##### 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, 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3 Great Pasture RoadDanbury, Connecticut
    
    06813(Address of principal executive offices)
    
    (Zip Code)
 (203) 825-6000
 þ o
 o 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 April 30, 2010 and October 31, 2009
    
    
    3Consolidated Statements of Operations for the three months ended April 30, 2010 and 2009
    
    
    4Consolidated Statements of Operations for the six months ended April 30, 2010 and 2009
    
    
    5Consolidated Statements of Cash Flows for the six months ended April 30, 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
    
    
    37Item 4. Controls and Procedures
    
    
    38PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    39Item 1A. Risk Factors
    
    
    39Item 6. Exhibits
    
    
    39Signature
    
    
    40Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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FUELCELL ENERGY, INC.
 
 Consolidated Balance Sheets
 (Unaudited)
 (Amounts in thousands, except share and per share amounts)
 April 30,
    
    
    October 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,112
    
    
    $
    57,823Investments  U.S. treasury securities
    
    
    3,012
    
    
    
    7,004Accounts receivable, net
    
    
    18,110
    
    
    
    22,920Inventories, net
    
    
    30,284
    
    
    
    25,433Other current assets
    
    
    4,620
    
    
    
    6,499Total current assets
    
    
    80,138
    
    
    
    119,679Property, plant and equipment, net
    
    
    30,314
    
    
    
    32,394Investments  U.S. treasury securities
    
    
    16,630
    
    
    
    Investment in and loans to affiliate
    
    
    10,260
    
    
    
    10,064Other assets, net
    
    
    600
    
    
    
    551Total assets
    
    $
    137,942
    
    
    $
    162,688LIABILITIES AND EQUITYCurrent liabilities:Current portion of long-term debt and other liabilities
    
    $
    984
    
    
    $
    997Accounts payable
    
    
    6,271
    
    
    
    8,484Accounts payable due to affiliate
    
    
    305
    
    
    
    1,584Accrued liabilities
    
    
    15,027
    
    
    
    13,808Deferred revenue, royalty income and customer deposits
    
    
    25,331
    
    
    
    17,013Total current liabilities
    
    
    47,918
    
    
    
    41,886Long-term deferred revenue and royalty income
    
    
    8,943
    
    
    
    10,124Long-term debt and other liabilities
    
    
    4,245
    
    
    
    4,410Total liabilities
    
    
    61,106
    
    
    
    56,420Redeemable preferred stock of subsidiary
    
    
    15,823
    
    
    
    14,976Redeemable preferred stock (liquidation preference of
$64,020 at April 30, 2010 and $64,120 at October 31,
2009)
    
    
    59,857
    
    
    
    59,950Total Equity:Shareholders equityCommon stock ($.0001 par value); 150,000,000
shares authorized; 85,265,076 and 84,387,741
shares issued and outstanding at April 30, 2010
and October 31, 2009, respectively
    
    
    8
    
    
    
    8Additional paid-in capital
    
    
    631,793
    
    
    
    631,296Accumulated deficit
    
    
    (630,474
    )
    
    
    (599,960
    )Accumulated other comprehensive income (loss)
    
    
    11
    
    
    
    (2
    )Treasury stock, Common, at cost (5,679 shares at
April 30, 2010 and October 31, 2009)
    
    
    (53
    )
    
    
    (53
    )Deferred compensation
    
    
    53
    
    
    
    53Total shareholders equity
    
    
    1,338
    
    
    
    31,342Noncontrolling interest in subsidiaries
    
    
    (182
    )
    
    
    Total equity
    
    
    1,156
    
    
    
    31,342Total liabilities and equity
    
    $
    137,942
    
    
    $
    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 EndedApril 30,2010
    
    
    2009Revenues:Product sales and revenues
    
    $
    13,007
    
    
    $
    19,308Research and development contracts
    
    
    3,580
    
    
    
    3,556Total revenues
    
    
    16,587
    
    
    
