# Fuelcell Energy Inc: Form 10-Q for the period ended Apr 30, 2018

- Company: [Fuelcell Energy Inc](/companies/fcel.md) (CIK 886128)
- Form: 10-Q
- Filed: 2018-06-07
- Accepted by EDGAR: Jun 7, 2018, 08:36 ET
- Period: 2018-04-30
- Accession: 0001564590-18-015202
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/886128/000156459018015202/fcel-10q_20180430.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/886128/000156459018015202/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-04-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2018-02-01 to 2018-04-30 | $21.5m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2017-11-01 to 2018-04-30 | $55.4m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2018-02-01 to 2018-04-30 | −$629.0k | us-gaap:GrossProfit |
| Gross profit | 6 months, 2017-11-01 to 2018-04-30 | $4.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2018-02-01 to 2018-04-30 | $5.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2017-11-01 to 2018-04-30 | $9.1m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2018-02-01 to 2018-04-30 | $7.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2017-11-01 to 2018-04-30 | $13.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-02-01 to 2018-04-30 | −$12.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-11-01 to 2018-04-30 | −$18.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-02-01 to 2018-04-30 | $2.1m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2017-11-01 to 2018-04-30 | $4.2m | us-gaap:InterestExpense |
| Income tax | 6 months, 2017-11-01 to 2018-04-30 | −$3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-02-01 to 2018-04-30 | −$13.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-11-01 to 2018-04-30 | −$17.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-02-01 to 2018-04-30 | −$0.23 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-11-01 to 2018-04-30 | −$0.35 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-02-01 to 2018-04-30 | −$0.23 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-11-01 to 2018-04-30 | −$0.35 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-02-01 to 2018-04-30 | 79,563,265 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-11-01 to 2018-04-30 | 75,731,565 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 6 months, 2017-11-01 to 2018-04-30 | $5.5m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2018-04-30 | $67.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-04-30 | $181.6m | us-gaap:AssetsCurrent |
| Total assets | at 2018-04-30 | $367.6m | us-gaap:Assets |
| Current liabilities | at 2018-04-30 | $77.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-04-30 | $193.4m | us-gaap:Liabilities |
| Current portion of debt | at 2018-04-30 | $10.1m | us-gaap:DebtCurrent |
| Shareholders' equity | at 2018-04-30 | $102.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 79,843 characters.

### 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. When used in this report, the words “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “believes,” “predicts,” “should,” “will”, “could”, “would”, “may”, “forecast”, and similar expressions and variations of such words are intended to identify forward-looking statements. Such statements relate to, among other things, the following: (i) the development and commercialization by FuelCell Energy, Inc. and its subsidiaries (“FuelCell Energy”, “Company”, “we”, “us”, and “our”) of fuel cell technology and products and the market for such products; (ii) expected operating results such as revenue growth and earnings; (iii) our belief that we have sufficient liquidity to fund our business operations for the next 12 months; (iv) future funding under Advanced Technologies contracts; (v) future financing for projects including publicly issued bonds, equity and debt investments by investors and commercial bank financing; (vi) the expected cost competitiveness of our technology; and (vii) our ability to achieve our sales plans and cost reduction targets.

The forward-looking statements contained in this report are subject to risks and uncertainties, known and unknown, that could cause actual results to differ materially from those forward-looking statements, including the risks contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017 in the section entitled “Item 1A. Risk Factors,” and the following: general risks associated with product development and manufacturing; general economic conditions; changes in the utility regulatory environment; changes in the utility industry and the markets for distributed generation, distributed hydrogen, and carbon capture configured fuel cell power plants for coal and gas-fired central generation; potential volatility of energy prices; availability of government subsidies and economic incentives for alternative energy technologies; rapid technological change; competition; market acceptance of our products; changes in accounting policies or practices adopted voluntarily or as required by accounting principles generally accepted in the United States; factors affecting our liquidity position and financial condition; government appropriations; the ability of the government to terminate its development contracts at any time; the ability of the government to exercise “march-in” rights with respect to certain of our patents; our changing relationship with POSCO Energy, which may affect our ability to develop the market in Asia and deploy SureSource power plants; our ability to implement our strategy; our ability to reduce our levelized cost of energy and cost reduction strategy generally; our ability to protect our intellectual property; the risk that commercialization of our products will not occur when anticipated; our ability to generate positive cash flow from operations; our ability to service our long-term debt; our ability to increase the output and longevity of our power plants; and our ability to expand our customer base and maintain relationships with our largest customers and strategic business allies.

We cannot assure you that we will be able to meet any of our development or commercialization schedules; any of our new products or technology, once developed, will be commercially successful; our existing SureSource power plants will remain commercially successful; the government will appropriate the funds anticipated by us under our government contracts; the government will not exercise its right to terminate any or all of our government contracts; or we will be able to achieve any other result anticipated in any other forward-looking statement contained herein.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks 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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 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. Actual results could differ from those estimates. Estimates are used in accounting for, among other things, revenue recognition, contract loss accruals, excess, slow-moving and obsolete inventories, product warranty accruals, loss accruals on service agreements, share-based compensation expense, allowance for doubtful accounts, depreciation and amortization, impairment of goodwill and in-process research and development intangible assets, impairment of long-lived assets (including project assets) 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 fiscal year ended October 31, 2017 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

FuelCell Energy delivers efficient, affordable and clean solutions for the supply, recovery and storage of energy. We design, manufacture, undertake project development of, install, operate and maintain megawatt-scale fuel cell systems, serving utilities and industrial and large municipal power users with solutions that include both utility-scale and on-site power generation, carbon capture, local hydrogen production for transportation and industrial users, and long duration energy storage. Our plants are operating in more than 50 locations on three continents and have generated more than 7.5 million megawatt hours (MWh) of electricity.

We provide comprehensive turn-key power generation solutions to our customers, including installation of the power plants as well as operating and maintaining the plants under multi-year service agreements. We target large-scale power users with our megawatt-class installations. As a reference, one megawatt is adequate to continually power approximately 1,000 average sized U.S. homes. Our customer base includes utility companies, municipalities, universities, government entities and businesses in a variety of industrial and commercial enterprises. Our leading geographic markets are South Korea and the United States, and we are pursuing expanding opportunities in other countries in Asia and Europe.

Our value proposition is to enable economic value with clean and affordable fuel cell power plants that supply power where consumed. Our solutions are easy-to-site in populated areas as they are clean, operate quietly and without vibrations, and have only modest space requirements. Fuel cells use an electrochemical process to convert a fuel source into electricity and heat in a highly efficient process that emits virtually no pollutants as the fuel is not burned, generating power that is almost wholly absent of criteria pollutants such as nitrogen oxides that cause smog, sulfur oxides that contribute to acid rain, and particulate matter that can aggravate asthma. Locating power generation near the point of use reduces reliance on the transmission grid, leading to enhanced energy security and power reliability. Utilities can minimize or even avoid the cost of transmission or other infrastructure by adopting distributed generation, which saves their customers the cost of installing and maintaining transmission and also avoids the losses associated with transmitting electricity over great distances. Our power plants provide electricity priced competitively to grid-delivered electricity in certain high cost regions and our strategy is to continue to reduce costs, which we believe will lead to wider adoption.

Our products can also be configured for recovery and storage applications. We are developing Advanced Technologies which leverage our commercial platform and expertise. Our SureSource power plants utilize carbonate fuel cell technology, which is a very versatile type of fuel cell technology. Utilizing our core SureSource plants, we have developed and are commercializing both a tri-generation distributed hydrogen configuration that generates electricity, heat and hydrogen for industrial or transportation uses, and a carbon capture application for coal or gas-fired power plants. We also are developing and working to commercialize solid oxide fuel cells for adjacent sub-megawatt applications to the markets for our megawatt-class SureSource power plants as well as energy storage applications. These applications are complementary to our core products, leverage our existing customer base, project development, sales and service expertise, and are large markets.

### 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 reduction 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”).

