Capital Cost - Capital costs of our ~~business, from engineering, procurement~~projects include cost to manufacture, install, interconnect, and ~~manufacturing through installation~~to provide any on-site application requirements such as configuring for a micro-grid and/or heating and ~~services. Close coordination with customers, suppliers and partners are key elements of the program. Since they were first commercialized in 2003, we~~cooling applications. We have reduced the product cost of our megawatt-class power plants by more than ~~60 percent.~~

~~Customer Satisfaction~~ is60% from the first commercial installation in 2003 through our ~~Strategic Priority aimed at ensuring that our customers are delighted with the performance~~ongoing product cost reduction program, which involves every aspect of our ~~products~~business including engineering, procurement and the ongoing services we provide. We have executed long-term service agreements with primarily all of our customers. These service agreements help us partner more closely with customers to deliver the value they expect and they create opportunities for us to provide additional services. Service agreements generate predictable and stable recurring revenue; as our installed base continues to grow they will generate sustainable revenue and contribute to profitability.

In December, 2012, the Company acquired Versa Power Systems, Inc. (Versa), a leading global developer of solid oxide fuel cell technology (SOFC). Prior to this action, we owned approximately 39 percent of Versa Power and partnered with Versa under the U.S. Department of Energy Solid State Energy Conversion Alliance (SECA) coal-based systems program. Under this program, we are currently testing a 60 kilowatt SOFC stack at our Danbury, Connecticut facility with expectations to demonstrate a 250 kW SOFC power plant should certain performance milestones be reached. The Versa SOFC technology is incorporated in programs involving a broad range of leading global companies including the Boeing Company. The potential market opportunity for the SOFC technology is with sub-megawatt applications for customers that need on-site power generation in either combined heat and power or electric-only configurations. The DFC® product line utilizes carbonate technology and is well-suited for the megawatt class market as the technology and the economics scale very well with greater size. SOFC technology is complementary and will target adjacent market opportunities in the sub-megawatt market, such as commercial buildings and high rise residential complexes. FuelCell Energy is currently in discussion with several potential global partners to commercialize the SOFC technology.

~~The transaction resulted in the Company exchanging approximately 3.5 million shares of its common stock for the remaining 61% of outstanding Versa shares held by the four Versa shareholders.~~

Versa's primary sources of revenue are from research contracts with the U.S. Department of Energy Solid State Energy Conversion Alliance (SECA) coal-based systems program and a research contract with The Boeing Company. Revenue and associated costsmanufacturing. Further cost reductions will be ~~recognized under Research~~primarily obtained from reducing the per-unit cost of materials purchasing from higher volumes, supported by continued actions with engineering and ~~development contracts in the consolidated financial statements of FuelCell Energy, Inc.~~

manufacturing cost reductions. We ~~intend to collaborate with a partner or multiple partners to commercialize the SOFC technology.~~recently

Versa has research facilities in Littleton, Colorado, USA and Calgary, Canada with 41 employees. Both facilities are leased. Research and development is being closely coordinated with existing FuelCell Energy research and development resources in Danbury, Connecticut, USA and administrative functions have been assumed by existing resources at FuelCell Energy facilities in Connecticut.

~~Manufacturing~~

~~Manufacturing Process~~

We have a 65,000 square-foot manufacturing facility in Torrington, Connecticut where we produce the DFC cell packages which are assembled into modules. The completed modules are then transported to our test and conditioning facilities in Danbury, Connecticut for the final step in the manufacturing process and then shipped to customer sites. For the South Korean marketplace, the DFC components are currently manufactured in the USA and then shipped to South Korea for local stacking and conditioning.

Our South Korean partner, POSCO, is developing a local manufacturing facility with capacity up to 140 megawatts of carbonate fuel cell components. Production is expected to begin in early 2015 at a level of up to 70 megawatts with production increasing thereafter as demand supports.

We have a 20,000 square-foot manufacturing facility in Ottobrun, Germany that has the capability to produce up to 30 megawatts per year of sub-megawatt DFC power plants. The facility will become operational as demand for DFC plants in Europe supports.

1511

integrated a global supply chain with our Asian partner, POSCO Energy so as Asian production leads to increased levels of purchasing from the integrated global supply chain, both FuelCell Energy and POSCO Energy will benefit with reductions in LCOE by obtaining lower pricing tiers from suppliers from the greater combined purchasing volume. On-site, our experienced Engineering, Procurement and Construction (“EPC”) team has substantial experience in working with contractors and local utilities to safely and efficiently execute our projects and we expect continued cost reduction in this area with experience and continued transition to multi-MW fuel cell parks. In addition to these cost reduction efforts, our technology roadmap includes plans to increase the output of our power plants which will add further value for our customers and reduce LCOE.