    22,864Costs and expenses:Cost of product sales and revenues
    
    
    19,120
    
    
    
    28,614Cost of research and development contracts
    
    
    3,267
    
    
    
    2,837Administrative and selling expenses
    
    
    4,547
    
    
    
    4,755Research and development expenses
    
    
    5,089
    
    
    
    5,053Total costs and expenses
    
    
    32,023
    
    
    
    41,259Loss from operations
    
    
    (15,436
    )
    
    
    (18,395
    )Interest expense
    
    
    (45
    )
    
    
    (66
    )Loss from equity investment
    
    
    (245
    )
    
    
    (216
    )Interest and other income, net
    
    
    364
    
    
    
    130Loss before redeemable preferred stock of subsidiary
    
    
    (15,362
    )
    
    
    (18,547
    )Accretion of redeemable preferred stock of subsidiary
    
    
    (603
    )
    
    
    (533
    )Loss before provision for income taxes
    
    
    (15,965
    )
    
    
    (19,080
    )Provision for income taxes
    
    
    (13
    )
    
    
    Net loss
    
    
    (15,978
    )
    
    
    (19,080
    )Net loss attributable to noncontrolling interest
    
    
    96
    
    
    
    Net loss attributable to FuelCell Energy, Inc.
    
    
    (15,882
    )
    
    
    (19,080
    )Preferred stock dividends
    
    
    (800
    )
    
    
    (802
    )Net loss to common shareholders
    
    $
    (16,682
    )
    
    $
    (19,882
    )Net loss per share to common shareholdersBasic
    
    $
    (0.20
    )
    
    $
    (0.29
    )Diluted
    
    $
    (0.20
    )
    
    $
    (0.29
    )Weighted average shares outstandingBasic
    
    
    84,515,979
    
    
    
    69,521,575Diluted
    
    
    84,515,979
    
    
    
    69,521,575
   4




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FUELCELL ENERGY, INC.
 
 Consolidated Statements of Operations
 (Unaudited)
 (Amounts in thousands, except share and per share amounts)
 Six Months EndedApril 30,2010
    
    
    2009Revenues:Product sales and revenues
    
    $
    25,815
    
    
    $
    38,339Research and development contracts
    
    
    5,388
    
    
    
    6,248Total revenues
    
    
    31,203
    
    
    
    44,587Costs and expenses:Cost of product sales and revenues
    
    
    37,133
    
    
    
    57,551Cost of research and development contracts
    
    
    5,363
    
    
    
    5,075Administrative and selling expenses
    
    
    8,703
    
    
    
    9,001Research and development expenses
    
    
    9,709
    
    
    
    10,790Total costs and expenses
    
    
    60,908
    
    
    
    82,417Loss from operations
    
    
    (29,705
    )
    
    
    (37,830
    )Interest expense
    
    
    (108
    )
    
    
    (126
    )Loss from equity investment
    
    
    (393
    )
    
    
    (562
    )Interest and other income, net
    
    
    683
    
    
    
    545Loss before redeemable preferred stock of subsidiary
    
    
    (29,523
    )
    
    
    (37,973
    )Accretion of redeemable preferred stock of subsidiary
    
    
    (1,160
    )
    
    
    (1,026
    )Loss before provision for income taxes
    
    
    (30,683
    )
    
    
    (38,999
    )Provision for income taxes
    
    
    (13
    )
    
    
    Net loss
    
    
    (30,696
    )
    
    
    (38,999
    )Net loss attributable to noncontrolling interest
    
    
    182
    
    
    
    Net loss attributable to FuelCell Energy, Inc.
    
