FUELCELL ENERGY INC - Quarter Report: 2011 April (Form 10-Q)

 

 

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

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.

(Exact name of registrant as specified in its charter)

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)

Registrant’s telephone number, including area code: (203) 825-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares of common stock, par value $.0001 per share, outstanding at June 7, 2011: 126,975,692

 

 

FUELCELL ENERGY, INC.

FORM 10-Q

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of April 30, 2011 and October 31, 2010			3
Consolidated Statements of Operations for the three months ended April 30, 2011 and 2010			4
Consolidated Statements of Operations for the six months ended April 30, 2011 and 2010			5
Consolidated Statements of Cash Flows for the six months ended April 30, 2011 and 2010			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures about Market Risk			42
Item 4. Controls and Procedures			43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			44
Item 1A. Risk Factors			44
Item 6. Exhibits			44
Signature			45
EX-10.70
EX-10.75
EX-10.80
EX-31.1
EX-31.2
EX-32.1
EX-32.2

FUELCELL ENERGY, INC.

		April 30,				October 31,
		2011				2010
ASSETS
Current assets:
Cash and cash equivalents		$	36,980			$	20,467
Investments — U.S. treasury securities			18,067				25,019
Accounts receivable, net			19,879				18,066
Inventories, net			36,199				33,404
Other current assets			7,395				5,253
Total current assets			118,520				102,209
Property, plant and equipment, net			24,289				26,679
Investments — U.S. treasury securities			—				9,071
Investment in and loans to affiliate			9,779				9,837
Other assets, net			5,941				2,733
Total assets		$	158,529			$	150,529
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt and other liabilities		$	4,017			$	976
Accounts payable			11,764				10,267
Accounts payable due to affiliate			275				575
Accrued liabilities			26,335				16,721
Deferred revenue			31,218				25,499
Preferred stock obligation of subsidiary			8,992				—
Total current liabilities			82,601				54,038
Long-term deferred revenue			7,500				8,042
Long-term preferred stock obligation of subsidiary			14,564				—
Long-term debt and other liabilities			4,124				4,056
Total liabilities			108,789				66,136
Redeemable preferred stock of subsidiary			—				16,849
Redeemable preferred stock (liquidation preference of $64,020 at April 30, 2011 and October 31, 2010)			59,857				59,857
Total (Deficit) Equity:
Shareholders’ (deficit) equity
Common stock ($.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				11
Additional paid-in capital			677,157				663,951
Accumulated deficit			(686,517	)			(655,623	)
Accumulated other comprehensive income			15				11
Treasury stock, Common, at cost (5,679 shares at April 30, 2011 and October 31, 2010)			(53	)			(53	)
Deferred compensation			53				53
Total shareholders’ (deficit) equity			(9,333	)			8,350
Noncontrolling interest in subsidiaries			(784	)			(663	)
Total (deficit) equity			(10,117	)			7,687
Total liabilities and (deficit) equity		$	158,529			$	150,529

See accompanying notes to consolidated financial statements.

FUELCELL ENERGY, INC.

		Three Months Ended
		April 30,
		2011				2010
Revenues:
Product sales and revenues		$	26,673			$	13,007
Research and development contracts			1,934				3,580
Total revenues			28,607				16,587
Costs and expenses:
Cost of product sales and revenues			37,460				19,120
Cost of research and development contracts			2,017				3,267
Administrative and selling expenses			4,454				4,547
Research and development expenses			4,498				5,089
Total costs and expenses			48,429				32,023
Loss from operations			(19,822	)			(15,436	)
Interest expense			(928	)			(45	)
Income (loss) from equity investment			143				(245	)
Interest and other income, net			634				364
Loss 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				96
Net 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

See accompanying notes to consolidated financial statements.

FUELCELL ENERGY, INC.

		Six Months Ended
		April 30,
		2011				2010
Revenues:
Product sales and revenues		$	52,433			$	25,815
Research and development contracts			4,254				5,388
Total revenues			56,687				31,203
Costs and expenses:
Cost of product sales and revenues			65,519				37,133
Cost of research and development contracts			4,354				5,363
Administrative and selling expenses			8,504				8,703
Research and development expenses			8,744				9,709
Total costs and expenses			87,121				60,908
Loss from operations			(30,434	)			(29,705	)
Interest expense			(982	)			(108	)
Loss from equity investment			(55	)			(393	)
Interest and other income, net			1,034				683
Loss 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				182
Net 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

See accompanying notes to consolidated financial statements.

FUELCELL ENERGY, INC.

		Six Months Ended
		April 30,
		2011				2010
Cash 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				1,377
Loss from equity investment			55				393
Accretion of redeemable preferred stock of subsidiary			525				1,160
Interest receivable on loan to affiliate			(86	)			(34	)
Loss on derivatives			78				30
Depreciation			3,185				3,772
Amortization of bond premium			42				32
Provision for doubtful accounts			235				40
(Increase) decrease in operating assets:
Accounts receivable			(2,048	)			4,770
Inventories			(2,795	)			(4,851	)
Other assets			(5,260	)			1,865
Increase (decrease) in operating liabilities:
Accounts payable			1,197				(3,492	)
Accrued liabilities			10,268				2,001
Deferred revenue			5,177				7,137
Net 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				7,000
Treasury 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				13
Net increase (decrease) in cash and cash equivalents			16,513				(33,711	)
Cash and cash equivalents-beginning of period			20,467				57,823
Cash and cash equivalents-end of period		$	36,980			$	24,112
Supplemental cash flow disclosures:
Cash interest paid		$	66			$	108
Noncash financing and investing activity:
Common stock issued in settlement of prior year bonus obligation		$	707			$	673
Common stock issued for Employee Stock Purchase Plan in settlement of prior year accrued employee contributions		$	58			$	109
Adjustment for modification of redeemable preferred stock of subsidiary		$	8,987				—

See accompanying notes to consolidated financial statements.

FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Tabular amounts in thousands, except share and per share amounts)

Note 1. Nature of Business and Basis of Presentation

FuelCell Energy, Inc. and subsidiaries (the “Company”, “FuelCell Energy”, “we”, “us”, or “our”) is a Delaware corporation engaged in the development, manufacture and service of high temperature fuel cells for clean electric power generation. Our Direct FuelCell power plants produce ultra-clean, efficient and reliable 24/7 base load electricity for commercial, industrial, government and utility customers. We have commercialized our stationary carbonate fuel cells and are also pursuing the complementary development of planar solid oxide fuel cell and other fuel cell technologies. We continue to invest in new product and market development and, as such, we are not currently generating positive cash flow from our operations. Our operations are funded primarily through cash generated from product sales and research and development contracts, license fee income and sales of equity and debt securities. In order to produce positive cash flow from operations, we need to be successful at increasing annual order volume and implementing our cost reduction efforts.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information. Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all normal and recurring adjustments necessary to fairly present our financial position as of April 30, 2011 have been included. All intercompany accounts and transactions have been eliminated.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The balance sheet at October 31, 2010 has been derived from the audited financial statements at that date, but it does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with our financial statements and notes thereto for the year ended October 31, 2010, which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission. The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

Use of Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Estimates are used in accounting for, among other things, revenue recognition, excess, slow-moving and obsolete inventories, product warranty costs, reserves on long-term service agreements, allowance for uncollectible receivables, depreciation and amortization, impairment of assets, taxes, and contingencies. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.

Concentrations

We contract with a concentrated number of customers for the sale and service of products and for research and development contracts. For the six months ended April 30, 2011 and 2010, our top four customers, POSCO Power (“POSCO”), which is a related party and owns approximately 9 percent of the outstanding common shares of the Company, the U.S. government (primarily the Department of Energy), BioFuels and Pacific Gas & Electric, in the aggregate, accounted for 88 percent and 81 percent, respectively, of our consolidated revenues. For the six months ended April 30, 2011 and 2010, our largest strategic partner, POSCO, accounted for 58 percent and 64 percent, respectively, of total revenues. The U.S. government accounted for 8 percent and 17 percent, respectively, of total revenues. BioFuels accounted for 15 percent and 0 percent, respectively, and Pacific Gas & Electric accounted for 7 percent and 0 percent of total revenues for the six months ended April 30, 2011 and 2010, respectively.

FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)

Subsequent Events

We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements. See Note 14.