### Comparison of Three Months Ended April 30, 2018 and 2017

### Revenues and Costs of revenues

Our revenues and cost of revenues for the three months ended April 30, 2018 and 2017 were as follows:

*(dollars in thousands)*

|  | Three Months Ended April 30, 2018 | 2017 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Total revenues | $20,830 | $20,417 | $413 | 2% |
| Total costs of revenues | $21,459 | $20,034 | $1,425 | 7% |
| Gross (loss) profit | $(629) | $383 | $(1,012) | (264)% |
| Gross (loss) profit margin | (3.0)% | 1.9% |  |  |

21

Total revenues for the three months ended April 30, 2018 of $20.8 million reflects an increase of $0.4 million from $20.4 million for the same period in the prior year. Total cost of revenues for the three months ended April 30, 2018 increased by $1.4 million to $21.4 million from $20.0 million during the same period in the prior year. A discussion of the changes in product revenues, service and license revenues, generation revenues and Advanced Technologies contract revenues follows.

### Product revenues

Our product revenues, cost of product revenues and gross loss margin for the three months ended April 30, 2018 and 2017 were as follows:

*(dollars in thousands)*

|  | Three Months Ended April 30, 2018 | 2017 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Product revenues | $12,200 | $737 | $11,463 | 1,555% |
| Cost of product revenues | 13,947 | 3,204 | 10,743 | 335% |
| Gross loss from product revenues | $(1,747) | $(2,467) | $720 | 29% |
| Product revenues gross loss | (14.3)% | (334.7)% |  |  |

Product revenues for the three months ended April 30, 2018 included $11.2 million of power plant revenue and $1.0 million of revenue related to engineering and construction services. This is compared to product revenues for the three months ended April 30, 2017, which included $0.3 million of power plant revenue and $0.4 million of revenue related to engineering and construction services. The increase in product revenues is due to the sale of the 2.8 megawatt (“MW”) fuel cell power plant project located at the Waste Water Treatment Facility in Tulare, California to NRG Yield, Inc. (“NRG Yield”). The power plant, under the new ownership of NRG Yield, will deliver clean power and heat to the City of Tulare under a multi-year power purchase agreement (“PPA”). We will operate and maintain the power plant under a twenty-year service agreement. The sale of this power plant and its assets to NRG Yield for a purchase price of $11.2 million resulted in product revenue recognition out of our generation project assets portfolio totaling $10.8 million in the three months ended April 30, 2018. The remaining $0.4 million will be recognized upon completion of future deliverables.

Cost of product revenues increased $10.7 million for the three months ended April 30, 2018 to $13.9 million, compared to $3.2 million in the same period in the prior year. Overall gross loss from product revenues was $1.7 million for the three months ended April 30, 2018 compared to gross loss of $2.5 million in the comparable prior year period. Gross loss decreased from the same period in the prior year due to margins realized from the sale of the 2.8 MW power plant project to NRG Yield. Both periods were impacted by the under-absorption of fixed overhead costs due to low production volumes. Manufacturing variances, primarily related to low production volumes, totaled approximately $3.2 million for the three months ended April 30, 2018 compared to approximately $2.5 million for the three months ended April 30, 2017. For the three months ended April 30, 2018, the Company operated at an annualized production rate of approximately 25 MW. This is compared to the annual production rate of 35 MW in the same period in the prior year. Given the current level of backlog and awards, the Company is evaluating a plan to increase production in the second half of 2018.

### Service and license revenues

Service and license revenues and related costs for the three months ended April 30, 2018 and 2017 were as follows:

*(dollars in thousands)*

|  | Three Months Ended April 30, 2018 | 2017 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Service and license revenues | $3,206 | $12,592 | $(9,386) | (75)% |
| Cost of service and license revenues | 2,531 | 12,159 | (9,628) | (79)% |
| Gross profit from service and license revenues | $675 | $433 | $242 | 56% |
| Service and license revenues gross margin | 21.1% | 3.4% |  |  |

22

Revenues for the three months ended April 30, 2018 from service agreements and license fee and royalty agreements decreased $9.4 million to $3.2 million from $12.6 million for the three months ended April 30, 2017. Service agreement revenue decreased from the three months ended April 30, 2017 primarily due to a lower number of module replacements during the three months ended April 30, 2018 compared to the prior year. Quarterly revenue recognition for service agreements is variable. For service agreements where we expect to have a module exchange at some point during the term (generally service agreements in excess of five years), the costs of performance are not expected to be incurred on a straight-line basis, and therefore, a portion of the initial contract value related to the module exchange(s) is deferred and is recognized upon such module replacement event(s). Revenue from license, royalty and material management fees increased slightly to $0.6 million for the three month period ended April 30, 2018 from $0.5 million for the prior year period.

Cost of service and license revenues decreased $9.6 million to $2.5 million for the three months ended April 30, 2018 from $12.1 million for the three months ended April 30, 2017. Cost of service agreements includes maintenance and operating costs, module exchanges, and performance guarantees. The decrease over the prior year period relates to lower expenses associated with module replacements and lower operating costs in the three months ended April 30, 2018.

Overall gross profit from service and license revenues was $0.7 million for the three months ended April 30, 2018. The overall gross margin percentage of 21.1 percent for the three months ended April 30, 2018 compared to 3.4 percent in the prior year period. Service margins were positively impacted by lower maintenance costs during the three months ended April 30, 2018.

Service revenue from module exchanges is recognized at the time of the module exchange activity whereas the remaining portion of service revenue from service agreements is recognized ratably over the life of the service contract. As a result, quarterly revenue and gross profit related to module exchanges can fluctuate from quarter to quarter. Additional power plant installations would lead to growth in service revenue.

### Generation revenues

Generation revenues and related costs for the three months ended April 30, 2018 and 2017 were as follows:

*(dollars in thousands)*

|  | Three Months Ended April 30, 2018 | 2017 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Generation revenues | $1,742 | $1,634 | $108 | 7% |
| Cost of generation revenues | 2,036 | 1,294 | 742 | 57% |
| Gross (loss) profit from generation revenues | $(294) | $340 | $(634) | (186)% |
| Generation revenues gross (loss) margin | (16.9)% | 20.8% |  |  |

Revenues for the three months ended April 30, 2018 from generation totaled $1.7 million, compared to $1.6 million for the three months ended April 30, 2017. Generation revenues for the three months ended April 30, 2018 and 2017 reflects revenue from electricity generated from the Company’s PPAs. Cost of generation revenues totaled $2.0 million in the three months ended April 30, 2018, compared to $1.3 million for the comparable prior year period. The decrease in gross profit from generation revenues was primarily a result of the $0.5 million impairment of a 1.4 MW project in development that was terminated in the period and lower revenue while maintenance was being performed at certain installations in the second quarter of 2018 compared to the same period in the prior year. Cost of generation revenues included depreciation of approximately $1.1 million for the three months ended April 30, 2018 and April 30, 2017. The Company had 11.2 MW of operating power plants in its portfolio for both periods presented.

### Advanced Technologies contract revenues

Advanced Technologies contract revenues and related costs for the three months ended April 30, 2018 and 2017 were as follows:

*(dollars in thousands)*

|  | Three Months Ended April 30, 2018 | 2017 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Advanced Technologies contract revenues | $3,682 | $5,454 | $(1,772) | (32)% |
| Cost of Advanced Technologies contract revenues | 2,945 | 3,377 | (432) | (13)% |
| Gross profit from Advanced Technologies contracts | $737 | $2,077 | $(1,340) | (65)% |
| Advanced Technologies contract gross margin | 20.0% | 38.1% |  |  |

23

Advanced Technologies contract revenue for the three months ended April 30, 2018 was $3.7 million, which reflects a decrease of $1.8 million when compared to $5.5 million of revenue for the three months ended April 30, 2017. Advanced Technologies contract revenue was lower for the three months ended April 30, 2018 primarily due to the timing of project activity under existing contracts. Cost of Advanced Technologies contract revenues decreased $0.4 million to $2.9 million for the three months ended April 30, 2018, compared to $3.3 million for the same period in the prior year. Advanced Technologies contracts for the three months ended April 30, 2018 generated a gross profit of $0.7 million compared to a gross profit of $2.1 million for the three months ended April 30, 2017. The decrease in Advanced Technologies contract gross margin is related to the timing and mix of contracts being performed during the three months ended April 30, 2018, particularly a lower proportion related to private industry contracts.