    
    (30,514
    )
    
    
    (38,999
    )Preferred stock dividends
    
    
    (1,602
    )
    
    
    (1,604
    )Net loss to common shareholders
    
    $
    (32,116
    )
    
    $
    (40,603
    )Net loss per share to common shareholdersBasic
    
    $
    (0.38
    )
    
    $
    (0.59
    )Diluted
    
    $
    (0.38
    )
    
    $
    (0.59
    )Weighted average shares outstandingBasic
    
    
    84,459,926
    
    
    
    69,178,940Diluted
    
    
    84,459,926
    
    
    
    69,178,940
   5




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FUELCELL ENERGY, INC.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 (Amounts in thousands)
 Six Months EndedApril 30,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (30,696
    )
    
    $
    (38,999
    )Adjustments to reconcile net loss to net cash used in operating activities:Share-based compensation
    
    
    1,377
    
    
    
    2,553Loss from equity investment
    
    
    393
    
    
    
    562Accretion of redeemable preferred stock of subsidiary
    
    
    1,160
    
    
    
    1,026Interest receivable on loan to affiliate
    
    
    (34
    )
    
    
    (73
    )Loss on derivatives
    
    
    30
    
    
    
    14Depreciation
    
    
    3,772
    
    
    
    4,369Amortization of bond premium
    
    
    32
    
    
    
    538Provision (recovery) for doubtful accounts
    
    
    40
    
    
    
    (6
    )(Increase) decrease in operating assets:Accounts receivable
    
    
    4,770
    
    
    
    1,743Inventories
    
    
    (4,851
    )
    
    
    1,690Other assets
    
    
    1,197
    
    
    
    375Increase (decrease) in operating liabilities:Accounts payable
    
    
    (3,492
    )
    
    
    (7,880
    )Accrued liabilities
    
    
    2,135
    
    
    
    216Deferred revenue, royalty income and customer deposits
    
    
    7,137
    
    
    
    (7,412
    )Net cash used in operating activities
    
    
    (16,496
    )
    
    
    (41,284
    )Cash flows from investing activities:Capital expenditures
    
    
    (1,685
    )
    
    
    (1,944
    )Convertible loan to affiliate
    
    
    (600
    )
    
    
    (600
    )Treasury notes matured
    
    
    7,000
    
    
    
    23,000Treasury notes purchased
    
    
    (19,670
    )
    
    
    Net cash (used in) provided by investing activities
    
    
    (14,955
    )
    
    
    20,456Cash flows from financing activities:Repayment of debt
    
    
    (205
    )
    
    
    (120
    )Proceeds from debt
    
    
    
    
    
    
    436Payment of preferred dividends
    
    
    (1,917
    )
    
    
    (1,864
    )Net proceeds from sale of common stock
    
    
    
    
    
    
    1,230Common stock issued for stock plans and related expenses
    
    
    (151
    )
    
    
    178Net cash used in financing activities
    
    
    (2,273
    )
    
    
    (140
    )Effects on cash from changes in foreign currency rates
    
    
    13
    
    
    
    (4
    )Net decrease in cash and cash equivalents
    
    
    (33,711
    )
    
    
    (20,972
    )Cash and cash equivalents-beginning of period
    
    
    57,823
    
    
    
    38,043Cash and cash equivalents-end of period
    
    $
    24,112
    
    
    $
    17,071Supplemental cash flow disclosures:Cash interest paid
    
    $
    108
    
    
    $
    126Noncash 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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FUELCELL ENERGY, INC.   (Unaudited)
   Inventories and Advance Payments to Vendors
   Concentrations
   9




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FUELCELL ENERGY, INC.   (Unaudited)
  Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2010
    
    
    2009
    
    
    2010
    
    
    2009POSCO
    
    
    64
    %
    
    
    68
    %
    
    
    64
    %
    
    
    66
    %U.S. Government
    
    
    22
    %
    
    
    15
    %
    
    
    17
    %
    
    
    14
    %Combined
    
    
    86
    %
    
    
    83
    %
    
    
    81
    %
    
    
    80
    %
  Subsequent Events
    Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net loss attributable to FuelCell
    
    $
    (15,882
    )
    
    $
    (19,080
    )
    
    $
    (30,514
    )
    
    $
    (38,999
    )Foreign currency translation adjustments
    
    
    5
    
    
    