Comprehensive Loss

Comprehensive loss for the periods presented was as follows:

		Three Months Ended								Six Months Ended
		April 30,								April 30,
		2011				2010				2011				2010
Net loss		$	(20,008	)		$	(15,978	)		$	(31,015	)		$	(30,696	)
Foreign currency translation adjustments			2				5				4				13
Comprehensive loss		$	(20,006	)		$	(15,973	)		$	(31,011	)		$	(30,683	)

Note 2. Recent Accounting Pronouncements

Recently Adopted Accounting Guidance

In April 2010, the FASB provided guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon the achievement of milestone events. An entity may only recognize consideration that is contingent upon the achievement of a milestone in its entirety in the period the milestone is achieved only if the milestone meets certain criteria. We adopted this guidance effective November 1, 2010 and it did not impact our financial statements.

In December 2009, the FASB issued revised guidance related to the consolidation of variable interest entities (“VIE”). The revised guidance requires reporting entities to evaluate former qualified special purpose entities for consolidation, changes the approach to determining a VIE’s primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. We adopted this guidance effective November 1, 2010 and it did not impact our financial statements.

In October 2009, the FASB issued guidance updating accounting standards for revenue recognition for multiple-deliverable arrangements. The stated objective of the update was to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. The guidance provides amended methodologies for separating consideration in multiple-deliverable arrangements and expands disclosure requirements. We adopted this guidance for revenue arrangements entered into or materially modified after November 1, 2010 and it did not have an impact on our financial statements or disclosures to date.

FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)

In June 2009, the FASB issued accounting guidance which requires a company to perform ongoing reassessment of whether it is the primary beneficiary of a variable interest entity (“VIE”). Specifically, the guidance modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The guidance clarifies that the determination of whether a company is required to consolidate a VIE is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the VIE that most significantly impact the VIE’s economic performance. The guidance requires an ongoing reassessment of whether a company is the primary beneficiary of a VIE and enhanced disclosures of the company’s involvement in VIEs and any significant changes in risk exposure due to that involvement. We adopted this guidance effective November 1, 2010 and it did not have an impact on our financial statements.

Recent Accounting Guidance Not Yet Effective

In January 2010, the FASB issued guidance that requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements. This amended guidance require disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers in and out of Levels 1 and Levels 2 fair value measurements and disclosures about the purchase, sale, issuance and settlement activity of Level 3 fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about the purchase, sale, issuance and settlement activity of Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010. The Company was not impacted by the disclosures effective for interim periods beginning after December 15, 2009 and we do not expect the remaining disclosures required after December 15, 2010 upon adoption of this guidance will have a material impact on our financial statements or disclosures.

Note 3. Equity investments

Versa Power Systems, Inc. (“Versa”) is one of our sub-contractors under the Department of Energy’s (“DOE”) large-scale hybrid project to develop a coal-based, multi-megawatt solid oxide fuel cell (“SOFC”) based hybrid system. Versa is a private company founded in 2001 that is developing advanced SOFC systems for various stationary and mobile applications. We have a 39 percent ownership interest in Versa and account for Versa under the equity method of accounting. We recognize our share of the income (loss) as income (loss) from equity investments on the consolidated statements of operations.

In 2007, we loaned Versa $2.0 million in the form of a convertible note (the “2007 Convertible Note”). In 2009 and 2010, we loaned Versa $0.6 million in each year in the form of convertible notes (the “2009 Convertible Note” and the “2010 Convertible Note”, respectively). The 2007 Convertible Note matures May 2017, the 2009 Convertible Note matures November 2018 and the 2010 Convertible Note matures April 2020, unless certain prepayment events occur. In conjunction with the Convertible Notes, we received warrants for the right to purchase 3,969 shares of Versa common stock at a weighted average exercise price of $165 per share. Our ownership percentage would increase to 45 percent if the Convertible Notes and warrants are converted into common stock.

We have determined that the above warrants represent derivatives subject to fair value accounting. The fair value is determined based on the Black-Scholes valuation model using historical stock price, volatility (based on a peer group since Versa’s common stock is not publicly traded) and risk-free interest rate assumptions. The fair value of the warrants is included within investment and loan to affiliate on the consolidated balance sheets and changes in the fair value of the warrants are included in interest and other income on the consolidated statements of operations. The fair value of the warrants as of April 30, 2011 and October 31, 2010 was $0.2 million. The change in the fair value of the warrants was not material to the consolidated financial statements for the three months ended April 30, 2011 and 2010. The carrying value of our investment in and loans to Versa was $9.8 million as of April 30, 2011 and October 31, 2010, respectively.

FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)

Note 4. Investments in U.S. Treasury Securities

We classify our investments as held-to-maturity and record them at amortized cost. These investments consist entirely of U.S. treasury securities. The following table summarizes the amortized cost basis and fair value (based on quoted market prices) at April 30, 2011 and October 31, 2010:

						Gross				Gross
		Amortized				unrealized				unrealized
		cost				gains				gains (losses)				Fair value
U.S. government obligations
As of April 30, 2011		$	18,067			$	47			$	—			$	18,114
As of October 31, 2010		$	34,090			$	74			$	—			$	34,164

The following table summarizes the contractual maturities of investments at amortized cost and fair value as of April 30, 2011:

										Weighted
										average
		Amortized								yield to
		cost				Fair value				maturity
Due within one year		$	18,067			$	18,114				1.2	%
Due after one year			—				—				—
Total investments		$	18,067			$	18,114				1.2	%

Note 5. Inventories

The components of inventory at April 30, 2011 and October 31, 2010 consisted of the following:

		April 30,				October 31,
		2011				2010
Raw materials		$	17,805			$	15,509
Work-in-process			20,540				22,786
Gross Inventory		$	38,345			$	38,295
Less amount to reduce certain inventories to lower of cost or market			(2,146	)			(4,891	)
Net inventory		$	36,199			$	33,404

Raw materials consist mainly of various nickel powders and steels, various other components used in producing cell stacks and purchased components for balance of plant. Work-in-process inventory is comprised of material, labor, and overhead costs incurred to build fuel cell stacks, which are subcomponents of a power plant. Work in process also includes costs related to power plants in inventory which have not yet been dedicated to a particular commercial customer contract. The above inventory amounts include a lower of cost or market adjustment to write down the carrying value of certain legacy inventory to its estimated market value.

FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)

Note 6. Accounts Receivable

Accounts receivable at April 30, 2011 and October 31, 2010 consisted of the following:

		April 30,				October 31,
		2011				2010
U.S. Government:
Amount billed		$	323			$	223
Unbilled recoverable costs			988				605
			1,311				828
Commercial Customers:
Amount billed			7,531				9,718
Unbilled recoverable costs			11,037				7,520
			18,568				17,238
		$	19,879			$	18,066

We bill customers for power plant and module sales based on certain milestones being reached. We bill the U.S. government for research and development contracts based on actual recoverable costs incurred, typically in the month subsequent to incurring costs. Unbilled recoverable costs relate to revenue recognized on customer contracts that have not been billed. Accounts receivable are presented net of an allowance for doubtful accounts of $0.6 million and $0.4 million at April 30, 2011 and October 31, 2010, respectively.

Note 7. Accrued Liabilities

Accrued liabilities at April 30, 2011 and October 31, 2010 consisted of the following:

		April 30,				October 31,
		2011				2010
Accrued payroll and employee benefits(1)		$	3,660			$	3,430
Accrued contract and operating costs(2)			1,077				2,126
Reserve for product warranty cost(3)			682				696
Reserve for long-term service agreement costs(4)			10,457				7,742
Reserve for B1200 repair and upgrade program(4)			8,752				—
Accrued taxes, legal, professional and other(5)			1,707				2,727
		$	26,335			$	16,721

Reserve for long-term service agreement costs (LTSA)

The Company provides for reserves on LTSA agreements when the estimated future stack replacement and service costs exceed the remaining contract value. For certain of our legacy LTSA contracts on power plants with our older 3-year stack designs, the Company has accrued a reserve as a result of the estimated costs associated with the replacement of older stacks produced prior to the five-year stack design. We expect the replacement of these older 3-year stack designs to continue into mid 2012. Reserve estimates for future costs associated with maintaining legacy service agreements are determined by a number of factors including the estimated life of the stack, used replacement stacks available, our limit of liability on service agreements and future operating plans for the power plant. This reserve also includes estimated amounts accrued under guaranteed output provisions of the LTSA service contracts.

FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)

Reserve for B1200 repair and upgrade program

During the second quarter of fiscal 2011, the Company incurred an obligation to repair and upgrade a select group of 1.2 megawatt (MW) fuel cell modules produced between 2007 and early 2009. The repair and upgrade obligation was based on events that occurred and knowledge obtained concerning the performance of this select group of modules during the second fiscal quarter of 2011 however, the formal agreement to begin the repair and upgrade program was not finalized until May 2011. The program is expected to start in the third quarter of 2011 and conclude by mid-2012. The Company recorded a charge of approximately $8.8 million during the quarter ended April 30, 2011 recorded as a cost of product sales and revenues on the consolidated statements of operations. The charge consisted of the costs associated with the replacement of modules of $9.5 million and the costs associated with the repair of other modules of $4.1 million, partially off-set by the estimated fair value at the end of the respective LTSA contract terms for upgraded assets being deployed in the program of approximately $4.8 million, which will be returned to the Company at the expiration of the respective LTSA agreements if the customer does not renew the LTSA agreement through at least the remaining useful life of the upgraded assets.

Note 8. Revolving Credit Facility

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. Aside from certain negative covenants limiting the Company’s ability to merge or acquire another company, sell non-inventory assets, create liens against collateral or change the organizational structure or identity, the facility does not require compliance with any financial covenants. At April 30, 2011, the outstanding amount owed under this facility was $3.0 million and is classified as current portion of long-term debt and other liabilities on the consolidated balance sheets.

Note 9. Share-Based Compensation Plans

We have shareholder approved equity incentive plans and a shareholder approved Section 423 Stock Purchase Plan (the “ESPP”). We account for stock awards to employees and non-employee directors under the fair value method. We determine the fair value of stock options at the grant date using the Black-Scholes valuation model. The model requires us to make estimates and assumptions regarding the expected life of the award, the risk-free interest rate, the expected volatility of our common stock price and the expected dividend yield. The fair value of restricted stock awards (“RSA”) is based on the common stock price on the date of grant. The fair value of stock awards is amortized to expense over the vesting period, generally four years.

FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)

Share-based compensation reflected in the consolidated statements of operations for the three and six months ended April 30, 2011 and 2010 was as follows:

		Three Months Ended								Six Months Ended
		April 30,								April 30,
		2011				2010				2011				2010
Cost of product sales and revenues		$	260			$	168			$	403			$	392
Cost of research and development contracts			52				38				71				77
General and administrative expense			485				372				891				566
Research and development expense			29				156				241				341
Total share-based compensation		$	826			$	734			$	1,606			$	1,376

The following table summarizes stock option activity for the six months ended April 30, 2011:

						Weighted
		Number of				average
		options				option price ($)
Outstanding at October 31, 2010			5,118,201				10.15
Granted			216,657				1.98
Cancelled			(421,925	)			23.03
Outstanding at April 30, 2011			4,912,933				8.69

As of April 30, 2011, there were 2,278,319 RSAs outstanding with a weighted average per share fair value of $2.29. There were 1,293,616 RSAs granted during the three months ended April 30, 2011 and forfeitures totaled 11,586 during this period.

For the six months ended April 30, 2011, 60,082 shares were issued under the ESPP at a per share cost of $0.97. There were 1,067,621 shares of common stock reserved for issuance under the ESPP as of April 30, 2011.

FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)

Note 10. Shareholders’ Equity

Registered Direct Offering

On January 13, 2011 we sold an aggregate of 10,160,428 units at a negotiated price of $1.87 per unit, with each unit consisting of (i) one share of FuelCell Energy, Inc. common stock, par value $0.0001 per share (“Common Stock”) and (ii) one warrant to purchase 1.0 share of Common Stock, in a registered direct offering for gross proceeds of $19.0 million. The net proceeds from the sale of the units, after deducting the placement agent fees and other estimated offering expenses, was approximately $17.8 million. We have used and intend to use the proceeds from this offering for product development, project financing, expansion of manufacturing capacity, and general corporate purposes.

The warrants have an exercise price of $2.29 per share and are exercisable beginning on the date that is six months and one day after the closing date and will expire twenty one months after issuance. Additionally, FuelCell Energy has the right, subject to certain conditions, to require the investor to purchase up to 10.0 million additional shares approximately nine months after the initial closing date of the transaction. The sale price for the additional shares will be based on a fixed ten percent discount to a volume weighted average price (“VWAP”) measurement at the time FuelCell Energy exercises the option. FuelCell Energy cannot require the investor to purchase more than $20 million of additional shares.

Common Stock Sales

The Company may sell common stock on the open market from time to time to raise funds in order to pay obligations related to the Company’s outstanding Series 1 and Series B preferred shares. During the six months ended April 30, 2011, we sold 1,925,400 shares of the Company’s common stock on the open market and raised approximately $3.7 million, net of fees.

Changes in shareholders’ (deficit) equity

Changes in shareholders’ equity were as follows for the six months ended April 30, 2011:

		Total
		Shareholders’				Noncontrolling				Total
		(Deficit) Equity				interest				(Deficit) Equity
Balance at October 31, 2010		$	8,350			$	(663	)		$	7,687
Sale of Common Stock and related fees			21,533				—				21,533
Share-based compensation			1,608				—				1,608
Common stock issued in settlement of prior year bonus obligation			707				—				707
Stock 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				—				4
Net loss			(30,894	)			(121	)			(31,015	)
Balance at April 30, 2011		$	(9,333	)		$	(784	)		$	(10,117	)

FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)

Note 11. Loss Per Share

The calculation of basic and diluted loss per share was as follows:

		Three Months Ended								Six Months Ended
		April 30,								April 30,
		2011				2010				2011				2010
Numerator
Net loss		$	(20,008	)		$	(15,978	)		$	(31,015	)		$	(30,696	)
Net loss attributable to noncontrolling interest			52				96				121				182
Adjustment 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	)
Denominator
Weighted average basic common shares			125,009,180				84,515,979				119,963,394				84,459,926
Effect of dilutive securities (1)			—				—				—				—
Weighted average diluted common shares			125,009,180				84,515,979				119,963,394				84,459,926
Basic loss per share		$	(0.24	)		$	(0.20	)		$	(0.35	)		$	(0.38	)
Diluted loss per share (1)		$	(0.24	)		$	(0.20	)		$	(0.35	)		$	(0.38	)

Note 12. Commitments and Contingencies

We have pledged approximately $9.4 million of our cash and cash equivalents as collateral and letters of credit for certain banking requirements and contracts. As of April 30, 2011, outstanding letters of credit totaled $8.0 million. These expire on various dates through May 2012.

Note 13. Redeemable Preferred Stock

Series 1 Preferred Share Obligation

On March 31, 2011, the Company entered into an agreement with Enbridge, Inc. (“Enbridge”) to modify the provisions of the Class A Cumulative Redeemable Exchangeable Preferred Shares (the “Series 1 Preferred Shares”) of FCE FuelCell Energy Ltd. (“FCE Ltd.”), a wholly-owned subsidiary of the Company. Enbridge is the sole holder of the Series 1 Preferred Shares. Consistent with the previous Series 1 preferred share agreement FuelCell Energy, Inc. continues to guarantee the return of principal and dividend obligations of FCE Ltd. to the Series 1 preferred shareholders under the modified agreement.

Under the original Series 1 Preferred Shares provisions, FCE Ltd. had an accrued and unpaid dividend obligation of approximately Cdn. $12.5 million representing the deferral of dividends plus additional dividends thereon. Payment was originally due to Enbridge as of December 31, 2010, but was subsequently extended based on mutual consent. Under the modified share provisions, this obligation will be settled as (i) equal quarterly return 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 cash payments, as consideration for the one-year deferral, calculated at a 9.8 percent rate per annum on the unpaid Cdn. $12.5 million obligation, which additional payments will also be made 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.

FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)

Under the original Series 1 Preferred Shares provisions, FCE Ltd. was to make annual dividend payments totaling Cdn. $1,250,000. The modified terms of the Series 1 Preferred Shares adjust these payments to (i) annual dividend payments of Cdn$500,000 and (ii) annual return of capital payments of Cdn. $750,000, in each case payable in cash. These payments commenced on March 31, 2011 and will 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 Series 1 Preferred Shares and the balance of the principal redemption price shall be paid to the holders of the Series 1 Preferred Shares. FCE Ltd. has the option of making dividend payments in the form of common stock or cash under the Series 1 Preferred Shares provisions.

On March 31, 2011, the modified instrument had a carrying value of Cdn. $25.2 million. The Company assessed the accounting guidance related to the classification of the preferred shares after the modification on March 31, 2011 and concluded that the preferred shares should be classified as a mandatorily redeemable financial instrument, and presented as a liability on the consolidated balance sheet. Due to the reclassification of the instrument to a liability, the Company has accounted for this modification of the Series 1 Preferred shares as an extinguishment and therefore the difference between the fair value of the consideration transferred to the holders of the preferred stock and the carrying amount of the preferred stock on our balance sheet prior to the modification represents a return to the preferred stockholder and treated in a manner similar to the treatment of dividends paid on preferred stock. Accordingly, the difference between (1) the fair value of the Series 1 Preferred shares and (2) the carrying amount of the Series 1 Preferred shares on our balance sheet prior to the modification was subtracted from net loss to arrive at loss to common stockholders in the calculation of earnings per share.