### Administrative and selling expenses

Administrative and selling expenses were $7.1 million and $6.5 million for the three months ended April 30, 2018 and 2017, respectively. The increase from the prior year period relates to higher legal and professional related expenditures due to business activities in the three months ended April 30, 2018.

### Research and development expenses

Research and development expenses decreased to $5.0 million for the three months ended April 30, 2018 compared to $5.4 million during the three months ended April 30, 2017. The decrease from the prior year period is primarily due to lower expenses following the introduction of the 3.7 MW SureSource 4000 TM.

### Restructuring expense

Restructuring expense of $0.01 million was recorded for the three months ended April 30, 2017, relating to personnel separation costs from the business restructuring that was undertaken to reduce costs and align production levels with production needs. There were no restructuring activities in the second quarter of fiscal year 2018.

### Loss from operations

Loss from operations for the three months ended April 30, 2018 was $12.7 million compared to $11.5 million for the three months ended April 30, 2017. The increase in the loss from operations was primarily a result of the gross loss realized for the three months ended April 30, 2018, and higher overall operating expenses during the three months ended April 30, 2018 as described above.

### Interest expense

Interest expense for the three months ended April 30, 2018 and 2017 was $2.1 million and $2.3 million, respectively. Interest expense for both periods presented includes interest on the loan and security agreement with Hercules Capital, Inc. (“Hercules”), interest expense related to sale-leaseback transactions recorded under the financing method and interest for the amortization of the redeemable preferred stock of subsidiary fair value discount.

### Other income, net

Other income, net, was income of $1.6 million for the three months ended April 30, 2018 compared to income of $0.5 million for the same period in 2017. The income (expense) for both periods presented includes foreign exchange losses related to the remeasurement of the Canadian Dollar denominated preferred stock obligation of our U.S. Dollar functional currency Canadian subsidiary. For the three months ended April 30, 2018, a foreign exchange gain was realized on the unbilled receivable balance denominated in South Korean Won for the HYD (defined below) contract.

### Benefit for income taxes, net

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 income and withholding taxes in South Korea. For the three months ended April 30, 2017, our benefit for income taxes was $0.04 million. There was minimal income taxes recorded for the three months ended April 30, 2018. We manufacture 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 additional tax benefit has been recognized for net operating losses (“NOLs”) or other deferred tax assets as significant uncertainty exists surrounding the recoverability of these deferred tax assets.

### Preferred stock deemed dividends

Installment conversions in which the conversion price is below the fixed conversion price of $1.84 per share result in a variable number of shares being issued to settle the installment amount and are treated as a partial redemption of the Series C Preferred Shares. Installment conversions during the three months ended April 30, 2018 that were settled in a variable number of shares and treated as redemptions resulted in deemed dividends of $4.2 million. There were no deemed dividends recorded for the three month period ended April 30, 2017. The deemed dividend represents the difference between the fair value of the common shares issued to settle the installment amounts and the carrying value of the Series C Preferred Shares.

### Preferred stock dividends

Dividends recorded on the Series B Preferred Stock were $0.8 million for the three month periods ended April 30, 2018 and 2017.

### Net loss attributable to common stockholders and loss per common share

Net loss attributable to common stockholders represents the net loss for the period less the preferred stock deemed dividends on the Series C Preferred Stock and the preferred stock dividends on the Series B Preferred Stock. For the three month periods ended April 30, 2018 and 2017, net loss attributable to common stockholders was $18.2 million and $14.0 million, respectively, and loss per common share was $0.23 and $0.33, respectively.

### Comparison of Six Months Ended April 30, 2018 and 2017

### Revenues and Costs of revenues

Our revenues and cost of revenues for the six months ended April 30, 2018 and 2017 were as follows:

*(dollars in thousands)*

|  | Six Months Ended April 30, 2018 | 2017 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Total revenues | $59,443 | $37,419 | $22,024 | 59% |
| Total costs of revenues | $55,437 | $35,223 | $20,214 | 57% |
| Gross profit | $4,006 | $2,196 | $1,810 | 82% |
| Gross margin | 6.7% | 5.9% |  |  |

Total revenues for the six months ended April 30, 2018 of $59.4 million reflects an increase of $22.0 million from $37.4 million for the same period in the prior year. Total cost of revenues for the six months ended April 30, 2018 increased by $20.2 million to $55.4 million from $35.2 million during the same period in the prior year. A discussion of the changes in product revenues, service and license revenues, generation revenues and Advanced Technologies contract revenues follows.

### Product revenues

Our product revenues, cost of product revenues and gross profit (loss) for the six months ended April 30, 2018 and 2017 were as follows:

*(dollars in thousands)*

|  | Six Months Ended April 30, 2018 | 2017 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Product revenues | $41,730 | $2,544 | $39,186 | 1,540% |
| Cost of product revenues | 40,084 | 7,259 | 32,825 | 452% |
| Gross profit (loss) from product revenues | $1,646 | $(4,715) | $6,361 | 135% |
| Product revenues gross margin (loss) | 3.9% | (185.3)% |  |  |

Product revenues for the six months ended April 30, 2018 included $39.9 million of power plant revenue and $1.8 million of revenue related to engineering and construction services. This is compared to product revenues for the six months ended April 30, 2017, which included $1.3 million of power plant revenue and $1.2 million of revenue related to engineering and construction services.

The increase in product revenues during the period was due to the 20 MW order from Hanyang Industrial Development Co., Ltd (“HYD”), pursuant to which we provided equipment to HYD for a fuel cell project with Korea Southern Power Co., Ltd. (“KOSPO”). Shipments began in our fourth fiscal quarter of 2017 and were completed in our first fiscal quarter of 2018. The Company is in the process of commissioning the plant, which is expected to be completed in the third fiscal quarter of 2018. The Company also completed the sale of the City of Tulare SureSource 3000 power plant to NRG Yield during the second quarter of fiscal year 2018.

Cost of product revenues increased $32.8 million for the six months ended April 30, 2018 to $40.1 million, compared to $7.3 million in the same period in the prior year. Overall gross profit from product revenues was $1.6 million for the six months ended April 30, 2018 compared to gross loss of $4.7 million in the prior year comparable period. Gross profit increased from a gross loss in the same period in the prior year due to the favorable margins realized for the HYD contract and favorable margins on the sale of the City of Tulare SureSource 3000 power plant. Both periods were impacted by the under-absorption of fixed overhead costs due to low production volumes. For the six months ended April 30, 2018, the Company operated at an annualized production rate of approximately 25 MW. This is compared to the annual production rate of 35 MW in the same period in the prior year.

### Service and license revenues

Service and license revenues and related costs for the six months ended April 30, 2018 and 2017 were as follows:

*(dollars in thousands)*

|  | Six Months Ended April 30, 2018 | 2017 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Service and license revenues | $7,310 | $19,528 | $(12,218) | (63)% |
| Cost of service and license revenues | 5,937 | 18,425 | (12,488) | (68)% |
| Gross profit from service and license revenues | $1,373 | $1,103 | $270 | 24% |
| Service and license revenues gross margin | 18.8% | 5.6% |  |  |

Revenues for the six months ended April 30, 2018 from service agreements and license fee and royalty agreements decreased $12.2 million to $7.3 million from $19.5 million for the six months ended April 30, 2017. Service agreement revenue decreased from the six months ended April 30, 2017 primarily due to a lower number of module replacements in the six months ended April 30, 2018. Revenue from license, royalty and material management fees decreased to $1.1 million for the six month period ended April 30, 2018 from $1.6 million for the prior year period due to lower royalties recognized. The Company’s license and royalty agreements with POSCO Energy included a minimum royalty which expired in December 2016.

Cost of service and license revenues decreased $12.5 million to $5.9 million for the six months ended April 30, 2018 from $18.4 million for the three months ended April 30, 2017. Cost of service agreements includes maintenance and operating costs, module exchanges, and performance guarantees. The decrease over the prior year period relates to lower expenses associated with module replacements and lower operating costs in the six months ended April 30, 2018.