    (4
    )
    
    
    13
    
    
    
    (4
    )Comprehensive loss
    
    $
    (15,877
    )
    
    $
    (19,084
    )
    
    $
    (30,501
    )
    
    $
    (39,003
    )
 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
   13




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FUELCELL ENERGY, INC.   (Unaudited)
 Note 2. Investments
  Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealizedCost
    
    
    gains
    
    
    (losses)
    
    
    Fair ValueU.S. Government ObligationsAs of April 30, 2010
    
    $
    19,642
    
    
    $
    
    
    
    $
    (15
    )
    
    $
    19,627As of October 31, 2009
    
    $
    7,004
    
    
    $
    40
    
    
    $
    
    
    
    $
    7,044
  WeightedAmortized
    
    
    
    
    
    
    average yieldCost
    
    
    Fair Value
    
    
    to maturityDue within one year
    
    $
    3,012
    
    
    $
    3,012
    
    
    
    0.9
    %Due after one year
    
    
    16,630
    
    
    
    16,615
    
    
    
    1.2
    %Total investments
    
    $
    19,642
    
    
    $
    19,627
    
    
    
    1.1
    %
 Note 3. Accounts Receivable
  April 30,
    
    
    October 31,2010
    
    
    2009U.S. Government:Amount billed
    
    $
    1,028
    
    
    $
    574Unbilled recoverable costs
    
    
    689
    
    
    
    7761,717
    
    
    
    1,350Commercial Customers:Amount billed
    
    
    4,734
    
    
    
    5,439Unbilled recoverable costs
    
    
    11,659
    
    
    
    16,13116,393
    
    
    
    21,570$
    18,110
    
    
    $
    22,920
   14




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FUELCELL ENERGY, INC.   (Unaudited)
 Note 4. Inventories
  April 30,
    
    
    October 31,2010
    
    
    2009Raw materials
    
    $
    14,366
    
    
    $
    14,583Work-in-process
    
    
    23,027
    
    
    
    19,790Gross inventory
    
    
    37,393
    
    
    
    34,373Less amount to reduce certain
inventories to lower of cost or market
    
    
    (7,109
    )
    
    
    (8,940
    )Net inventory
    
    $
    30,284
    
    
    $
    25,433
 Note 5. Property, Plant and Equipment
  April 30,
    
    
    October 31,
    
    
    Estimated2010
    
    
    2009
    
    
    Useful LifeLand
    
    $
    524
    
    
    $
    524
    
    
    Building and improvements
    
    
    6,875
    
    
    
    6,851
    
    
    10-26 yearsMachinery, equipment and software
    
    
    60,508
    
    
    
    59,860
    
    
    3-8 yearsFurniture and fixtures
    
    
    2,614
    
    
    
    2,604
    
    
    10 yearsPower plants for use under PPAs
    
    
    17,743
    
    
    
    17,743
    
    
    10 yearsConstruction in progress (1)
    
    
    7,695
    
    
    
    6,71095,959
    
    
    
    94,292Less, accumulated depreciation and amortization
    
    
    (65,645
    )
    
    
    (61,898
    )Property, plant and equipment, net
    
    $
    30,314
    
    
    $
    32,394
 
 (1)
    
    Included in construction in progress are costs of $0.9 million and $0.8 million at
April 30, 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
  April 30,
    
    
    October 31,2010
    
    
    2009Accrued payroll and employee benefits
    
    $
    3,075
    
    
    $
    3,258Accrued contract and operating costs (1)
    
    
    4,108
    
    
    
    3,190Reserve for product warranty costs (2)
    
    
    1,919
    
    
    
    500Reserve for long-term service agreement costs
    
    
    4,922
    
    
    
    5,950Accrued taxes and other
    
    
    1,003
    
    
    
    910Total
    
    $
    15,027
    
    
    $
    13,808
 
 (1)
    