The previous model used to value the original Series I Preferred shares was modified to value the pre-modification contract, to reflect the new cash-flows discussed above. The notional amount of the instrument is amortizing beginning in 2011 to correspond to the initial four quarterly returns of capital payments in 2011 and to the quarterly $187,500 paid from 2011-2020 as return of capital. It is assumed that the Company will exercise the call option to force conversion in 2020. The conversion feature is modeled using a lattice approach. Call option strikes are adjusted for cumulative dividends and the conversion ratio is adjusted by the notional schedule. The stock is projected in the future assuming a log-normal distribution. The stock volatility, the interest rate curve, the foreign exchange rates and credit spreads are assumed to be deterministic. The cumulative dividend is modeled as a quarterly cash dividend component and a cumulative payment in 2020.

As previously modeled, the variable dividend component is valued using a Monte-Carlo simulation approach. Its value is defined as the difference between a 5% annual dividend payment stream and the value of a stock price and foreign exchange rate linked dividend payment stream. Future stock price and exchange rates are simulated assuming a Geometric Brownian motion to determine the dividend amount up to 2020, when the Preferred Shares are assumed to be force converted.

The revaluation of the Series 1 Preferred shares resulted in a reduction of additional paid in capital of $9.0 million, which is also presented on the consolidated statements of operations as a charge to modification of redeemable preferred stock of subsidiary to arrive at net loss to common shareholders and is included in the calculation of earnings per share for net loss to common shareholders. The reason for the change in the value of the obligation was that the original obligation had been accounted for under purchase price accounting at the time of the Global Thermoelectric Inc. acquisition in November 2003. The valuation at that time included a market risk discount and used the exchange rate at the time of the acquisition. Under the new valuation, the future estimated cash flows were discounted using the current exchange rate.

FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)

The Company made its first scheduled payment of Cdn.$3.7 million during the second fiscal quarter under the terms of the modified agreement, including interest of approximately Cdn.$0.9 million. As of April 30, 2011, the carrying value of the Series 1 Preferred shares was Cdn.$22.4 million ($23.6 million USD) and is classified as “Preferred stock obligation of subsidiary” on the consolidated balance sheets. As of April 30, 2011 the current amount of this obligation totaled $9.0 million and the long term amount totaled $14.6 million. Interest expense will be recorded on the consolidated statement of operations as these balances are amortized. For the three and six months ended April 30, 2011, interest expense totaled approximately $0.9 million.

Significant Terms of the Series 1 Preferred Shares

The significant terms of the Series 1 Preferred Shares include the following:

•

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.

FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)

•

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

In May 2011, the Company announced a $129 million order for 70 megawatts of fuel cell kits and other equipment and services to POSCO Power. The delivery of fuel cell kits will begin in October 2011 and occur monthly through October 2013. Payment terms include a down payment and progress payments during the term of the contract, with approximately 40 percent of the contract value received by October 2011. POSCO Power is an independent power producer in South Korea and subsidiary of POSCO, a global steel producer.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (including exhibits and any information incorporated by reference herein) contains both historical and forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this report that are not purely historical are forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future. These statements appear in a number of places in this Report and include all statements that are not historical statements of fact regarding our intent, belief or current expectations with respect to, among other things: (i) our ability to achieve our sales plans and cost reduction targets; (ii) trends affecting our financial condition or results of operations; (iii) our growth and operating strategy; (iv) our product development strategy; (v) our financing plans; (vi) the timing and magnitude of future contracts; (vii) changes in the regulatory environment; (viii) potential volatility of energy prices; and (ix) rapid technological change or competition. The words “may,” “would,” “could,” “should,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plans” and similar expressions and variations thereof are intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein, including those discussed in detail in our filings with the Securities and Exchange Commission (“SEC”), including in our Annual Report on Form 10-K for the fiscal year ended October 31, 2010 in the section entitled “Item 1A. Risk Factors.”

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to the accompanying financial statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of operations. The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Estimates are used in accounting for, among other things, revenue recognition, excess, slow-moving and obsolete inventories, product warranty costs, reserves on long-term service agreements, allowance for uncollectible receivables, depreciation and amortization, impairment of assets, taxes, and contingencies. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates. The following discussion should be read in conjunction with information included in our Annual Report on Form 10-K for the year ended October 31, 2010 filed with the SEC. Unless otherwise indicated, the terms “Company”, “FuelCell Energy”, “we”, “us”, and “our” refer to FuelCell Energy Inc. and its subsidiaries. All tabular dollar amounts are in thousands.

OVERVIEW AND RECENT DEVELOPMENTS

Overview

We are a world leader in the development, manufacture and service of ultra-clean, efficient and reliable fuel cell power plants for commercial, industrial, government and utility customers. Our ultra-clean, high efficiency Direct FuelCell^® (DFC^®) power plants are generating power at over 50 locations worldwide. Our products have generated over 750 million kWh of power using renewable wastewater gas, renewable food and beverage waste gas, natural gas and other hydrocarbon fuels.

Our vision is to provide ultra-clean, highly efficient, reliable distributed generation baseload power at a cost per kilowatt hour that is less than the cost of grid-delivered electricity. Our power plants provide electricity that is priced competitively to grid-delivered electricity in certain high cost regions of the United States.

Our Company was founded in Connecticut in 1969 and reincorporated in Delaware in 1999. Our core fuel cell products (“Direct FuelCell^®” or “DFC^® Power Plants”) offer highly efficient stationary power generation for customers. In addition to our commercial products, we continue to develop our carbonate fuel cells, planar solid oxide fuel cell (“SOFC”) technology and other fuel cell technology with our own and government research and development funds.

Our proprietary carbonate DFC Power Plants electrochemically (without combustion) produce electricity directly from readily available hydrocarbon fuels such as natural gas and biogas in a highly efficient process. The primary byproducts of the fuel cell process are heat and water. Due to the lack of combustion, our fuel cells emit virtually zero pollutants such as NOx, SOx or particulate matter.

Our fuel cells operate 24 hours per day seven days per week providing reliable power to both on-site customers and grid-support applications. Our DFC Power Plants can be part of a total on-site power generation solution with our high efficiency products providing base load power. Our power plants can also work in conjunction with intermittent power, such as solar or wind, or less efficient combustion-based equipment that provide peaking and load following. Our products are also well suited for meeting the needs of utility grid-support applications.

Higher fuel efficiency results in lower emissions of carbon dioxide (“CO2”), a major greenhouse gas, and also results in less fuel needed per kWh of electricity generated and Btu of heat produced. The high efficiency of the DFC Power Plant results in significantly less CO2 per unit of power production compared to the average U.S. fossil fuel power plant. Greater efficiency reduces customers’ exposure to volatile fuel costs, minimizes operating costs, and provides maximum electrical output from a finite fuel source. DFC Power Plants achieve electrical efficiencies of 47 percent to 60 percent or higher depending on configuration, location, and application, and up to 90 percent total efficiency in combined heat and power applications.

A fuel cell power plant includes the fuel cell stack module that produces the electricity, and balance-of-plant (BOP). The mechanical balance-of-plant processes the incoming fuel such as natural gas or renewable biogas and includes various fuel handling and processing equipment such as pipes and blowers. The electrical balance-of-plant processes the power generated for use by the customer and includes electrical interface equipment such as inverters.

Our fuel cells operate on a variety of hydrocarbon fuels, including natural gas, renewable biogas, propane, methanol, coal gas, and coal mine methane.

Compared to other power generation technologies, our products offer significant advantages including:

•

Near-zero pollutants;

•

High efficiency;

•

Ability to site units locally as distributed power generation;

•

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.

Typical customers for our products include utilities, universities, manufacturers, mission critical institutions such as correction facilities and government installations, hotels, natural gas letdown stations and customers who can use renewable biogas for fuel such as municipal water treatment facilities, breweries, and food processors. With increasing demand for renewable and ultra-clean power options and increased volatility in electric markets, our products offer our customers greater control over power generation economics, reliability, and emissions.

Our DFC Power Plants are protected by 66 U.S. and 57 international patents. We currently have 29 U.S. and 118 international patents under application.