Operations and Maintenance - We provide services to remotely monitor, operate, and maintain customer power plants to meet specified performance levels. Operations and maintenance (O&M) is a key driver for power plants to deliver on projected electrical output and revenues for our customers. Many of our service agreements include guarantees for system performance levels including electrical output. While the electrical and mechanical balance of plant (BOP) in our DFC power plants is designed to last over 25 years, the fuel cell modules are currently scheduled for replacement every five years, the price of which is included in our service agreements. Customers benefit from predictable savings and financial returns over the life of the contract and minimal risk. Our goal is to optimize our customers’ power plants to meet expected operating parameters throughout the plant’s operational life. We expect to continually drive down the cost of O&M with an expanding fleet which will leverage our investments in this area. Additionally, we are actively developing fuel cells that have a longer life which will reduce O&M costs by increasing our scheduled module replacement period to seven years.

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Fuel - Our fuel cells directly convert chemical energy (fuel) into electricity, heat, water and in certain configurations, other value streams such as high purity hydrogen. Because fuel cells generate power electrochemically rather than by combusting (burning) fuels, they are more efficient in extracting energy from fuels and produce less carbon dioxide (CO₂) and only trace levels of pollutants compared to combustion-type power generation. Our power plants operate on a variety of existing and readily available fuels including natural gas, renewable biogas, directed biogas and propane. Our core DFC power plants deliver electrical efficiencies of 47% and hybrid applications and advanced configurations are capable of delivering electrical efficiencies of 60% or greater. In a CHP configuration, our plants can deliver up to 90% total system efficiency, depending on the application. Increasing electrical efficiency and reducing fuel costs is a key element of our operating cost reduction efforts.

Cost of Capital - Most of our MW scale projects are financed either by the off-taker that owns the asset or a project investor that owns the asset and sells energy to the off-taker. Other ownership models include utility ownership where the fuel cell project is added to the utility rate-base, direct ownership by the end-user of the power, or we hold a project that we developed, retaining the revenue and associated margins from the sale of power and heat. We are witnessing greater interest in the pay-as-you-go approach by end users that prefer to avoid the up-front investment in power generation assets. Our ability to provide the end-user with financing options or to retain projects that we develop helps to accelerate order flow. Our projects create predictable recurring revenue that is not dependent on weather or time of the day, investment tax credits, accelerated tax depreciation or other incentives. Credit risk is mitigated by contracting with customers with strong credit. In addition, we offer meaningful system-level output performance guarantees over the life of our projects. As a result, cost of capital for our projects has declined over time given our operating experience. With continued execution, we expect our ability to attract bank credit, financial and project performance credibility to continue to improve which we expect will lead to further decreases in financing costs.

Today, on an unsubsidized basis, our LCOE is approximately $0.12/kWh with natural gas at $4.50MMBtu or $0.11/kWh at $2.50/MMBtu; each $2/MMBtu change equates to about $0.01/kWh. When combined with incentives, this price is competitive in our target markets and creates an attractive value proposition for our customers. The LCOE is approximately 1/3 fuel costs, 1/3 for both cost of capital and capital costs, and 1/3 for operations and maintenance. As a result of our cost reduction and growth strategies, we are working to reduce our LCOE without incentives to $0.09-$0.11/kWh when the combined global production volume reaches 210 MW annually, assuming natural gas prices of $4.00 to $6.00 per million Btu. We expect LCOE reductions to be similar on a percentage basis in Europe and Asia. A LCOE in the range of $0.09-$0.11/kWh will enable pricing below the electric grid without incentives, which we expect will accelerate adoption and broaden potential target markets.

Our core fuel cell platform is versatile and part of our strategy is finding new applications for our power generation solution. Advanced Technology Programs, discussed in a following section, identifies and obtains private and government funding sources to commercialize new applications of the power plants, such as distributed hydrogen and carbon capture. Energy storage applications are also being pursued utilizing both carbonate and solid oxide fuel cell technology.

Products

Our core fuel cell products (Direct FuelCell^® or DFC^® power plants) offer ultra-clean, highly efficient power generation for customers including the 2.8 MW DFC3000^®, the 1.4 MW DFC1500^® and the 300 kW DFC300^® plus derivations of this core DFC product for specific applications. The plants are scalable for multi-megawatt utility scale applications or on-site CHP generation for a broad range of applications. We can provide a comprehensive and complete turn-key fuel cell project that includes project development, engineering procurement and construction (EPC) services, O&M and project finance.