Overall gross profit from service and license revenues was $1.4 million for the six months ended April 30, 2018. The overall gross margin percentage of 18.8 percent for the six months ended April 30, 2018 compared to 5.6 percent in the prior year period. Service margins were positively impacted by lower maintenance costs during the six months ended April 30, 2018.

### Generation revenues

Generation revenues and related costs for the six months ended April 30, 2018 and 2017 were as follows:

*(dollars in thousands)*

|  | Six Months Ended April 30, 2018 | 2017 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Generation revenues | $3,634 | $3,719 | $(85) | (2)% |
| Cost of generation revenues | 3,645 | 2,409 | 1,236 | 51% |
| Gross (loss) profit from generation revenues | $(11) | $1,310 | $(1,321) | (101)% |
| Generation revenues gross (loss) margin | (0.3)% | 35.2% |  |  |

Revenues for the six months ended April 30, 2018 from generation totaled $3.6 million, compared to $3.7 million for the six months ended April 30, 2017. Generation revenues for the six months ended April 30, 2018 and 2017 reflects revenue from electricity generated from the Company’s PPAs. Cost of generation revenues totaled $3.6 million in the six months ended April 30, 2018, compared to $2.4 million for the comparable prior year period. The decrease in gross profit from generation revenues was primarily a result of the $0.5 million impairment of a 1.4 MW project in development that was terminated in the period and higher maintenance activities at certain installations that occurred in the first half of 2018. Cost of generation revenues included depreciation of approximately $2.1 million for the six months ended April 30, 2018 and April 30, 2017. The Company had 11.2 MW of operating power plants in its portfolio for both periods presented.

### Advanced Technologies contract revenues

Advanced Technologies contract revenues and related costs for the six months ended April 30, 2018 and 2017 were as follows:

*(dollars in thousands)*

|  | Six Months Ended April 30, 2018 | 2017 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Advanced Technologies contract revenues | $6,769 | $11,628 | $(4,859) | (42)% |
| Cost of Advanced Technologies contract revenues | 5,771 | 7,130 | (1,359) | (19)% |
| Gross profit from Advanced Technologies contracts | $998 | $4,498 | $(3,500) | (78)% |
| Advanced Technologies contract gross margin | 14.7% | 38.7% |  |  |

Advanced Technologies contract revenue for the six months ended April 30, 2018 was $6.8 million, which reflects a decrease of $4.8 million when compared to $11.6 million of revenue for the six months ended April 30, 2017. Advanced Technologies contract revenue was lower for the six months ended April 30, 2018 primarily due to the timing of project activity under existing contracts. Cost of Advanced Technologies contract revenues decreased $1.3 million to $5.8 million for the six months ended April 30, 2018, compared to $7.1 million for the same period in the prior year. Advanced Technologies contracts for the six months ended April 30, 2018 generated a gross profit of $1.0 million compared to a gross profit of $4.5 million for the six months ended April 30, 2017. The decrease in Advanced Technologies contract gross margin is related to the timing and mix of contracts being performed during the six months ended April 30, 2018, particularly a lower proportion related to private industry contracts.

### Administrative and selling expenses

Administrative and selling expenses were $13.2 million and $12.5 million for the six months ended April 30, 2018 and 2017, respectively. The increase from the prior year period relates to higher legal and professional related expenditures due to business activities in the six months ended April 30, 2018.

### Research and development expenses

Research and development expenses decreased to $9.1 million for the six months ended April 30, 2018 compared to $10.8 million during the six months ended April 30, 2017. The decrease from the prior year period is primarily due to lower expenses following the introduction of the 3.7 MW SureSource 4000 TM.

### Restructuring expense

Restructuring expense of $1.4 million was recorded for the six months ended April 30, 2017, relating to personnel separation costs from the business restructuring that was undertaken to reduce costs and align production levels with the degree of production needs. There were no restructuring activities for the six months ended April 30, 2018.

### Loss from operations

Loss from operations for the six months ended April 30, 2018 was $18.3 million compared to $22.4 million for the six months ended April 30, 2017. The decrease in the loss from operations was primarily a result of the increased gross profit realized for the six months ended April 30, 2018, lower operating expenses relating to decreased research and development expenses and the lack of restructuring expense. This was partially offset by an increase in administrative and selling expenses during the six months ended April 30, 2018.

### Interest expense

Interest expense for the six months ended April 30, 2018 and 2017 was $4.2 million and $4.6 million, respectively. Interest expense for both periods presented includes interest on the loan and security agreement with Hercules, interest expense related to sale-leaseback transactions recorded under the financing method and interest for the amortization of the redeemable preferred stock of subsidiary fair value discount.

### Other income, net

Other income, net, was income of $2.1 million for the six months ended April 30, 2018 compared to income of $0.1 million for the same period in 2017. The income for both periods presented includes foreign exchange losses related to the remeasurement of the Canadian Dollar denominated preferred stock obligation of our U.S. Dollar functional currency Canadian subsidiary. For the six months ended April 30, 2018, a foreign exchange gain was realized on payments and unbilled receivable balances denominated in South Korean Won for the HYD contract.

### Benefit (provision) for income taxes, net

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 income and withholding taxes in South Korea. The Company recorded an income tax benefit totaling $3.0 million for the six months ended April 30, 2018 compared to income tax expense of $0.05 million for the six months ended April 30, 2017. The income tax benefit for the six months ended April 30, 2018 related to the Tax Cuts and Jobs Act (the “Act”) that was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 34% to 21% effective January 1, 2018, which resulted in a deferred tax benefit of $1.0 million related to a reduction of the Company’s deferred tax liability for in process research and development (“IPR&D”). The Act also established an unlimited carryforward period for the net operating loss (“NOL”) the Company anticipates generating in fiscal year 2018. This provision of the Act resulted in a reduction of the valuation allowance attributable to deferred tax assets at the enactment date by $2.0 million based on the indefinite life of the resulting NOL as well as the deferred tax liability for IPR&D.

### Preferred stock deemed dividends

Installment conversions in which the conversion price is below the fixed conversion price of $1.84 per share result in a variable number of shares being issued to settle the installment amount and are treated as a partial redemption of the Series C Preferred Shares. Installment conversions during the six months ended April 30, 2018 that were settled in a variable number of shares and treated as redemptions resulted in deemed dividends of $7.7 million. There were no deemed dividends recorded for the six month period ended April 30, 2017. The deemed dividend represents the difference between the fair value of the common shares issued to settle the installment amounts and the carrying value of the Series C Preferred Shares.

### Preferred stock dividends

Dividends recorded on the Series B Preferred Stock were $1.6 million for the six month periods ended April 30, 2018 and 2017.

### Net loss attributable to common stockholders and loss per common share

Net loss attributable to common stockholders represents the net loss for the period less the preferred stock deemed dividends on the Series C Preferred Stock and the preferred stock dividends on the Series B Preferred Stock. For the six month periods ended April 30, 2018 and 2017, net loss attributable to common stockholders was $26.6 million and $28.5 million, respectively, and loss per common share was $0.35 and $0.71, respectively.

### LIQUIDITY AND CAPITAL RESOURCES

As of April 30, 2018, we believe that our cash, cash equivalents on hand, cash flows from operating activities, availability under our loan facilities and access to the capital markets will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months.

We intend to maintain appropriate cash and debt levels based upon our expected cash requirements for operations, capital expenditures, construction of project assets and principal, interest and dividend payments. In the future, we may also engage in additional debt or equity financings, including project specific debt financings. We believe that, when necessary, we will have adequate access to the capital markets, although 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.

Cash and cash equivalents including restricted cash totaled $105.2 million as of April 30, 2018 compared to $87.4 million as of October 31, 2017. As of April 30, 2018:

- Unrestricted cash and cash equivalents was $67.0 million compared to $49.3 million as of October 31, 2017.
- Restricted cash and cash equivalents was $38.2 million, of which $5.2 million was classified as current and $33.0 million was classified as non-current, compared to $38.1 million of total restricted cash and cash equivalents as of October 31, 2017, of which $4.6 million was classified as current and $33.5 million was classified as non-current.

During fiscal year 2017, the Company completed an equity capital raise, which included the issuance of warrants. If all remaining warrants related to this equity offering are exercised in periods subsequent to April 30, 2018, the Company could receive additional cash proceeds of up to $18.5 million.