Recent Developments

POSCO Power 70MW Order

In May 2011, the Company announced a $129 million order for 70 megawatts of fuel cell kits and other equipment and services to POSCO Power. The delivery of fuel cell kits will begin in October 2011 and occur monthly through October 2013. Payment terms include a down payment and progress payments during the term of the contract, with approximately 40 percent of the contract value received by October 2011. POSCO Power is an independent power producer in South Korea and subsidiary of POSCO, a global steel producer.

Series 1 Preferred Share Obligation

On March 31, 2011, the Company entered into an agreement with Enbridge, Inc. (“Enbridge”) to modify the Class A Cumulative Redeemable Exchangeable Preferred Shares agreement (the “Series 1 preferred share agreement”) between FCE FuelCell Energy Ltd. (“FCE Ltd”), a wholly-owned subsidiary of FuelCell Energy, and Enbridge, the sole holder of the Series 1 preferred shares. Consistent with the previous Series 1 preferred share agreement, FuelCell continues to guarantee the return of principal and dividend obligations of FCE Ltd. to the Series 1 preferred shareholders under the modified agreement.

The modification of the Series 1 preferred share agreement resulted in a reclassification of the instrument on the consolidated balance sheet from redeemable minority interest to a liability (preferred stock obligation of subsidiary). As a result of this reclassification, the Company revalued the instrument. The revaluation of the Series 1 Preferred shares resulted in a reduction of additional paid in capital of $9.0 million, which is also presented on the consolidated statement of operations as a charge to modification of redeemable preferred stock of subsidiary to arrive at net loss to common shareholders and is included in the calculation of earnings per share for net loss to common shareholders. The Company made its first scheduled payment of Cdn.$3.7 million during the second fiscal quarter under the terms of the modified agreement, including the recording of interest expense of approximately Cdn.$0.9 million. As of April 30, 2011, the carrying value of the Series 1 Preferred shares was Cdn.$22.4 million ($23.6 million USD) and is classified as preferred stock obligation of subsidiary on the consolidated balance sheets. Refer to Note 13 of Notes to Consolidated Financial Statements for more information.

B1200 Repair and Upgrade Program

During the second quarter of fiscal 2011, the Company incurred an obligation to repair and upgrade a select group of 1.2 megawatt (MW) fuel cell modules produced between 2007 and early 2009. The repair and upgrade obligation was based on events that occurred and knowledge obtained concerning the performance of this select group of modules during the second fiscal quarter of 2011 however, the formal agreement to begin the repair and upgrade program was not finalized until May 2011. The program is expected to start in the third quarter of 2011 and conclude by mid-2012. The Company recorded a charge of approximately $8.8 million during the quarter ended April 30, 2011 recorded as a cost of product sales and revenues on the consolidated statements of operations. The charge consisted of the costs associated with the replacement of modules of $9.5 million and the costs associated with the repair of other modules of $4.1 million, partially off-set by the estimated fair value at the end of the respective LTSA contract terms for upgraded assets being deployed in the program of approximately $4.8 million, which will be returned to the Company at the expiration of the respective LTSA agreements if the customer does not renew the LTSA agreement through at least the remaining useful life of the upgraded assets.

RESULTS OF OPERATIONS

Management evaluates the results of operations and cash flows using a variety of key performance indicators including revenues compared to prior periods and internal forecasts, costs of our products and results of our “cost-out” initiatives, and operating cash use. These are discussed throughout the ‘Results of Operations’ and ‘Liquidity and Capital Resources’ sections.

Results of Operations are presented in accordance with accounting principles generally accepted in the United States (“GAAP”) and as adjusted for certain items referenced below. Management also uses non-GAAP measures which exclude non-recurring items in order to measure operating periodic performance. Adjustments to GAAP are referenced below in under “Revenues and Costs of Revenues” and “Net Loss to Common Shareholders”. We have added this information because we believe it helps in understanding the results of our operations on a comparative basis. This adjusted information supplements and is not intended to replace performance measures required by U.S. GAAP disclosure.

Comparison of Three Months Ended April 30, 2011 and April 30, 2010

Revenues and Costs of revenues

Our revenues and cost of revenues for the three months ended April 30, 2011 and 2010 were as follows:

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

		Three Months Ended
		April 30,								Change
		2011				2010				$				%
Non-GAAP Adjustment to cost of product sales and revenues:
B1200 Repair and Upgrade Cost		$	(8,752	)		$	—			$	(8,752	)			N/M
Gross Margin (non-GAAP):
Gross margin from product sales and revenues		$	(2,035	)		$	(6,113	)		$	4,078				67
Gross margin from research and development contracts			(83	)			313				(396	)			(127	)
Total		$	(2,118	)		$	(5,800	)		$	3,682				63
Product Sales Cost-to-revenue ratio			1.08				1.47				N/M				(27	)

Total revenues for the three months ended April 30, 2011 increased $12.0 million, or 72 percent to $28.6 million from $16.6 million during the same period last year. Total cost of revenues for the three months ended April 30, 2011 increased $17.1 million, or 76 percent to $39.5 million from $22.4 million during the same period last year. A discussion of the change in product sales and revenues and research and development contracts follows.

Product sales and revenues

Product sales and revenues increased $13.7 million, or 105 percent in the second quarter 2011 to $26.7 million compared to $13.0 million for the prior year period. Product sales and revenues for the second quarter of 2011 included $21.4 of power plants, fuel cell modules, and fuel cell power plant components, $2.2 million of revenue primarily from the design and delivery of capital equipment to POSCO Power for their fuel cell module assembly facility and construction and installation services, and $3.1 million of revenue from service and power purchase agreements.

Cost of product sales and revenues increased $18.3 million, or 96 percent, in the second quarter 2011 to $37.5 million compared to $19.1 million in the same period the prior year. This increase is primarily due to the doubling of revenues in the second quarter fiscal 2011 as compared to the second quarter of fiscal 2010 as well as the cost of the B1200 repair and upgrade program. See Note 7 of Notes to Consolidated Financial Statements and above discussion in Recent Developments for additional details. Margins for product sales and revenues decreased by $4.7 million over the prior year quarter primarily due to the $8.8 million charge for the B1200 repair and upgrade program, partially offset by improved product margins. The product cost-to-revenue ratio was 1.40-to-1.00 in the second quarter of 2011 (1.08-to-1.00 excluding the B1200 repair and upgrade charge) compared to 1.47-to-1.00 in the second quarter of 2010.

Cost of product sales and revenues includes costs to manufacture and ship our power plants and power plant components to customers, site engineering and construction costs where we are responsible for power plant system installation, costs for stack module assembly and conditioning equipment sold to POSCO, warranty expense, liquidated damages and costs to service power plants for customers with long-term service agreements (including maintenance and stack replacement costs incurred during the period), power purchase agreement (PPA) operating costs and lower of cost or market inventory adjustments.

We contract with a concentrated number of customers for the sale of our products and for research and development contracts. For the three months ended April 30, 2011 and 2010 our top four customers, POSCO Power (“POSCO”) and the U.S. government (primarily the Department of Energy), BioFuels and Pacific Gas & Electric in the aggregate accounted for 87 percent and 86 percent of our consolidated revenues, respectively. For the three months ended April 30, 2011 and 2010, our largest strategic partner, POSCO, accounted for 55 percent and 64 percent of total revenues, respectively, the U.S. government accounted for 7 percent and 22 percent of total revenues, respectively, BioFuels accounted for 20 percent and 0 percent of total revenues, respectively, and Pacific Gas & Electric accounted for 5 percent and 0 percent of total revenues, respectively.

There can be no assurance that we will continue to achieve historical levels of sales of our products to our largest customers. Even though our customer base is expected to increase and our revenue streams to diversify, a substantial portion of net revenues could continue to depend on sales to a limited number of customers. Our agreements with these customers may be cancelled if we fail to meet certain product specifications or materially breach the agreement, and our customers may seek to renegotiate the terms of current agreements or renewals. The loss of, or reduction in sales to, one or more of our larger customers, could have a material adverse affect on our business, financial condition and results of operations.

Research and development contracts

Research and development contract revenue decreased $1.7 million to $1.9 million for the three months ended April 30, 2011 compared to $3.6 million for the same period in 2010. Cost of research and development contracts decreased $1.3 million to $2.0 million for the three months ended April 30, 2011 compared to $3.3 million during the same period in 2010. The decrease in revenue was due to lower research activities over the prior period primarily related to the solid oxide fuel cell development program with the U.S. Department of Energy (DOE).

Administrative and selling expenses

Administrative and selling expenses were $4.5 million for the three months ended April 30, 2011, remaining consistent compared to last year.

Research and development expenses

Research and development expenses were $4.5 million for the three months ended April 30, 2011 a decrease of $0.6 million compared to last year’s period as a result of lower overall headcount and increased support of commercial projects during the period which are classified as cost of sales.