Our proprietary DFC technology generates electricity directly from a fuel, such as natural gas or renewable biogas, by reforming the fuel inside the fuel cell to produce hydrogen, which is why it is called a Direct FuelCell. This “one-step” reforming process results in a simpler, more efficient, and cost-effective energy conversion system compared with external reforming fuel cells. Additionally, natural gas has an established infrastructure and is readily available in our existing and target markets. The Direct FuelCell operates at approximately 1,200° Fahrenheit. An advantage of high temperature fuel cells is that they do not require the use of precious metal electrodes required by lower temperature fuel cells, such as proton exchange membrane (PEM) and phosphoric acid. As a result, we are able to use less expensive and readily available industrial metals as catalysts for our fuel cell components. In addition, our DFC fuel cell produces high quality byproduct heat (700°F) that can be utilized for CHP applications using hot water, steam or chiller water for facility heating and cooling.

The DFC product line is a global platform based on carbonate fuel cell technology. Utilizing a standard design globally enables volume-based cost reduction and optimal resource utilization. Our power plants utilize a variety of available fuels to produce electricity electrochemically, in a process that is highly efficient, quiet, and due to the avoidance of combustion, produces virtually no pollutants. Thus, our plants generate more power and fewer emissions for a given unit of fuel than combustion-based power generation of a similar size, making them economical and environmentally responsible power generation solutions. In addition to electricity, our standard configuration produces high quality heat, suitable for making steam or hot water for facility use as well as absorption cooling. System efficiencies can reach up to 90%, depending on the application, when configured for CHP.

We market different configurations of the DFC plants to meet specific market needs, including:

On-Site Power (Behind the Meter): Customers benefit from improved power reliability and energy security from on-site power that reduces reliance on the electric grid. Utilization of the high quality heat produced by the fuel cell in a CHP configuration supports economics and sustainability goals by lessening or even avoiding the need for combustion-based boilers for heat and their associated cost, pollutants and carbon emissions. On-site CHP power projects generally range in size from a single 1.4 MW DFC1500 to combining multiple 2.8 MW DRC3000 power plants for projects up to about 14 MW in size.

Utility Grid Support: The DFC power plants are scalable, which enables siting multiple fuel cell power plants together in a fuel cell park. Fuel cell parks enable utilities to add clean and continuous power generation when and where needed and enhance the resiliency of the electric grid by reducing reliance on large central generation plants and the associated transmission grid. Consolidating certain steps for multiple plants, such as fuel processing, reduces the cost per megawatt hour for fuel cell parks compared to individual fuel cell power plants. Fuel cell park examples include a five plant, 14.9 MW fuel cell park in Bridgeport, Connecticut that is supplying the electric grid, and multiple fuel cell parks in South Korea in excess of 10 megawatts each that supply power to the electric grid and high quality heat to district heating systems, such as a 59 MW installation which is consisting of 21 power plants, the world’s largest. By producing power near the point of use, our fuel cells help to ease congestion of the electric grid and can also enable the smart grid via distributed generation combined with the continuous monitoring and operation by our service organization. Thus, our solutions can avoid or reduce investment in new central generation and transmission infrastructure which is costly, difficult to site and expensive to maintain. Deploying our DFC power plants throughout a utility service territory can also help utilities comply with government-mandated clean energy regulations and meet air quality standards. A 10 MW fuel cell park only requires about one acre of land whereas an equivalent size solar array requires up to ten times as much land, illustrating how fuel cell parks are easy to site in high density areas with constrained land resources, and adjacent to the demand source thereby avoiding costly transmission construction. Our products can be part of a total on-site power generation solution with our high efficiency products providing continuous power, and can be combined with intermittent power generation, such as solar or wind, or less efficient combustion-based equipment that provides peaking or load following power. The DFC plants can also be configured as a micro-grid, either independently or with other forms of power generation. We possess the capabilities to model, design and operate the micro grid and have multiple examples of our DFC plants operating within micro-grids, some individually and some with other forms of power generation.

Higher Electrical Efficiency - Multi-megawatt applications: The HEFC™ (High Efficiency Fuel Cell) system is configured with a series of three fuel cell modules that operate in sequence, yielding a higher electrical efficiency than the standard DFC3000 configuration of two fuel cell modules operating in parallel. The heat energy and unused hydrogen from two fuel cell modules is supplied to the third module, along with some natural gas to generate additional electricity. The HEFC

configuration is designed to extract more electrical power from each unit of fuel with electrical efficiency of approximately 60%. The HEFC system is targeted at applications with large load requirements and limited waste heat utilization such as utility/grid support or data centers.