In addition to the cash and cash equivalents described above, the Company has $40.0 million of availability under its project finance loan agreement with NRG through FuelCell Finance, which can be used for project asset construction. Draws under the facility are subject to traditional project finance conditions precedent, including the existence of a PPA with the end-user of the power and customary project documentation, economic performance and compliance with applicable laws and regulations. Projects must be located in the United States.

We also have an effective shelf registration statement on file with the SEC for issuance of equity and debt securities.

The Company’s future liquidity will be dependent on obtaining a combination of increased order and contract volumes, increased cash flows from our generation and service portfolios and cost reductions necessary to achieve profitable operations. Our expanding development of large-scale turn-key projects in the United States requires liquidity and is expected to continue to have increasing liquidity requirements. A key element of our business model includes the development of turn-key projects and we may commence construction upon the execution of a multi-year PPA with an end-user that has a strong credit profile. Project development and construction cycles, which span the time between securing a PPA and commercial operation of the plant, vary substantially and can take years. As a result of these project cycles and strategic decisions to finance the construction of certain projects, we may need to make significant up-front investments of resources in advance of the receipt of any cash from the sale or long-term financing of such projects. These up-front investments may include using our working capital availability under our construction financing facility or other project financing arrangements. We may choose to substantially complete the construction of a project before it is sold to a project investor. Alternatively, we may choose to retain ownership of one or more of these projects after they become operational if we determine it would be of economic and strategic benefit to do so. If, for example, we cannot sell a project at economics that are attractive to us, we may instead elect to own and operate such project, generally until such time that we can sell such project on economically attractive terms. In markets where there is a compelling value proposition, we may also build one or more power plants on an uncontracted “merchant” basis in advance of securing long-term contracts for the project attributes (including energy, renewable energy credits and capacity). Delays in construction progress or in completing the sale of our projects that we are self-financing may impact our liquidity.

Our operating portfolio (11.2 MW as of April 30, 2018) contributes higher long-term cash flows to the Company than if these projects had been sold. These projects currently generate $7 - $8 million per year in annual revenue. The Company plans to continue to grow this portfolio while also selling projects to investors. As of April 30, 2018, the Company had an additional 22.5 MW under development and construction, some of which are expected to generate operating cash flows in fiscal 2018. These totals do not include the 39.8 MW Long Island Power Authority (“LIPA”) project awards, which are not yet in backlog. Including the LIPA awards, the projects in process totaled 62.3 MW as of April 30, 2018. We expect these projects to generate an additional $50 - $60 million of annual recurring revenue once they become operational. Retaining long-term cash flow positive projects combined with our service fleet reduces reliance on new project sales to achieve cash flow positive operations. We have worked with financial institutions to secure long-term debt and sale-leasebacks for our project asset portfolio as well as NRG for construction period financing. Through April 30, 2018, we have financed four projects through sale-leaseback transactions. As of April 30, 2018, total financing obligations and debt outstanding related to project assets was $46.4 million. Our generation portfolio provides the Company with the full benefit of future cash flows.

The following table summarizes our operating portfolio as of April 30, 2018:

| Project Name | Location | Power Off-Taker | Rated Capacity (MW) | Actual Commercial Operation Date (FuelCell Energy Fiscal Quarter) | PPA Term (Years) |
| --- | --- | --- | ---: | --- | ---: |
| Central CT State University (“CCSU”) | New Britain, CT | CCSU (CT University) | 1.4 | Q2 ‘12 | 10 |
| UCI Medical Center (“UCI”) | Orange, CA | UCI (CA University Hospital) | 1.4 | Q1 '16 | 19 |
| Riverside Regional Water Quality Control Plant | Riverside, CA | City of Riverside (CA Municipality) | 1.4 | Q4 '16 | 20 |
| Pfizer, Inc. | Groton, CT | Pfizer, Inc. | 5.6 | Q4 '16 | 20 |
| Santa Rita Jail | Dublin, CA | Alameda County, California | 1.4 | Q1 '17 | 20 |
|  |  | **Total MW Operating:** | **11.2** |  |  |

The following table summarizes projects in process as of April 30, 2018:

| Project Name | Location | Power Off-Taker | Rated Capacity (MW) | Estimated Commercial Operation Date (FuelCell Energy Fiscal Quarter) | PPA Term (Years) |
| --- | --- | --- | ---: | --- | ---: |
| Trinity College | Hartford, CT | Trinity College (University) | 1.4 | Q3 '18 | 20 |
| Triangle St | Danbury, CT | Eversource (CT Utility) | 3.7 | Q4 '18 | Tariff |
| Tulare BioMAT | Tulare, CA | PG&E CA (CA Utility) | 2.8 | Q1 '19 | 20 |
| Bolthouse Farms | Bakersfield, CA | Bolthouse Farms (Campbells) | 5.0 | Q1 '19 | 20 |
| Groton Sub Base | Groton, CT | CMEEC (CT Electric Co-op) | 7.4 | Q3 '19 | 20 |
| Toyota | Los Angeles, CA | SCE; Toyota | 2.2 | Q3 '20 | 20 |
| LIPA 1 | Long Island, NY | PSEG / LIPA, LI NY (Utility) | 7.4 | Q3 '20 | 20 |
| LIPA 2 | Long Island, NY | PSEG / LIPA, LI NY (Utility) | 18.5 | Q4 '20 | 20 |
| LIPA 3 | Long Island, NY | PSEG / LIPA, LI NY (Utility) | 13.9 | Q1 '21 | 20 |
|  |  | **Total MW in Process:** | **62.3** |  |  |

The Company had a contract backlog totaling approximately $681.9 million as of April 30, 2018. Backlog by revenue category is as follows:

- Services backlog totaled $189.9 million as of April 30, 2018 compared to $188.3 million as of April 30, 2017. Services backlog includes future contracted revenue from routine maintenance and scheduled module exchanges for power plants under service agreements. During the three months ended April 30, 2018, a service agreement was added related to the Tulare 2.8 MW project which is now owned by NRG Yield.
- Generation backlog totaled $451.2 million as of April 30, 2018 compared to $184.4 million as of April 30, 2017. Generation backlog represents future contracted energy sales under contracted power purchase agreements between the Company and the end-user of the power. During the three months ended April 30, 2018, a 1.4 MW generation project in New York was terminated due to site constraints and was removed from backlog. Also, the Tulare 2.8 MW project was removed from backlog as it was sold to NRG Yield. New projects added to backlog in the period included the 5.0 MW Bolthouse Farms Project and the 2.8 MW Tulare BioMAT project.
- Product sales backlog totaled $1.4 million as of April 30, 2018 compared to $12.9 million as of April 30, 2017. Product sales backlog primarily consists of the remaining scope of work on the 20 MW Korean utility order.
- Advanced Technologies contract backlog totaled $39.4 million as of April 30, 2018 compared to $48.9 million as of April 30, 2017.

Backlog represents definitive agreements executed by the Company and our customers. Projects with respect to which the Company intends to retain ownership are included in generation backlog, which represents future revenue under long-term power purchase agreements. Projects sold to customers (and not retained by the Company) are included in product sales and service backlog. Project awards referenced by the Company are notifications that the Company has been selected, typically through a competitive bidding process, to enter into definitive agreements. These awards have been publicly disclosed. The Company is working to enter into definitive agreements with respect to these project awards and, upon execution of a definitive agreement with respect to a project award, that project award will become backlog. Project awards that were not included in backlog as of April 30, 2018 include the 39.8 MW LIPA project awards (which are expected to become generation backlog) and the 20 year service agreement supporting the 20 MW Korean utility project. These awards in total represent approximately $936 million of future revenue potential, assuming the Company retains ownership of the LIPA projects.

The Company also has a strong sales and service pipeline of potential projects in various stages of development in North America, Asia and Europe. This pipeline includes projects for on-site ‘behind-the-meter’ applications and for grid support multi-megawatt fuel cell parks. Behind-the-meter applications provide end users with predictable long-term economics, on-site power including micro-grid capabilities and reduced carbon emissions. In addition, a number of multi-megawatt utility grid support projects are being developed for utilities and independent power producers to support the grid where power is needed. These projects may help both utilities and governments meet their renewable portfolio standards.

