Contract or Compensatory Plan or Arrangement