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Gas Pipeline Applications: DFC-ERG® (Direct FuelCell Energy Recovery Generation^TM) (DFC-ERG) power plants are used in natural gas pipeline applications, harnessing energy that is otherwise lost during the station’s natural gas pressure-reduction (“letdown”) process. Also, thermal energy produced as a byproduct of the fuel cell’s operation supports the letdown process, improving the station’s carbon footprint and enhancing the project’s economics. Depending on the specific gas flows and application, the DFC-ERG configuration is capable of achieving electrical efficiencies up to 70%. A 3.4 megawatt DFC-ERG system is being installed in Connecticut, purchased by UIL Holdings.

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Carbon Capture: The DFC carbon capture system separates CO₂ from the flue gases of natural gas or coal-fired power plants or industrial facilities while producing ultra-clean power. Exhaust flue gas from the coal/gas plant is supplied to the cathode side of the fuel cell, instead of ambient air. The CO₂ in the exhaust is transferred to the anode side of the fuel cell, where it is much more concentrated and easy to separate. The CO₂ from the anode exhaust stream is liquefied using common chilling equipment. The purified CO₂ is then available for enhanced oil recovery, industrial applications or sequestration. Carbon concentration and capture within the carbonate fuel cell is a side reaction of the natural gas-fueled power generation process. Carbon capture systems can be implemented in increments, starting with as little as 5% capture with no appreciable change in the cost of power and with minimum capital outlay. Our solution generates a return on capital resulting from the fuel cell's production of electricity rather than increase in operating expense required by other carbon capture technologies, and can extend the life of existing coal-fired power plants, enabling low carbon utilization of domestic coal and gas resources. We are currently evaluating sites with coal plant operators for the first installation of a carbon capture configured DFC3000 power plant, which will be partially funded by the US Department of Energy under an award received in September of this year.

Distributed Hydrogen: The DFC fuel cells internally reform the fuel source (i.e. natural gas or biogas) to obtain hydrogen. DFC plants can be configured for tri-generation, supplying power, heat and high purity hydrogen. Power output is modestly reduced to support hydrogen generation that can then be used for industrial applications such as metal or glass processing, material handling applications or petrochemicals, or transportation applications. Siting the tri-generation fuel cell plant at a source of biogas such as wastewater treatment facilities, results in renewable hydrogen for transportation, an attractive proposition to regulatory and legislative officials and car companies. After operating two sub-megawatt systems - one for renewable vehicle fueling and one producing industrial hydrogen for our Torrington facility - we are now evaluating a variety of possible sites for the first commercial MW-scale application of the technology.

We are offering a dispatchability option for utility-scale applications where some degree of power production cycling is valued on a pre-determined schedule to accommodate periods of lower power demand. Our power plants can also provide reactive power avoiding the need for separate static or dynamic VAR (volt-ampere reactive) compensation systems.

In summary, our solutions offer many advantages:

Distributed generation: Generating power near the point of use improves power reliability and energy security and lessens the need for costly and difficult-to-site generation and transmission infrastructure, enhancing the resiliency of the grid.

Ultra-clean: Our DFC power plants produce electricity electrochemically − without combustion − directly from readily available fuels such as natural gas and renewable biogas in a highly efficient process. The virtual absence of pollutants facilitates siting the power plants in regions with clean air permitting regulations and is an important public health benefit.

High efficiency: Fuel cells are the most efficient power generation option in their size class, providing the most power from a given unit of fuel, reducing fuel costs. This high electrical efficiency also reduces carbon emissions compared to less efficient combustion-based power generation.

Combined heat and power: Our power plants provide both electricity and usable high quality heat/steam from the same unit of fuel. The heat can be used for facility heating and cooling or further enhancing the electrical efficiency of the power plant in a combined cycle configuration. When used in CHP configurations, system efficiencies can reach up to 90%, depending on the application.

Reliability / continuous operation: Our DFC power plants improve power reliability and energy security by lessening reliance on transmission and distribution infrastructure of the electric grid. Unlike solar and wind power, fuel cells are able to operate continuously regardless of weather or time of day.

Fuel flexibility: Our DFC power plants operate on a variety of existing and readily available fuels including natural gas, renewable biogas, directed biogas and propane.

Scalability: Our DFC power plants are scalable, providing a cost-effective solution to adding power incrementally as demand grows, such as multi-megawatt fuel cell parks supporting the electric grid.

Quiet operation: Because they produce power without combustion and contain very few moving parts, our DFC power plants operate quietly and without vibrations.