    Includes $2.8 million and $2.2 million at April 30, 2010 and October 31, 2009,
respectively, potentially owed to customers related to contract performance.(2)
    
    Activity in the reserve for product warranty costs during the six months ended April
30, 2010 included additions for specific known warranty issues
totaling $1.5 million, other general reserve additions for
estimates of potential future warranty obligations
of $1.0 million on contracts in the warranty period
and reserve reductions of $1.1 million as
contracts progress through the warranty period or are beyond the
warranty period. Note 8. Debt
  April 30,
    
    
    October 31,2010
    
    
    2009Connecticut Development Authority Note
    
    $
    3,917
    
    
    $
    4,000Connecticut Clean Energy Fund Note
    
    
    679
    
    
    
    650Capitalized lease obligations
    
    
    215
    
    
    
    321Total debt
    
    
    4,811
    
    
    
    4,971Less  current portion
    
    
    (984
    )
    
    
    (997
    )Long-term debt
    
    $
    3,827
    
    
    $
    3,974
   16




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FUELCELL ENERGY, INC.   (Unaudited)
   Note 9. Share-Based Compensation Plans
   Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Cost of product sales and revenues
    
    $
    168
    
    
    $
    210
    
    
    $
    392
    
    
    $
    515Cost of research and development contracts
    
    
    38
    
    
    
    49
    
    
    
    77
    
    
    
    102General and administrative expense
    
    
    372
    
    
    
    661
    
    
    
    566
    
    
    
    1,495Research and development expense
    
    
    156
    
    
    
    180
    
    
    
    341
    
    
    
    425Total share-based compensation
    
    $
    734
    
    
    $
    1,100
    
    
    $
    1,376
    
    
    $
    2,537
  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
    
    
    
    700,231
    
    
    
    2.79Exercised / Vested
    
    
    
    
    
    
    
    
    
    
    (135,417
    )
    
    
    2.85Cancelled
    
    
    (655,018
    )
    
    
    11.76
    
    
    
    (20,500
    )
    
    
    2.85Outstanding at April 30, 2010
    
    
    5,256,826
    
    
    
    10.56
    
    
    
    1,137,576
    
    
    
    2.83
  17




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FUELCELL ENERGY, INC.   (Unaudited)
  Number ofSharesBalance at October 31, 2009
    
    
    207,207Issued @ $2.70
    
    
    (39,858
    )Balance at April 30, 2010
    
    
    167,349
 Note 10. Conversion of Preferred Stock
  Note 11. Equity
  TotalShareholders
    
    
    NoncontrollingEquity
    
    
    interest
    
    
    Total EquityBalance at October 31, 2009
    
    $
    31,342
    
    
    $
    
    
    
    $
    31,342Share-based compensation
    
    
    1,377
    
    
    
    
    
    
    
    1,377Stock issued under benefit plans
    
    
    628
    
    
    
    
    
    
    
    628Preferred dividends  Series B
    
    
    (1,602
    )
    
    
    
    
    
    
    (1,602
    )Conversion of Series B preferred
stock to common stock, net of
original issuance costs
    
    
    93
    
    
    
    
    
    
    
    93Effect of foreign currency translation
    
    
    14
    
    
    
    
    
    
    
    14Net loss
    
    
    (30,514
    )
    
    
    (182
    )
    
    
    (30,696
    )Balance at April 30, 2010
    
    $
    1,338
    
    
    $
    (182
    )
    
    $
    1,156
  18




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##### Table of Contents



FUELCELL ENERGY, INC.   (Unaudited)
 Note 12. Net Loss Per Share
  Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2010
    
    
    2009
    
    
    2010
    
    
    2009NumeratorNet loss
    
    $
    (15,978
    )
    
    $
    (19,080
    )
    
    $
    (30,696
    )
    
    $
    (38,999
    )Net loss attributable to noncontrolling interest
    
    
    96
    
    
    
    
    
    
    
    182
    
    
    
    Preferred stock dividend
    
    
    (800
    )
    