Factors that may impact our liquidity in fiscal year 2018 and beyond include:

- Timing of project awards and factory production rate. The Company bids on large projects in diverse markets that can have long decision cycles and uncertain outcomes.
- As project sizes evolve, project cycle times may increase. We may need to make significant up-front investments of resources in advance of the receipt of any cash from the sale of our projects. These amounts include development costs, interconnection costs, posting of letters of credit, bonding or other forms of security, and incurring engineering, permitting, legal, and other expenses.
- The amount of accounts receivable as of April 30, 2018 and October 31, 2017 was $57.3 million ($11.2 million of which is classified as “Other assets”) and $81.3 million ($12.8 million of which is classified as “Other assets”), respectively. Included in accounts receivable as of April 30, 2018 and October 31, 2017 was $39.7 million and $38.3 million, respectively, of unbilled accounts receivable. Unbilled accounts receivable represents revenue that has been recognized in advance of billing the customer under the terms of the underlying contracts. Such costs have been funded with working capital and the unbilled amounts are expected to be billed and collected from customers once we meet the billing criteria under the contracts. Our accounts receivable balances may fluctuate as of any balance sheet date depending on the timing of individual contract milestones and progress on completion of our projects.
- The amount of total inventory as of April 30, 2018 and October 31, 2017 was $55.3 million and $74.5 million, respectively, which includes work in process inventory totaling $35.9 million and $54.4 million, respectively. As we continue to execute on our business plan, we must produce fuel cell modules and procure balance of plant (“BOP”) components in required volumes to support our planned construction schedules and potential customer contractual requirements. As a result, we may manufacture modules or acquire BOP in advance of receiving payment for such activities. This may result in fluctuations of inventory and use of cash as of any balance sheet date. The Company reduced its production rate during fiscal year 2017 and expects to operate at lower levels for a period of time in order to deploy inventory to new projects and mitigate future increases in inventory.
- Cash and cash equivalents as of April 30, 2018 included $0.9 million of cash advanced by POSCO Energy for raw material purchases made on its behalf by the Company. Under an inventory procurement agreement that ensures coordinated purchasing from the global supply chain, the Company provides procurement services for POSCO Energy and receives compensation for services rendered. While POSCO Energy makes payments to us in advance of supplier requirements, quarterly receipts may not match disbursements.
- The amount of total project assets as of April 30, 2018 and October 31, 2017 was $79.6 million and $73.0 million, respectively. Project assets consist of capitalized costs for fuel cell projects that are either operating and producing revenue or under construction. Project assets as of April 30, 2018 consist of $31.1 million of completed installations currently operating and $48.5 million of projects in development. As of April 30, 2018, we had 11.2 MW of our operating project assets that generated $3.6 million of revenue in the first six months of fiscal 2018. Also, as of April 30, 2018, the Company had an additional 62.3 MW under development and construction some of which are expected to generate operating cash flows in fiscal year 2018. We expect this portfolio to continue to grow.
- Under the terms of certain contracts, the Company will provide performance security for future contractual obligations. As of April 30, 2018, we had pledged approximately $38.2 million of our cash and cash equivalents as collateral for performance security and for letters of credit for certain banking requirements and contracts. This balance may increase with a growing backlog and installed fleet.
- For fiscal year 2018, we forecast capital expenditures in the range of $11.0 to $13.0 million compared to $12.4 million in fiscal year 2017. We have completed the first phase of our project to expand our 65,000 square foot manufacturing facility in Torrington, Connecticut by approximately 102,000 square feet for a total size of 167,000 square feet. Initially, this additional space will be used to enhance and streamline logistics functions through consolidation of satellite warehouse locations and will provide the space needed to reconfigure the existing production process to improve manufacturing efficiencies and realize cost savings. Investments in 2018 include adding module conditioning capacity to our Torrington facility. This is expected to result in logistics and time savings as modules are currently shipped to our Danbury, Connecticut facility for conditioning.

### Cash Flows

Cash and cash equivalents and restricted cash and cash equivalents totaled $105.2 million as of April 30, 2018 compared to $87.4 million as of October 31, 2017. As of April 30, 2018, restricted cash and cash equivalents was $38.2 million, of which $5.2 million was classified as current and $33.0 million was classified as non-current, compared to $38.1 million total restricted cash and cash equivalents as of October 31, 2017, of which $4.6 million was classified as current and $33.5 million was classified as non-current.

The following table summarizes our consolidated cash flows:

*(dollars in thousands)*

| Consolidated Cash Flow Data: | Six Months Ended April 30, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash provided by (used in) operating activities | $41,915 | $(38,575) |
| Net cash used in investing activities | (27,255) | (17,811) |
| Net cash provided by financing activities | 2,992 | 22,241 |
| Effects on cash from changes in foreign currency rates | 87 | (38) |
| Net increase (decrease) in cash, cash equivalents and restricted cash | $17,739 | $(34,183) |

The key components of our cash inflows and outflows were as follows:

***Operating Activities –*** Net cash provided by operating activities was $41.9 million during the six months ended April 30, 2018, compared to $38.6 million of net cash used in operating activities during the six months ended April 30, 2017.

Net cash provided by operating activities for the six months ended April 30, 2018 was primarily the result of decreases in inventory of $31.0 million and accounts receivable of $24.4 million and increases in accounts payable of $3.3 million and deferred revenue of $0.4 million and non-cash adjustments of $5.9 million. Accounts receivable and inventory decreased primarily as a result of cash received and inventory delivered under the HYD contract. The amounts were offset by the net loss of $17.4 million for the six months ended April 30, 2018 and a decrease in accrued liabilities of $4.2 million.

Net cash used in operating activities for the six months ended April 30, 2017 was primarily the result of a net loss of $26.9 million and increases in accounts receivable of $9.0 million and inventory of $1.8 million and decreases in accounts payable of $4.8 million and accrual liabilities of $5.7 million. Inventory increased due to purchase commitments and quarter production offset by usage of inventory. The amounts were offset by non-cash adjustments of $9.5 million.

***Investing Activities –*** Net cash used in investing activities was $27.3 million for the six months ended April 30, 2018, compared to net cash used in investing activities of $17.8 million during the six months ended April 30, 2017.

Net cash used in investing activities for the six months ended April 30, 2018 included a $21.7 million investment in project assets to expand our operating portfolio and $5.5 million for capital expenditures.

Net cash used in investing activities for the six months ended April 30, 2017 resulted from capital expenditures of $8.3 million primarily relating to the Torrington facility expansion and project asset expenditures of $10.2 million to expand our operating portfolio offset by cash received from an asset acquisition of $0.6 million.

***Financing Activities –*** Net cash provided by financing activities was $3.0 million during the six months ended April 30, 2018, compared to net cash provided by financing activities of $22.2 million during the six months ended April 30, 2017.

Net cash provided by financing activities during the six months ended April 30, 2018 resulted from the receipt of $13.1 million from the amended Hercules loan and security agreement and $3.3 million of cash received from warrant exercises offset by cash payments of $10.9 million primarily relating to the repayment obligations under the Hercules loan and the payment of preferred dividends and the return of capital of $2.1 million.

Net cash provided by financing activities during the six months ended April 30, 2017 related to $17.9 million of net proceeds relating to the sale-leaseback transactions with PNC and net proceeds received of $12.8 million from open market sales of common stock offset by the repayment of debt of $6.3 million and the payment of preferred dividends and return of capital of $2.1 million.

### Sources and Uses of Cash and Investments

In order to consistently produce positive cash flow from operations, we need to increase order flow to support higher production levels, leading to lower costs on a per unit basis. We also continue to invest in new product and market development and, as a result, we are not consistently generating positive cash flow from our operations. Our operations are funded primarily through cash generated from product sales, service contracts, generation assets and Advanced Technologies contracts as well as sales of equity and equity linked securities and issuances of corporate and project debt. Please see our Annual Report on Form 10-K for the fiscal year ended October 31, 2017 for further details.