Loss from operations

Loss from operations increased to $19.8 million for the three months ended April 30, 2011 compared to $15.4 million for same period last year. The increase in loss from operations is primarily due to the B1200 repair and upgrade charge, partially offset by improved margins on product sales.

Interest Expense

Interest expense, increased to $0.9 million for the three months ended April 30, 2011 compared to less than $0.1 million for the same period in 2010. The increase is due to the modification of redeemable preferred stock of subsidiary. Accounting guidance now requires amortization of this instrument post-modification to be recorded as interest expense.

On March 31, 2011, the modified instrument had a carrying value of Cdn. $25.2 million. The Company assessed the accounting guidance related to the classification of the preferred shares after the modification on March 31, 2011 and concluded that the preferred shares should be classified as a mandatorily redeemable financial instrument, and presented as a liability on the consolidated balance sheet. As of April 30, 2011, the carrying value of the Series 1 Preferred shares was Cdn.$22.4 million ($23.6 million USD) and is classified as “Preferred stock obligation of subsidiary” on the consolidated balance sheets. As of April 30, 2011 the current amount of this obligation totaled $9.0 million and the long term amount totaled $14.6 million. Amortization of this balance will be recorded as interest expense on the consolidated statement of operations. For the three and six months ended April 30, 2011, interest expense totaled approximately $0.9 million.

Income (loss) from equity investment

Our share of equity income in Versa was $0.1 million for the three months ended April 30, 2011 compared to a loss of $0.2 million for the three months ended April 30, 2010.

Interest and other income, net

Interest and other income, net, increased to $0.6 million for the three months ended April 30, 2011 compared to $0.4 million for the same period in 2010. The increase is due to higher royalty income related to our agreements in the Korea market as minimum annual royalties escalate over the term of the contract.

Accretion of Preferred Stock of Subsidiary

The Series 1 Preferred Shares issued by our subsidiary, FCE Ltd., to Enbridge were originally recorded at a substantial discount to par value (“fair value discount”). On a quarterly basis, the carrying value of the Series 1 Preferred Shares was increased to reflect the passage of time with a corresponding non-cash charge (accretion). The accretion of the fair value discount was $0 and $0.6 million for the three months ended April 30, 2011 and 2010, respectively.

The modification of the Series 1 preferred share agreement resulted in a reclassification of the instrument on the consolidated balance sheets from redeemable minority interest to a liability (preferred stock obligation of subsidiary). Refer to Recent Developments above as well as the section discussing the adjustment for modification of redeemable preferred stock of subsidiary below and Note 13 of Notes to Consolidated Financial Statements for more information.

Provision for income taxes

We have not paid federal or state income taxes in several years due to our history of net operating losses, although we have paid foreign taxes in South Korea. For the three months ended April 30, 2011 our provision for income taxes was $.03 million, which related to South Korean tax obligations. During 2009, we began manufacturing products that are gross margin profitable on a per unit basis; however, we cannot estimate when production volumes will be sufficient to generate taxable domestic income. Accordingly, no tax benefit has been recognized for our U.S. federal or state net operating losses or other deferred tax assets as significant uncertainty exists surrounding the recoverability of these deferred tax assets.

Net loss attributable to noncontrolling interest

The net loss attributed to the noncontrolling interest for the quarters ended April 30, 2011 and April 30, 2010 was $0.1 million.

Adjustment for modification of redeemable preferred stock of subsidiary

Modification of redeemable preferred stock of subsidiary resulted in a charge of $9.0 million for the six month period ended April 30, 2011.

Due to the reclassification of the instrument to a liability, the Company has accounted for this modification of the Series 1 Preferred shares as an extinguishment and therefore the difference between the fair value of the consideration transferred to the holders of the preferred stock and the carrying amount of the preferred stock on our balance sheet prior to the modification represents a return to the preferred stockholder and treated in a manner similar to the treatment of dividends paid on preferred stock. Accordingly, the difference between (1) the fair value of the Series 1 Preferred shares and (2) the carrying amount of the Series 1 Preferred shares on our balance sheet prior to the modification was subtracted from net loss to arrive at loss to common stockholders in the calculation of earnings per share.

The revaluation of the Series 1 Preferred shares resulted in a reduction of additional paid in capital of $9.0 million, which is also presented on the consolidated statements of operations as a charge to modification of redeemable preferred stock of subsidiary to arrive at net loss to common shareholders and is included in the calculation of earnings per share for net loss to common shareholders. The Company made its first scheduled payment of Cdn.$3.7 million during the second fiscal quarter under the terms of the modified agreement, including interest of approximately Cdn.$0.9 million.

Preferred Stock dividends

Dividends recorded on the Series B Preferred Stock were $0.8 million in each of the quarters ended April 30, 2011 and 2010.

Net loss to common shareholders and loss per common share

Net loss to common shareholders represents the net loss for the period less the net loss attributable to noncontrolling interest less the preferred stock dividends on the Series B Preferred Stock and the $9.0 million adjustment for the modification of redeemable preferred stock of subsidiary. For the quarters ended April 30, 2011 and 2010, net loss to common shareholders was $29.7 million and $16.7 million, respectively and loss per common share was $(0.24) and $(0.20), respectively.

Excluding the two charges discussed above and recorded in the second quarter of 2011, net loss to common shareholders was $12.0 million or $(0.10) per basic and diluted share, compared to $16.7 million for the second quarter or $(0.20) per basic and diluted share in the second quarter of 2010. Reconciliation of GAAP to Non-GAAP results are as follows:

		Three Months Ended
		April 30,
		2011				2010
Net 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 Adjustments
B1200 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	)

Comparison of Six Months Ended April 30, 2011 and April 30, 2010

Revenues and Costs of revenues

Our revenues and cost of revenues for the six months ended April 30, 2011 and 2010 were as follows:

		Six Months Ended
		April 30,								Change
		2011				2010				$				%
Revenues:
Product sales and revenues		$	52,433			$	25,815			$	26,618				103
Research and development contracts			4,254				5,388				(1,134	)			(21	)
Total		$	56,687			$	31,203			$	25,484				82
Cost of revenues:
Product sales and revenues		$	65,519			$	37,133			$	28,386				76
Research and development contracts			4,354				5,363				(1,009	)			(19	)
Total		$	69,873			$	42,496			$	27,377				64
Gross Margin:
Gross margin from product sales and revenues		$	(13,086	)		$	(11,318	)		$	(1,768	)			16
Gross margin from research and development Contracts			(100	)			25				(125	)			(500	)
Total		$	(13,186	)		$	(11,293	)		$	(1,893	)			17
Product Sales Cost-to-revenue ratio (1)			1.25				1.44				N/M				(13	)

		Six Months Ended
		April 30,								Change
		2011				2010				$				%
Non-GAAP Adjustment to cost of product sales and revenues:
B1200 Repair and Upgrade Cost		$	(8,752	)		$	—			$	(8,752	)			N/M
Gross Margin (non-GAAP):
Gross margin from product sales and revenues		$	(4,334	)		$	(11,318	)		$	6,984				62
Gross margin from research and development contracts			(100	)			25				(125	)			(500	)
Total		$	(4,434	)		$	(11,293	)		$	6,859				61
Product Sales Cost-to-revenue ratio			1.08				1.44				N/M				(25	)

Total revenues for the six months ended April 30, 2011 increased $25.5 million, or 82 percent to $56.7 million from $31.2 million during the same period last year. Total cost of revenues for the six months ended April 30, 2011 increased $27.4 million, or 64 percent to $69.9 million from $42.5 million during the same period last year. A discussion of the changes product sales and revenues and research and development contracts follows.

Product sales and revenues

Product sales and revenues increased $26.6 million, or 103 percent in the first six months of 2011 to $52.4 million compared to $25.8 million for the prior year period. Product sales and revenues for the first six months of 2011 included $41.7 of power plants, fuel cell modules, and fuel cell power plant components, $4.7 million of revenue primarily from the design and delivery of capital equipment to POSCO Power for their fuel cell module assembly facility as well as construction and installation services, and $6.0 million of revenue from service and power purchase agreements.

Cost of product sales and revenues increased $28.4 million, or 76 percent in the first six months of 2011 to $65.5 million compared to $37.1 million in the same period the prior year. This increase is primarily due to the doubling of revenues in the first six months of fiscal 2011 as compared to the first six months of fiscal 2010 as well as the B1200 repair and upgrade program charge discussed above. Margins for product sales and revenues decreased by $1.8 million over the prior year due to the B1200 repair and upgrade program charge, partially offset by improved product margins. The product cost-to-revenue ratio was 1.25-to-1.00 in the first six months of 2011 (1.08-to-1.00 excluding the $8.8 million B1200 repair and upgrade charge) compared to 1.44-to-1.00 in the first six months of 2010.