Easy to site: Our DFC power plants are relatively easy to site by virtue of their ultra-clean emissions profile, modest space requirements and quiet operation. Space requirements are about one tenth of the land required for a solar array offering a

similar rated output. These characteristics facilitate the installation of the power plants in urban locations with scarce and expensive land.

DFC Emissions Profile

Fuel cells are devices that directly convert chemical energy (fuel) into electricity, heat and water. Because fuel cells generate power electrochemically rather than by combusting (burning) fuels, they are more efficient in extracting energy from fuels and produce less carbon dioxide (CO₂) and only trace levels of pollutants compared to combustion-type power generation. The following table illustrates the favorable emission profile of our DFC and high efficiency power plants:



	Emissions (Lbs. Per MWh)
	NO_X	SO₂	PM₁₀	CO₂	CO₂withCHP
Average U.S. Fossil Fuel Plant	5.06	11.6	0.27	2,031	NA
Microturbine (60 kW)	0.44	0.008	0.09	1,596	520 - 680
Small Gas Turbine	1.15	0.008	0.08	1,494	520 - 680
DFC^® Power Plant	0.01	0.0001	0.00002	940	520 - 680
HEFC^TM High Efficiency Fuel Cell Plant	0.01	0.0001	0.00002	740	520 - 680

For power plants operating on natural gas, higher fuel efficiency results in lower CO₂, and also results in less fuel needed per kWh of electricity generated and Btu of heat produced. The high efficiency of our products results in significantly less CO₂ per unit of power production compared to the average U.S. fossil fuel power plant, and the carbon emissions are reduced even further when configured for combined heat and power. When operating on renewable biogas, government agencies and regulatory bodies generally classify our power plants as carbon neutral due to the renewable nature of the fuel source.

High electrical efficiency reduces customers' exposure to volatile fuel costs, minimizes operating costs, and provides maximum electrical output from a finite fuel source. Our power plants achieve electrical efficiencies of 47% to 60% or higher depending on configuration, location, and application, and up to 90% total efficiency in a CHP configuration, depending on the application. The electric grid in the United States is only approximately 36% electrically efficient and does not support CHP configurations.

Manufacturing

We design and manufacture the core DFC fuel cell ~~components.~~components that are stacked on top of each other to build a fuel cell stack. For MW size power plants, four fuel cell stacks are combined to build a fuel cell module. To complete the power plant, the fuel cell module or modules are combined with the BOP. The ~~Balance of Plant (BOP)~~mechanical BOP 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 BOP processes the power generated for use by the customer and includes electrical interface equipment such as an inverter. The BOP components are either purchased directly from suppliers or the manufacturing is outsourced based on our designs and specifications. This strategy allows us to leverage our manufacturing capacity, focusing on the critical aspects of the power plant where we have specialized knowledge and expertise. ~~Localizing the BOP ensures designs meet local power needs, minimizes our inventory investment, reduces shipping costs and offers the potential for partners to manufacture BOP and create local jobs.~~ BOP components are shipped directly to a customer's site and are assembled with the fuel cell module into a complete power plant.

~~Capacity~~Cell Manufacturing and ~~Production Increase~~Capacity

Our strategy is to produce power for prices that are below typical grid prices. Without incentives, annual global production of approximately 210 MW will provide the needed cost reductions to support these price targets. Higher purchasing volume reduces the per unit cost of raw materials and componentry. As explained below, the North American production facility has an annual capacity of 100 MW with an expansion underway, and the Asian manufacturing, owned and operated by our partner, POSCO Energy, has 100 MW of annual capacity in a building that is sized for 200 MW annually. Our global cell manufacturing capabilities are described below:

North America: We operate a 65,000 square-foot manufacturing facility in Torrington, Connecticut where we produce the DFC cell packages and assemble the fuel cell modules. The completed modules are then conditioned at our facility in Danbury, Connecticut for the final step in the manufacturing process and shipped to customer sites. Our overall DFC manufacturing process in ~~the USA~~North America (module manufacturing, final assembly, testing and conditioning) has a production capacity of ~~up to 90~~100 MW per year, with full utilization under its current configuration. ~~In conjunction~~

We are undertaking a multi-year project to reduce costs and position ourselves for future growth in two phases. The first phase is underway to add a 102,000 square foot addition of our North American manufacturing facility. The building expansion will

allow for consolidation of warehousing and service facilities enabling manufacturing efficiencies by providing the needed space to re-configure production. The fuel cell module conditioning process will be moved to Torrington from Danbury, for example. As demand supports, the second phase will involve the addition of manufacturing equipment to increase annual capacity to at least 200 megawatts. The State of Connecticut is extending two low interest long term loans to us for each of the two phases and up to $10 million of tax credits. Each loan is $10 million, with an interest rate of 2.0% and a term of 15 years. Up to 50% of the ~~2012 license agreement~~principal is forgivable if certain job creation and retention targets are met.