### Commitments and Significant Contractual Obligations

A summary of our significant commitments and contractual obligations as of April 30, 2018 and the related payments by fiscal year are as follows:

*(dollars in thousands)*

|  | Payments Due by Period Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | More than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Purchase commitments (1) | $48,071 | $46,557 | $1,459 | $55 | $— |
| Series 1 Preferred obligation (2) | 5,894 | 973 | 4,921 | — | — |
| Term loans (principal and interest) | 53,759 | 9,533 | 28,150 | 3,939 | 12,137 |
| Capital and operating lease commitments (3) | 5,990 | 985 | 1,051 | 764 | 3,190 |
| Sale-leaseback financing obligation (4) | 22,759 | 3,741 | 6,921 | 4,829 | 7,268 |
| Option fee(5) | 550 | 250 | 300 | — | — |
| Series B Preferred dividends payable (6) | — | — | — | — | — |
| **Totals** | $137,023 | $62,039 | $42,802 | $9,587 | $22,595 |

(1) Purchase commitments with suppliers for materials, supplies and services incurred in the normal course of business.

(2) The terms of the Class A Cumulative Redeemable Exchangeable Preferred Share Agreement (the “Series 1 Preferred Share Agreement”) require payments of (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 will end on December 31, 2020. Dividends accrue at a 1.25 percent quarterly rate on the unpaid principal balance, and additional dividends will accrue on the cumulative unpaid dividends at a rate of 1.25 percent per quarter, compounded quarterly. On December 31, 2020, the amount of all accrued and unpaid dividends on the Series 1 Preferred Shares of Cdn. $21.1 million and the balance of the principal redemption price of Cdn. $4.4 million will be due 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 Series 1 Preferred Share Agreement. For purposes of preparing the above table, the final balance of accrued and unpaid dividends due December 31, 2020 of Cdn. $21.1 million is assumed to be paid in the form of common stock and not included in this table.

(3) Future minimum lease payments on capital and operating leases.

(4) The amount represents payments due on sale-leaseback transactions of our wholly-owned subsidiaries, under their respective financing agreements with PNC. Lease payments under this facility are generally payable in fixed quarterly installments over a ten-year period.

(5) The Company entered into an agreement with a customer on June 29, 2016 that includes a fee for the purchase of the plants at the end of the term of the agreement. The fee is payable in installments over the term of the agreement.

(6) We pay $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 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 the 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 ($141 per share) for 20 trading days during any consecutive 30 trading day period.

In November 2016, the Company’s wholly-owned subsidiary, FuelCell Finance, entered into a membership interest purchase agreement with GW Power LLC (“GWP”) whereby FuelCell Finance purchased all of the outstanding membership interests in New Britain Renewable Energy, LLC (“NBRE”) from GWP. GWP assigned the NBRE interest to FuelCell Finance free and clear of all liens other than a pledge in favor of Webster Bank, National Association (“Webster Bank”). FuelCell Finance assumed the debt outstanding with Webster Bank in the amount of $2.3 million. The term loan interest rate is 5.0% per annum and payments due on a quarterly basis commenced in January 2017. The balance outstanding as of April 30, 2018 was $1.4 million.

In April 2016, the Company entered into a loan and security agreement (the “Hercules Agreement”) with Hercules for an aggregate principal amount of up to $25.0 million, subject to certain terms and conditions. The Company received an initial term loan advance on the date of closing of $15.0 million and an additional $5.0 million in September 2016. The Hercules Agreement was subsequently amended in the fourth fiscal quarter of 2017. The loan was a 30 month secured facility. The term loan interest rate was previously 9.75% per annum and increased to 10.0% per annum during the three months ended January 31, 2018 as a result of the increase in the prime rate. In addition to interest, which is paid on a monthly basis, principal payments commenced on November 1, 2017 in equal monthly installments. The loan balance and all accrued and unpaid interest was due and payable by October 1, 2018. Per the terms of the Hercules Agreement, there was an end of term charge of $1.7 million also due on October 31, 2018 which was being accreted using the effective interest rate method.

On March 28, 2018, the Company and Hercules entered into an amendment to the Hercules Agreement (such amendment, the “Amendment”) which allowed the Company to draw a term loan advance of $13.1 million. The aggregate amount outstanding, which includes the amount outstanding under the original Hercules Agreement of $11.9 million and the term loan advance under the Amendment, is $25.0 million. The term loan maturity date is October 1, 2020, subject to extension upon the Company’s achievement of certain performance milestones. Payments for the aggregate amount outstanding are interest only for the initial 12-month period, followed by equal monthly installments of principal and interest until the term loan maturity date and the term loan interest rate is 10.15% per annum. The end of term charge of $1.7 million remains due on October 31, 2018, however, under the terms of the Amendment, it has been considered earned and has been fully accrued. An additional end of term charge of $0.9 million will be due on October 1, 2020, subject to extension upon the Company’s achievement of certain performance milestones. The end of term charge is being accreted over a 30-month term.

As collateral for obligations under the Hercules Agreement, as amended, the Company granted Hercules a security interest in FuelCell Energy, Inc.’s existing and thereafter-acquired assets except for intellectual property and certain other excluded assets. The collateral does not include assets held by FuelCell Finance or any project subsidiary thereof. The Company may continue to collateralize and finance its project subsidiaries through other lenders and partners. Under the Hercules Agreement, as amended, there is a minimum cash covenant which requires the Company to maintain an unrestricted cash balance in accounts subject to an account control agreement in favor of Hercules of at least the greater of (x) (a) 75% of the outstanding loan balance plus (b) the amount of accounts payable (as defined under GAAP) not paid within 90 days of the invoice date and (y) $10.0 million. The Hercules Agreement, as amended, contains customary representations and warranties, affirmative and negative covenants, and events of default that entitle Hercules to cause our indebtedness under the agreement to become immediately due and payable.

In November 2015, the Company closed on a definitive Assistance Agreement with the State of Connecticut and received a disbursement of $10.0 million which was used for the first phase of the expansion of our Torrington, Connecticut manufacturing facility. In conjunction with this financing, the Company entered into a $10.0 million Promissory Note and related security agreements securing the loan with equipment liens and a mortgage on its Danbury, Connecticut location. Pursuant to the terms of the loan, payment of principal is deferred for the first four years with principal payments beginning in November 2019. Monthly interest payments at a fixed rate of 2.0 percent per annum began in December 2015. The financing is payable over 15 years, and is predicated on certain terms and conditions, including the forgiveness of up to 50 percent of the loan principal if certain job retention and job creation targets are reached. On April 17, 2017, the Company entered into an amendment to the Assistance Agreement extending certain of the job creation target dates until October 28, 2019. In addition, the Company may receive up to $10.0 million of non-refundable transferable tax credits if certain terms and conditions are met.

The second phase of our manufacturing expansion, for which we will be eligible to receive an additional $10.0 million in low-cost financing from the State of Connecticut, will commence as demand supports. This includes adding manufacturing equipment to increase annual capacity from the current 100 MW to at least 200 MW. Plans for this phase also include the installation of a megawatt scale tri-generation fuel cell plant to power and heat the facility as well as provide hydrogen for the manufacturing process of the fuel cell components, and the creation of an Advanced Technologies Center for technology testing and prototype manufacturing. In addition, conditioning facilities which are the final stage of the fuel cell module manufacturing will be relocated to the Torrington facility from its current location at the Danbury, Connecticut headquarters. This is intended to reduce logistics costs. The total cost of both phases of the expansion could be up to $65.0 million over a five year period, including the proposed Advanced Technologies Center and tri-generation fuel cell power plant.

On July 30, 2014, the Company’s subsidiary, FuelCell Finance, entered into a Loan Agreement with NRG (the “NRG Agreement”). Pursuant to the NRG Agreement, NRG has extended a $40.0 million revolving construction and term financing facility to FuelCell Finance for the purpose of accelerating project development by the Company and its subsidiaries. FuelCell Finance and its subsidiaries may draw on the facility to finance the construction of projects through the commercial operating date of the power plants. FuelCell Finance has the option to continue the financing term for each project after the commercial operating date for a maximum term of five years per project. The interest rate is 8.5 percent per annum for construction-period financing and 8.0 percent thereafter. As of April 30, 2018, there was no outstanding balance on this facility.