Cost of product sales and revenues includes costs to manufacture and ship our power plants and power plant components to customers, site engineering and construction costs where we are responsible for power plant system installation, costs for stack module assembly and conditioning equipment sold to POSCO, warranty expense, liquidated damages and costs to service power plants for customers with long-term service agreements (including maintenance and stack replacement costs incurred during the period), PPA operating costs and lower of cost of market inventory adjustments.

Total product sales and service backlog as of April 30, 2011 was $135.5 million compared to $75.5 million as of April 30, 2010. Product order backlog was $60.4 million and $48.1 million as of April 30, 2011 and 2010, respectively. Product backlog at the end of the first six months includes 18.1 megawatts (MW) of power plants and fuel cell component kits as well as orders for parts and work associated with a commercial joint development agreement with POSCO Power for a small scale DFC power plant for the commercial building market. Backlog for long-term service agreements was $75.1 million and $27.4 million as of April 30, 2011 and 2010, respectively.

For the six months ended April 30, 2011 and 2010, our top four customers, POSCO Power (“POSCO”), which is a related party and owns approximately 9 percent of the outstanding common shares of the Company, the U.S. government (primarily the Department of Energy), BioFuels and Pacific Gas & Electric in the aggregate accounted for 88 percent and 81 percent, respectively, of our consolidated revenues. Our largest strategic partner, POSCO, accounted for 58 percent and 65 percent, respectively, of total revenues. The U.S. government accounted for 8 percent and 22 percent, respectively, of total revenues. BioFuels accounted for 15 percent and 0 percent, respectively, and Pacific Gas & Electric accounted for 7 percent and 0 percent, respectively, of total revenues.

There can be no assurance that we will continue to achieve historical levels of sales of our products to our largest customers. Even though our customer base is expected to increase and our revenue streams to diversify, a substantial portion of net revenues could continue to depend on sales to a limited number of customers. Our agreements with these customers may be cancelled if we fail to meet certain product specifications or materially breach the agreement, and our customers may seek to renegotiate the terms of current agreements or renewals. The loss of, or reduction in sales to, one or more of our larger customers, could have a material adverse affect on our business, financial condition and results of operations.

Research and development contracts

Research and development contract revenue decreased $1.1 million to $4.3 million for the six months ended April 30, 2011 compared to $5.4 million for the same period in 2010. Cost of research and development contracts decreased $1.0 million to $4.4 million for the six months ended April 30, 2011 compared to $5.4 million during the first six months of 2010. The decrease in revenue was due to lower levels of research activities over the prior period as phase II of the solid oxide fuel cell development program with the U.S. Department of Energy (DOE) ended. The Company began phase III of this program towards the end of the second quarter 2011.

The Company’s research and development backlog totaled $15.2 million ($3.9 million funded) as of April 30, 2011 compared to $9.9 million ($6.4 million funded) as of April 30, 2010. The increase is primarily due to SECA Phase III program award.

Administrative and selling expenses

Administrative and selling expenses were $8.5 million for the six months ended April 30, 2011, a decrease of $0.2 million compared to last year’s period.

Research and development expenses

Research and development expenses were $8.7 million for the six months ended April 30, 2011 a decrease of $1.0 million compared to last year’s period as a result of lower overall headcount and increased support of commercial projects during the period which are classified as cost of sales.

Loss from operations

Loss from operations increased to $30.4 million for the six months ended April 30, 2011 compared to $29.7 million for same period last year due to the B1200 repair and upgrade charge discussed above, partially offset by improved product margins.

Interest Expense

Interest expense, increased to $1.0 million for the six months ended April 30, 2011 compared to $0.1 million for the same period in 2010. The increase is due to the modification of redeemable preferred stock of subsidiary. Accounting guidance now requires amortization of this instrument post-modification to be recorded as interest expense.

Loss from equity investment

Our share of equity losses in Versa decreased to $0.1 million for the six months ended April 30, 2011 compared to $0.4 million for the six months ended April 30, 2010.

Interest and other income, net

Interest and other income, net, increased to $1.0 million for the six months ended April 30, 2011 compared to $0.7 million for the same period in 2010. The increase is due to higher royalty income related to our agreements in the Korea market as minimum annual royalties escalate over the term of the contract.

Accretion of Preferred Stock of Subsidiary

The accretion of the fair value discount on the Series 1 Preferred Shares was $0.5 million and $1.2 million for the six months ended April 30, 2011 and 2010, respectively.

The modification of the Series 1 preferred share agreement resulted in a reclassification of the instrument on the consolidated balance sheets from redeemable minority interest to a liability (preferred stock obligation of subsidiary). Refer to Recent Developments as well as the section on adjustment for modification of redeemable preferred stock of subsidiary below and Note 13 of Notes to Consolidated Financial Statements for more information.

Provision for income taxes

We have not paid federal or state income taxes in several years due to our history of net operating losses, although we have paid foreign taxes in South Korea. For the six months ended April 30, 2011 our provision for income taxes was $0.1 million, which related to South Korean tax obligations. During 2009, we began manufacturing products that are gross margin profitable on a per unit basis; however, we cannot estimate when production volumes will be sufficient to generate taxable income. Accordingly, no tax benefit has been recognized for these net operating losses or other deferred tax assets as significant uncertainty exists surrounding the recoverability of these deferred tax assets.

Net loss attributable to noncontrolling interest

The net loss attributed to the noncontrolling interest for the six months ended April 30, 2011 and April 30, 2010 was $0.1 million and $0.2 million, respectively.

Adjustment for modification of redeemable preferred stock of subsidiary

Modification of redeemable preferred stock of subsidiary resulted in a charge of $9.0 million for the six month period ended April 30, 2011.

Due to the reclassification of the instrument to a liability, the Company has accounted for this modification of the Series 1 Preferred shares as an extinguishment and therefore the difference between the fair value of the consideration transferred to the holders of the preferred stock and the carrying amount of the preferred stock on our balance sheet prior to the modification represents a return to the preferred stockholder and treated in a manner similar to the treatment of dividends paid on preferred stock. Accordingly, the difference between (1) the fair value of the Series 1 Preferred shares and (2) the carrying amount of the Series 1 Preferred shares our balance sheet prior to the modification was subtracted from net loss to arrive at loss to common stockholders in the calculation of earnings per share.

The revaluation of the Series 1 Preferred shares resulted in a reduction of additional paid in capital of $9.0 million, which is also presented on the consolidated statements of operations as a charge to modification of redeemable preferred stock of subsidiary to arrive at net loss to common shareholders and is included in the calculation of earnings per share for net loss to common shareholders. The Company made its first scheduled payment of Cdn.$3.7 million during the second fiscal quarter under the terms of the modified agreement, including interest of approximately Cdn.$0.9 million.

Preferred Stock dividends

Dividends recorded on the Series B Preferred Stock were $1.6 million in each of the six month periods ended April 30, 2011 and 2010.

Net loss to common shareholders and loss per common share

Net loss to common shareholders represents the net loss for the period less the net loss attributable to noncontrolling interest less the preferred stock dividends on the Series B Preferred Stock and the $9.0 million adjustment for the modification of redeemable preferred stock of subsidiary. For the six months ended April 30, 2011 and 2010, net loss to common shareholders was $41.5 million and $32.1 million, respectively and loss per common share was $(0.35) and $(0.38), respectively.

Excluding the two charges discussed above and recorded in the second quarter of 2011, net loss to common shareholders was $23.7 million or $(0.20) per basic and diluted share, compared to $32.1 million or $(0.38) per basic and diluted share for the six months ended April 30, 2011 and 2010, respectively. Reconciliation of GAAP to Non-GAAP results are as follows:

		Six Months Ended
		April 30,
		2011				2010
Net 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 Adjustments
B1200 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

Our future liquidity will be dependent on obtaining the order volumes and cost reductions necessary to achieve profitable operations. We estimate that we can achieve Company profitability at an annual production rate of 80 MW to 90 MW based on sales mix. Actual results will depend on product mix, volume, future service costs, and market pricing.

We have been engaged in a formal commercial cost-out program since 2003 to reduce the total life cycle costs of our power plants and have made significant progress primarily through value engineering our products, manufacturing process improvements, higher production levels, technology improvements and global sourcing. During fiscal 2009, we began production of our newest megawatt-class power plants. These power plants incorporate fuel cell stacks with outputs of 350 kilowatts (kW) compared to 300 kW previously, along with lower component and raw material costs. As a result, we have experienced significant improvement in our margins and cost ratios as these product sales are gross margin positive on a per unit basis.