The Torrington production facility, the Danbury corporate headquarters and research and development, and Field Service are ISO 9001:2008 certified, reinforcing the tenets of the FuelCell Energy Quality Management System and our core values of continual improvement and commitment to quality.

South Korea: Given the strong demand in Asia, POSCO ~~began designing and will construct~~Energy built a cell manufacturing facility in ~~South~~Pohang, Korea and the facility became operational in late 2015. Annual production capacity ~~capable of producing~~is 100 MW and the building is sized to accommodate up to ~~140~~200 MW of ~~product annually for sale~~annual production to support future growth in the Asian market.

If demand develops beyond the combined capacity of the Company and POSCO, we have the ability to further expand production capacity at our Torrington facility to approximately 150 MW. This expansion would require the addition of equipment (e.g. furnaces, tape casting and other equipment) to increase the capacity of certain manufacturing 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 an expansion of the Company's Torrington facility to 150 MW would require additional capital investments of $30 to $40 million, although this expansion may occur in stages depending on the level of market demand. We currently do not have plans to expand this facility.

InAdditionally, under a multi-year order that began in 2012 ~~POSCO placed~~and concludes at the end of 2016, DFC components are manufactured in the USA and then shipped to South Korea for assembly of modules and conditioning.

Europe: We have a ~~121.8~~20,000 square-foot manufacturing facility in Taufkirchen, Germany that has the capability to perform final module assembly for up to 20 MW ~~order with monthly delivery~~per year of ~~DFC~~sub-megawatt fuel cell ~~kits through October 2016. This order provides a base level of production~~power plants for ~~raw materials purchases and other operational considerations for a four-year period and is helping to further reduce costs through manufacturing and purchasing efficiencies.~~the European market.

Raw Materials and Supplier Relationships

We use various commercially available raw materials and components to construct a fuel cell module, including nickel and stainless steel, which are ~~critical~~key inputs to our manufacturing process. Our fuel cell stack raw materials are sourced from multiple vendors and are not considered precious metals. We have a global integrated supply chain that serves North American, European, and Asian production facilities. In addition to manufacturing the fuel cell module in our Torrington facility, the electrical and mechanical BOP are assembled by and procured from several suppliers. All of our suppliers must undergo a qualification process. We continually evaluate new suppliers and are currently qualifying several new suppliers. We purchase mechanical and electrical balance of plant componentry from third party vendors, based on our own proprietary designs.

~~Advanced Technology Programs (Third Party Funded Research~~Product Cost Reduction

Our overall cost reduction strategy is based on the assumption that continued increases in production will result in further economies of scale, reducing the per-unit cost of the raw materials and ~~Development)~~

componentry we purchase. In addition, our cost reduction strategy relies on implementation of further advancements in our manufacturing process, global competitive sourcing integrated with POSCO sourcing volumes, engineering design and technology improvements (including modules with longer life and increased module power output). We ~~perform both public and privately -funded research and development~~have a broad range of initiatives to ~~expand the markets for our DFC power plants,~~ reduce costs and ~~expand~~improve our ~~technology portfolio~~overall project affordability.

Improvements in ~~complementary high-temperature fuel cell systems. This research builds on the versatility~~affordability, driven by product cost reductions, are critical for us to accelerate market adoption of our fuel cell products and attain company 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 ~~plants~~ and contributes to the development of potentially new end markets. Our power plants provide various value streams including clean electricity, high quality usable heat and hydrogen, suitable for vehicle fueling or industrial purposes. Our Advanced Technology Programs are focused on three strategic areas that have strong prospects for commercialization within a reasonable timeframe: solid oxide fuel cell (SOFC) development and commercialization, hydrogen production, compression and storage, and carbon capture.other distributed generation technologies.

~~The revenue~~We have reduced the product cost of our megawatt-class power plants by more than 60% from the first commercial installation in 2003 through engineering redesign, sourcing, and ~~associated~~improved power output and module life. Growing purchasing volume has reduced costs and strengthened the supply chain by enabling direct purchasing rather than through distributors and the ability to access stronger national and international suppliers rather than small local or regional fabricators. Once POSCO’s Asian manufacturing facility is operational, we expect that increased levels of purchasing from government and third party sponsored research and development is classified as Revenue of research and development contracts and Cost of research and development contracts, respectively, in our consolidated financial statements.the integrated global supply chain, whether by POSCO Energy or the Company, will benefit both parties by obtaining lower pricing tiers from suppliers from the greater combined purchasing volume.