In March 2013, we closed on a long-term loan agreement with the Clean Energy Finance and Investment Authority, now known as the Connecticut Green Bank, totaling $5.9 million in support of the Bridgeport Fuel Cell Park Project. The loan agreement carries an interest rate of 5.0 percent per annum and principal repayments will commence on the eighth anniversary of the project’s provisional acceptance date which is December 20, 2021. Outstanding amounts are secured by future cash flows from the Bridgeport Fuel Cell Park contracts. The outstanding balance on the Connecticut Green Bank Note as of April 30, 2018 was $6.1 million.

In April 2008, we entered into a 10-year loan agreement with the Connecticut Development Authority allowing for a maximum amount borrowed of $4.0 million. As of April 30, 2018, we had an outstanding balance of $2.3 million on this loan. The interest rate is 5.0 percent per annum. Interest only payments commenced in January 2014 and the loan is collateralized by the assets procured under this loan as well as $4.0 million of additional machinery and equipment. Repayment terms required interest and principal payments through May 2018. However, the repayment terms were modified in April 2018, such that the remaining balance and interest will be paid on a monthly basis through December 2018.

We have pledged approximately $38.2 million of our cash and cash equivalents as performance security and for letters of credit for certain banking requirements and contracts. As of April 30, 2018, outstanding letters of credit totaled $2.3 million. These expire on various dates through April 2019. Under the terms of certain contracts, the Company will provide performance security for future contractual obligations. The restricted cash balance as of April 30, 2018 includes $15.0 million which was placed in a Grantor’s Trust account to secure certain Company obligations under the 15-year service agreement for the Bridgeport Fuel Cell Park Project and is reflected as long-term restricted cash. The restrictions on the $15.0 million will be removed upon completion of the final module exchange at the Bridgeport Fuel Cell Park Project under the terms of the service agreement. The restricted cash balance as of April 30, 2018 also includes $17.2 million to support obligations of the power purchase and service agreements related to the PNC sale-leaseback transactions.

As of October 31, 2017, we had uncertain tax positions aggregating $15.7 million and have reduced our NOL carryforwards by this amount. Because of the level of NOLs and valuation allowances, unrecognized tax benefits, even if not resolved in our favor, would not result in any cash payment or obligation and therefore have not been included in the contractual obligation table under the heading “Commitments and Significant Contractual Obligations.”

In addition to the commitments listed in the table under the heading “Commitments and Significant Contractual Obligations,” we have the following outstanding obligations:

#### Power purchase agreements

Under the terms of our PPAs, customers agree to purchase power from our fuel cell power plants at negotiated rates. Electricity rates are generally a function of the customers’ current and future electricity pricing available from the grid. We are responsible for all operating costs necessary to maintain, monitor and repair our fuel cell power plants. Under certain agreements, we are also responsible for procuring fuel, generally natural gas or biogas, to run our fuel cell power plants. In addition, under certain agreements, we are required to produce minimum amounts of power under our PPAs and we have the right to terminate PPAs by giving written notice to the customer, subject to certain exit costs. As of April 30, 2018, our operating portfolio was 11.2 MW.

#### Service and warranty agreements

We warranty our products for a specific period of time against manufacturing or performance defects. Our standard U.S. warranty period is generally fifteen months after shipment or twelve months after acceptance of the product. In addition to the standard product warranty, we have contracted with certain customers to provide services to ensure the power plants meet minimum operating levels for terms of up to twenty years. Pricing for service contracts is based upon estimates of future costs, which could be materially different from actual expenses. Refer to the Critical Accounting Policies included in our Annual Report on Form 10-K for the year ended October 31, 2017 for additional details.

#### Advanced Technologies contracts

We have contracted with various government agencies and certain companies from private industry to conduct research and development as either a prime contractor or sub-contractor under multi-year, cost-reimbursement and/or cost-share type contracts or cooperative agreements. Cost-share terms require that participating contractors share the total cost of the project based on an agreed upon ratio. In many cases, we are reimbursed only a portion of the costs incurred or to be incurred on the contract. While government research and development contracts may extend for many years, funding is often provided incrementally on a year-by-year basis if contract terms are met and Congress authorizes the funds. As of April 30, 2018, Advanced Technologies contracts backlog totaled $39.4 million, of which $19.6 million is funded. Should funding be delayed or if business initiatives change, we may choose to devote resources to other activities, including internally funded research and development.

#### Off-Balance Sheet Arrangements

We have no off-balance sheet debt or similar obligations, other than operating leases, which are not classified as debt. We do not guarantee any third-party debt. See Note 17 “Commitments and Contingencies” to our consolidated financial statements for the six months ended April 30, 2018 included in this Quarterly Report on Form 10-Q for further information.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures 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. Actual results could differ from those estimates. Estimates are used in accounting for, among other things, revenue recognition, contract loss accruals, excess, slow-moving and obsolete inventories, product warranty accruals, loss accruals on service agreements, share-based compensation expense, allowance for doubtful accounts, depreciation and amortization, impairment of goodwill and in-process research and development intangible asset, impairment of long-lived assets (including project assets) 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.

Our critical accounting policies are those that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a complete description of our critical accounting policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended October 31, 2017 filed with the Securities and Exchange Commission.

There have been no material changes in any of our critical accounting policies during the three and six months ended April 30, 2018.

### ACCOUNTING GUIDANCE UPDATE

See Note 2, “Recent Accounting Pronouncements,” to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a summary of recent accounting guidance that is not yet effective.

## Market risk

As filed, 2,319 characters.

### Interest Rate Exposure

Cash is invested overnight with high credit quality financial institutions and therefore we are not exposed to market risk on our cash holdings from changing interest rates. Based on our overall interest rate exposure as of April 30, 2018, including all interest rate sensitive instruments, a change in interest rates of 1% would not have a material impact on our results of operations.

### Foreign Currency Exchange Risk

As of April 30, 2018, approximately 4% of our total cash and cash equivalents and investments were in currencies other than U.S. dollars (primarily the Euro, Canadian dollars and South Korean Won) and we have no plans of repatriation. The Company had sales and accounts receivable denominated in foreign currencies and had outstanding accounts receivable denominated in foreign currencies as of April 30, 2018. We make purchases from certain vendors in currencies other than U.S. dollars. Although we have not experienced significant foreign exchange rate losses to date, we may in the future, especially to the extent that we do not engage in currency hedging activities. The economic impact of currency exchange rate movements on our operating results is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, may cause us to adjust our financing and operating strategies.

### Derivative Fair Value Exposure

#### Series 1 Preferred Shares

The conversion feature and the variable dividend obligation of our Series 1 Preferred Shares are embedded derivatives that require bifurcation from the host contract. The aggregate fair value of these derivatives included within long-term debt and other liabilities as of April 30, 2018 and October 31, 2017 was $0.8 million. The fair value was based on valuation models using various assumptions, including historical stock price volatility, risk-free interest rate and a credit spread based on the yield indexes of technology high yield bonds, foreign exchange volatility as the Series 1 Preferred Shares are denominated in Canadian dollars, and the closing price of our common stock. Changes in any of these assumptions would change the underlying fair value with a corresponding charge or credit to operations.

## Controls and procedures

As filed, 1,642 characters.

The Company maintains disclosure controls and procedures, which are designed to provide reasonable assurance that information required to be disclosed in the Company’s periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal controls over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 741 characters.

Part I, Item 1A, “Risk Factors” of our most recently filed Annual Report on Form 10-K for the fiscal year ended October 31, 2017, filed with the Securities and Exchange Commission on January 11, 2018, sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition and operating results. There have been no material changes to our risk factors disclosed in our most recently filed Annual Report on Form 10-K. Those risk factors continue to be relevant to an understanding of our business, financial condition and operating results and, accordingly, you should review and consider such risk factors in making any investment decision with respect to our securities.

Filed Jun 7, 2018.
Source: SEC EDGAR, the filing index for accession 0001564590-18-015202. Last ingested by Listed: Oct 30, 2026, 17:33 ET. No prices; not investment advice.