During fiscal 2010, our manufacturing run-rate was an annualized 22 MW. In response to the increased level of domestic orders received in 2010 and anticipating additional orders from POSCO Power, we increased our production run rate to 35 megawatts per year during the fourth quarter of fiscal year 2010 and recently increased this rate to 56 MW annually.

Our current manufacturing capacity is up to 90 MW, depending on product mix and other factors and we expect to invest approximately $5 million to $7 million for upgrades and maintenance of production assets. With increasing order flow, our plan has been to expand production capacity to approximately 150 MW within our existing Torrington facility. This expansion would require the addition of equipment (e.g. furnaces, tape casting and other equipment) to increase the capacity of certain operations. Due to the economies of scale and equipment required, we believe it is more cost effective to add capacity in large blocks. We estimate that the expansion to 150 MW will require additional capital investments of $30 to $40 million, although this expansion may occur in stages depending on the level of market demand.

In addition to increasing annual order volume and reducing product costs, we may also raise capital through debt or equity offerings; however, there can be no assurance that we will be able to obtain additional capital in the future. The timing and size of any financing will depend on multiple factors including market conditions, future order flow and the need to adjust production capacity. If we are unable to raise additional capital, our growth potential may be adversely affected and we may have to modify our plans. We anticipate that our existing capital resources, together with anticipated revenues and cash flows, will be adequate to satisfy our financial requirements and agreements through at least the next twelve months.

Cash Flows

Cash, cash equivalents, and investments in U.S. treasuries totaled $55.0 million as of April 30, 2011 compared to $54.6 million as of October 31, 2010. Net use of cash, cash equivalents and investments for the first six months of 2011 was $20.3 million compared to net use of $21.1 million in the first six months of 2010, excluding the net proceeds of $17.8 million from the registered direct offering of common stock and revolver borrowings of $3.0 million. Strong cash receipts from progress payments for U.S. orders combined with the favorable impact of improved product margins resulted in lower cash, cash equivalents and investments in US treasuries utilization during the first six months of 2011 compared to the prior year total of $21.1 million.

Cash and cash equivalents as of April 30, 2011 was $37.0 million compared to $20.5 million as of October 31, 2010. The key components of our cash inflows and outflows were as follows:

Operating Activities — Cash used in operating activities was $18.8 million during the first six months of 2011 compared to $16.5 million used in operating activities during the first six months of 2010. The increase in operating cash use compared to the prior year six month period is a result of an increase in accounts receivable and higher inventory due to an increase in the annual manufacturing production rate and higher other assets due to additional restacks recorded and depreciated over their expected useful life (refer to discussion of Critical Accounting Policies and Estimates below).

Investing Activities — Cash provided by investing activities was $15.3 million during the first six months of 2011 compared to net cash used in investing activities of $15.0 million during the first six months of 2010. The increase of $30.3 million was mainly due to the net maturity of U.S treasuries during the first six months 2011 of $16.0 million, compared to a net purchase of U.S. treasuries of $12.7 million during the first six months 2010.

Financing Activities — Cash provided by financing activities was $20.1 million during the first six months of 2011 compared to net cash used in financing activities of $2.3 million in the prior year period. The increase in cash in the first six months of 2011 compared to the first six months of 2010 was primarily due to cash received from a registered direct stock offering which raised $17.8 million. The Company also sold 1,925,400 shares of the Company’s common stock on the open market and raised approximately $3.7 million, net of fees, for use to pay obligations on the Series B and Series 1 preferred stock and other operating expenses.

The Company also closed on a $5.0 million revolving credit facility with JPMorgan Chase Bank, N.A. and the Export-Import Bank of the United States during the first six months of 2011 and borrowed $3.0 million during the period. 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.

Sources and Uses of Cash and Investments

We continue to invest in new product and market development and, as such, we are not currently generating positive cash flow from our operations. Our operations are funded primarily through cash generated from product sales and research and development contracts, license fee income and sales of equity and debt securities. In order to produce positive cash flow from operations, we need to be successful at increasing annual order volume and implementing our cost reduction efforts. The status of these activities is described below.

Increasing annual order volume

We need to increase annual order volume to achieve profitability. Increased production volumes lower costs by leveraging supplier/purchasing opportunities, creating opportunities for incorporating manufacturing process improvements, and spreading fixed costs over more units. Our overall manufacturing process has a production capacity of up to 90 MW, depending on product mix and other factors. Updates on our key markets are as follows:

South Korea: The Company continues to deepen and broaden its partnership with South Korea based POSCO Power. The recently announced $129 million order for 70 MW of fuel cell kits and other equipment and services represents the beginning of demand related to the renewable portfolio standard that takes effect in 2012 and mandates approximately 6,000 MW through 2022. FuelCell Energy will supply 2.8 MW of fuel cell kits monthly under the contract to support POSCO Power’s production schedule of fuel cell modules.

POSCO Power dedicated their newly built fuel cell module assembly at the end of March, 2011. The fuel cell module assembly and balance of plant facilities are designed for 100 MW annual capacity using fuel cell components purchased from FuelCell Energy. To date, POSCO Power has ordered 140 MW of fuel cell power plants, modules and components since 2007.

The size of the 70 MW order combined with the multi-year term has heightened interest in Direct FuelCells from prospective partners and customers in the United States and in Europe since the announcement. Refer to Note 14 of Notes to Consolidated Financial Statements for more information.

California: Our products address the need by utilities for ultra-clean baseload distributed generation. During the first quarter of 2011, Southern California Edison ordered a 1.4 MW DFC1500 to be installed at California State University, San Bernardino. This order follows previous authorization by the California Public Utilities Commission (CPUC) for Southern California Edison and Pacific Gas & Electric to pursue utility owned fuel cell installations. The CPUC recognizes fuel cells as preferred distributed generation resources due to clean natural gas and renewable baseload power generation that lessens reliance on the electrical transmission grid and represents incremental capacity that avoids or reduces investment in the transmission and distribution system.

Pacific Gas and Electric, one of the largest utilities in California, purchased two 1.4 MW power plants in June 2010 for installation at two California universities and contracted FuelCell Energy to provide the installation services. The plants are undergoing final testing and expected to be operational by summer 2011.

In April, Governor Jerry Brown signed into law a requirement that the State obtain 33 percent of its electricity from renewable resources by the year 2020, increasing the mandate from the previous level of 20 percent. Direct FuelCells operating on renewable biogas qualify under the law. The U.S. Secretary of Energy attended the signing and commented that he sees the measure as a model for other states. California is a leader in clean energy deployment and fuel cell power plants meet the State’s need for ultra-clean distributed baseload generation.

Connecticut: The Company continues active discussions with private and government financing sources for the 43.5 MW of fuel cell projects selected and approved by the Connecticut Department of Utility Control (CDUC).

United Kingdom: The Crown Estates ordered a DFC power plant during the first quarter of 2011 for installation in central London, England. The ultra-clean emission profile of the DFC plant combined with reduced greenhouse gas emissions support the sustainability goals of The Crown Estates and were the primary drivers for the order. This order represents the first DFC power plant sold by the Company in the United Kingdom.

The British government recently issued a series of proposals to address aggressive climate targets while balancing the need for replacing a significant portion of existing power generation that is nearing the end of its functional lifespan. Estimates are that about a quarter of the existing power generation capacity in the UK will need to be replaced by 2020. Fuel cells operating on natural gas or renewable biogas are a compelling solution for the needs of the British power market as they provide ultra-clean and efficient baseload power.

Cost reduction efforts

Product cost reductions are essential for us to more fully penetrate the market for our fuel cell products and attain profitability. Cost reductions will also reduce or eliminate the need for incentive funding programs which currently allow us to price our products to compete with grid-delivered power and other distributed generation technologies. Product cost reductions come from several areas including:

	•		engineering improvements;
	•		technology advances;
	•		supply chain management;
	•		production volume; and
	•		manufacturing process improvements.

Commitments and Significant Contractual Obligations

A summary of our significant future commitments and contractual obligations as of April 30, 2011 and the related payments by fiscal year are as follows:

		Payments Due by Period
						Less												More
						than				1 – 3				3 – 5				than
		Total				1 Year				Years				Years				5 Years
Purchase commitments(1)		$	52,564			$	46,902			$	5,662			$	—			$	—
Series 1 Preferred obligation (2)			27,503				11,646				2,630				2,630				10,597
Term loans (principal and interest)			4,486				909				391				433				2,753
Capital 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.