    
    (802
    )
    
    
    (1,602
    )
    
    
    (1,604
    )Net loss to common shareholders
    
    $
    (16,682
    )
    
    $
    (19,882
    )
    
    $
    (32,116
    )
    
    $
    (40,603
    )DenominatorWeighted average basic common shares
    
    
    84,515,979
    
    
    
    69,521,575
    
    
    
    84,459,926
    
    
    
    69,178,940Effect of dilutive securities (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average diluted common shares
    
    
    84,515,979
    
    
    
    69,521,575
    
    
    
    84,459,926
    
    
    
    69,178,940Basic loss per share
    
    $
    (0.20
    )
    
    $
    (0.29
    )
    
    $
    (0.38
    )
    
    $
    (0.59
    )Diluted loss per share (1)
    
    $
    (0.20
    )
    
    $
    (0.29
    )
    
    $
    (0.38
    )
    
    $
    (0.59
    )
 
 (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, 2010 and 2009,
there were options to purchase 5.3 million and 6.0 million shares of common stock,
respectively. There were no outstanding warrants as of April 30, 2010 and 0.5 million
outstanding warrants at April 30, 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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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Caution concerning forward-looking statements.
 Overview and recent developments.
 Results of operations.
 Liquidity and capital resources.
 Critical accounting policies and estimates.
 Recent accounting guidance.
 CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
  OVERVIEW AND RECENT DEVELOPMENTS
 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.
  Recent Developments
   21




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##### Table of Contents



RESULTS OF OPERATIONS
  Comparison of Three Months Ended April 30, 2010 and April 30, 2009
 Revenues and Costs of revenues
  Three Months EndedApril 30,
    
    
    Change2010
    
    
    2009
    
    
    $
    
    
    %Revenues:Product sales and revenues (1)
    
    $
    13,007
    
    
    $
    19,308
    
    
    $
    (6,301
    )
    
    
    (33
    )Research and development contracts
    
    
    3,580
    
    
    
    3,556
    
    
    
    24
    
    
    
    1Total
    
    $
    16,587
    
    
    $
    22,864
    
    
    $
    (6,277
    )
    
    
    (27
    )Cost of revenues:Product sales and revenues (2)
    
    $
    19,120
    
    
    $
    28,614
    
    
    $
    (9,494
    )
    
    
    (33
    )Research and development contracts
    
    
    3,267
    
    
    
    2,837
    
    
    
    430
    
    
    
    15Total
    
    $
    22,387
    
    
    $
    31,451
    
    
    $
    (9,064
    )
    
    
    (29
    )Gross Margin:Product sales and revenues
    
    $
    (6,113
    )
    
    $
    (9,306
    )
    
    $
    3,193
    
    
    
    34Research and development contracts
    
    
    313
    
    
    
    719
    
    
    
    (406
    )
    
    
    (57
    )Total
    
    $
    (5,800
    )
    
    $
    (8,587
    )
    
    $
    2,787
    
    
    
    32Product Sales Cost-to-revenue ratio(3)
    
    
    1.47
    
    
    
    1.48
 (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
  Accretion of Preferred Stock of Subsidiary
   24




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##### Table of Contents



Provision for income taxes
   Net loss attributable to noncontrolling interest
  Preferred Stock dividends
  Net loss to common shareholders and loss per common share
  Comparison of Six Months Ended April 30, 2010 and April 30, 2009
 Revenues and Costs of revenues
  Six Months EndedApril 30,
    
    
    Change2010
    
    
    2009
    
    
    $
    
    
    %Revenues:Product sales and revenues
    
    $
    25,815
    
    
    $
    38,339
    
    
    $
    (12,524
    )
    
    
    (33
    )Research and development contracts
    
    
    5,388
    
    
    
    6,248
    
    
    
    (860
    )
    
    
    (14
    )Total
    
    $
    31,203
    
    
    $
    44,587
    
    
    $
    (13,384
    )
    