~~Since 1975, we have worked~~Engineering, Procurement and Construction

We provide customers with ~~various U.S. government departments and agencies,~~complete turn-key solutions including the ~~Department~~development, engineering, procurement, construction, operations and interconnection for our fuel cell projects. From an Engineering, Procurement and Construction (EPC) standpoint, FCE has an extensive history of ~~Energy (DOE),~~safe and timely delivery of turnkey projects. We have developed relationships with many design firms and licensed general contractors and have a repeatable, safe, and efficient execution philosophy that has been successfully demonstrated multiple times in many different U.S. states and some European countries with an exemplary safety record. The ability to rapidly and safely execute installations minimizes high cost construction period financing and can assist customers in certain situations when the Department of Defense (DOD), the Environmental Protection Agency (EPA), the Defense Advanced Research Projects Agency (DARPA), Office of Naval Research (ONR), and the National Aeronautics and Space Administration (NASA) on technology development. Government funding, principally from the DOE, provided 6 percent, 6 percent, and 15 percent of our revenue for the fiscal years ended 2012, 2011, and 2010, respectively.commercial operating date is time sensitive.

~~Significant research and development programs on which we are currently working include:~~

~~Solid oxide fuel cell (SOFC) development and commercialization~~; We have been a prime contractor in the DOE's Solid State Energy Conversion Alliance (“SECA”) since 2003 and are currently participating in Phase III of the Large Scale Hybrid Program. The goal of this cost-share program is to develop a multi-megawatt, highly efficient, central generation SOFC power plant operating

on coal synthesis gas. We are currently in Phase III of the program and the objective for this phase is to operate an SOFC module with output of 60 kW. This will accelerate the development of affordable SOFC modules with enhanced performance and endurance. The 60 kW SOFC module is currently operating at our facility in Danbury, Connecticut.

We were awarded a $3.8 million contract by the U.S. Navy Office of Naval Research (ONR) to develop and test a Hybrid SOFC-Battery power system for large displacement undersea vehicle propulsion. The objective of the project is to develop a refuelable power system, with high energy density, that is suitable for undertaking long duration underwater missions of unmanned submersibles. The Hybrid SOFC-Battery system will be capable of generating 1,800 kilowatt hours of electricity during a 70 day mission with no exhaust discharged outside of the vehicle at any time. It will use liquid fuel and be self-contained with no reliance on external air.

Versa is a supplier to The Boeing Co. under a U.S. Defense Advanced Research Projects Agency (DARPA) program to develop and fly a very long endurance unmanned aircraft. Versa's specialized solid state SOFC technology is paired with solar equipment to provide an on-board source of power for propulsion and communication equipment.

~~Hydrogen production, compression and storage -~~ Our high temperature DFC power plant generates electricity directly from a fuel by reforming the fuel inside the fuel cell to supply hydrogen for the electrical generation process. We capture the excess hydrogen that is not used in the electrical generation process. Gas separation technology can then be added to capture hydrogen that is not used by the electrical generation process, and we term this configuration DFC-H2. This value-added proposition may be compelling for industrial users of hydrogen or for vehicle fueling. A DFC300-H2 power plant has been operating for over one year at the Orange County Wastewater Treatment Facility in Irvine, California to supply 1) hydrogen for use in fuel cell vehicle fueling, 2) clean renewable electricity, and 3) high quality heat for the wastewater treatment process. The demonstration is being performed under sub-contract to Air Products (NYSE: APD) with the majority of funding provided by the DOE.

~~Carbon Capture~~ - Coal is an abundant, low cost, domestic resource which is widely used to generate electricity, but with a significant carbon footprint. Cost effective and efficient carbon capture from coal-fired power plants potentially represents a large global market because it could enable clean use of this domestic fuel. Our carbonate fuel cell technology separates and concentrates carbon dioxide (CO₂~~) as a side reaction during the power generation process. DFC carbon capture research conducted by us has demonstrated that this is a viable technology for the efficient separation of CO~~₂~~. We are currently in the second phase of a DOE program to evaluate the use of Direct FuelCell technology to efficiently and cost effectively separate CO~~₂ ~~from the emissions of existing coal fired power plants and industrial flue gases.~~

~~Research and Development (Company Funded Research and Development)~~

In addition to research and development performed under government contracts, we also fund our own research and development projects including extending module life, increasing the power output of our modules and reducing the cost of our products. Initiatives include increasing the power output of the fuel cell stacks to 375 kW from 350 kW currently, and extending the stack life to seven years from five years currently. Greater power output and improved longevity will lead to improved profitability on a unit basis for each power plant sold and improved profitability of service contracts, which will support expanding margins for the Company. Company-funded research and development is included in research and development expenses (operating expenses) in our consolidated financial statements.