    
    (30
    )Cost of revenues:Product sales and revenues
    
    $
    37,133
    
    
    $
    57,551
    
    
    $
    (20,418
    )
    
    
    (35
    )Research and development contracts
    
    
    5,363
    
    
    
    5,075
    
    
    
    288
    
    
    
    6Total
    
    $
    42,496
    
    
    $
    62,626
    
    
    $
    (20,130
    )
    
    
    (32
    )Gross Margin:Product sales and revenues
    
    $
    (11,318
    )
    
    $
    (19,212
    )
    
    $
    7,894
    
    
    
    41Research and development contracts
    
    
    25
    
    
    
    1,173
    
    
    
    (1,148
    )
    
    
    (98
    )Total
    
    $
    (11,293
    )
    
    $
    (18,039
    )
    
    $
    6,746
    
    
    
    37Product Sales Cost-to-revenue ratio
    
    
    1.44
    
    
    
    1.50
  25




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##### Table of Contents



Product sales and revenues
    Research and development contracts
  Administrative and selling expenses
  Research and development expenses
   26




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##### Table of Contents



Loss from operations
  Loss from equity investment
  Interest and other income, net
  Accretion of Preferred Stock of Subsidiary
  Net loss attributable to noncontrolling interest
  Preferred Stock dividends
  Net loss to common shareholders and loss per common share
  LIQUIDITY AND CAPITAL RESOURCES
    27




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Cash Flows
    Operating Activities
  Investing Activities
 Financing Activities
  28




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Sources and Uses of Cash and Investments
  Increasing annual order volume
  South Korea:
   California:
    29




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##### Table of Contents



Connecticut:
  Cost reduction efforts
  
    
    engineering improvements;
 
    
    technology advances;
 
    
    supply chain management;
 
    
    production volume; and
 
    
    manufacturing process improvements.
  Continued involvement in research and development contracts
  Advanced Hydrogen Programs
  30




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##### Table of Contents



Solid Oxide Fuel Cell Development:
 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)
    
    $
    4,450
    
    
    $
    937
    
    
    $
    1,514
    
    
    $
    1,327
    
    
    $
    672Term loans (principal and interest)
    
    
    5,854
    
    
    
    1,044
    
    
    
    730
    
    
    
    730
    
    
    
    3,350Purchase commitments(2)
    
    
    34,297
    
    
    
    25,029
    
    
    
    9,268
    
    
    
    
    
    
    
    Series 1 Preferred dividends payable(3)
    
    
    24,730
    
    
    
    12,610
    
    
    
    2,486
    
    
    
    2,486
    
    
    
    7,148Series B Preferred dividends payable(4)Totals
    
    $
    69,331
    
    
    $
    39,620
    
    
    $
    13,998
    
    
    $
    4,543
    
    
    $
    11,170
 (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 April 30, 2010 was $10.8 million using an April
30, 2010 exchange rate of Cdn.$0.9945. 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.    31




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Power purchase agreements
   Service and warranty agreements
  Research and development cost-share contracts
   32




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Health Care Reform Acts
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Revenue Recognition
    33




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Warranty and Service Expense Recognition
      34




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Inventories and Advance Payments to Vendors
   ACCOUNTING GUIDANCE UPDATE
 Recently Adopted Accounting Guidance
     35




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Recent Accounting Guidance Not Yet Effective
      36




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Exposure
  Foreign Currency Exchange Risk
   37




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Derivative Fair Value Exposure
 Series 1 Preferred Stock
  Warrants
  
 Item 4. CONTROLS AND PROCEDURES
     38




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PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  
 Item 5. 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
  39




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SIGNATURE
  FUELCELL ENERGY, INC.(Registrant)June 9, 2010

Date
    
    /s/ Joseph G. Mahler

Joseph G. MahlerSenior Vice President, Chief Financial Officer,Treasurer and Corporate Secretary(Principal Financial Officer andPrincipal Accounting Officer)
  40




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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