~~The total research and development expenditures in the consolidated statement of operations including third party and company funded are as follows:~~

Years Ended
October 31,
2012 2011 2012
Research and development contracts $ 7,237
$ 7,830
$ 10,370
Cost of research and development contracts 14,354
16,768
18,562
Total research and development $ 21,591
$ 24,598
$ 28,932

~~Competition~~

The electric generation market is competitive with continually evolving participants. Our DFC power plants compete in the marketplace for distributed generation. In addition to different types of stationary fuel cells, some other technologies that compete in this marketplace include micro-turbines and reciprocating gas engines.

Several companies in the U.S. are engaged in fuel cell development, although we believe we are the only domestic company engaged in significant manufacturing and commercialization of stationary carbonate fuel cells. Emerging fuel cell technologies (and the companies developing them) include PEM fuel cells (Ballard Power Systems, Plug Power and ClearEdge Power), phosphoric acid fuel cells (UTC Power/ClearEdge Power) and solid oxide fuel cells (Delphi, Rolls Royce, Bloom Energy, and Acumentrics). Each of these competitors has the potential to capture market share in our target markets.

There are other potential fuel cell competitors internationally. In Japan, Fuji Electric has been involved with both PEM and phosphoric acid fuel cells. In Korea, Doosan Corporation is engaged in carbonate fuel cell development and LG Electronics is engaged in SOFC development with its partner, Rolls Royce. In the United Kingdom, AFC Energy is engaged in alkaline fuel cell development. In Germany and Austria, Ceramic Fuel Cells is engaged in PEM fuel cell development for micro-CHP applications.

Other than fuel cell developers, we also compete with companies such as Caterpillar, Cummins, Wartsilla, MTU Friedrichshafen GmbH (MTU), Mitsubishi Heavy Industries and Detroit Diesel, which manufacture more mature combustion-based distributed power generation equipment, including various engines and turbines, and have well-established manufacturing and distribution operations along with product operating and cost features. Electrical efficiency of these products can be competitive with our DFC power plants in certain applications. Competition on larger MW projects may also come from gas turbine companies like General Electric, Solar Turbines and Kawasaki.

~~We also compete against the electric grid with utilities that generate power in large central generation locations and then use transmission lines to transport the electricity to the point of use.~~

Services and Warranty Agreements

We offer a comprehensive portfolio of services including: engineering, project management and installation, ~~performance contracts,~~ long-term operating and maintenance programs, ~~refurbishment and complete product support~~ including trained technicians that remotely monitor and operate the plants around the world 24 hours a day and 365 days a year. We employ field technicians to service the power plants and maintain service centers near our customers to ensure high availability of our plants. ~~In addition to the standard product warranty~~Virtually all of ~~one year, we also offer~~our customers purchase service agreements ~~(LTSA) for Direct FuelCell (DFC) power plants~~ ranging ~~from one~~up to 20 years. ~~Our standard LTSA term is five years and may be renewed if the parties mutually agree on future pricing.~~ Pricing for service contracts is based upon the markets in which we compete ~~as well as estimates of~~and includes all future maintenance and ~~stack replacement costs.~~

fuel cell module exchanges. While the electrical and mechanical ~~balance of plant (BOP)~~BOP in our DFC power plants is designed to last ~~over 20~~about 25 years, the current fuel cell ~~“stacks”~~modules must ~~currently~~ be replaced approximately every five years.

Under the typical provisions of the ~~LTSAs,~~service agreements, we provide services to monitor, operate and maintain customer power plants to meet specified performance levels. Operations and maintenance is a key driver for power plants to deliver their projected revenue and cash flows. Many of our service agreements include guarantees for system performance, including electrical output and heat rate. Should the power plant not meet the minimum performance levels, we may be required to replace the fuel cell ~~stack~~module with a new or used replacement and/or pay performance penalties. The service aspects of our business model provide a recurring and predictable revenue stream for the Company. We have committed future production for scheduled fuel cell module exchanges under service agreements through the year 2036. The pricing structure of the service agreements incorporates these scheduled fuel cell module exchanges and the committed nature of this production facilitates our production planning. Our goal is to optimize our customers’ power plants to meet expected operating parameters throughout their contracted project term.

In addition to our service agreements, we provide for a warranty for our products for a specific period of time against manufacturing or performance defects. Our warranty is limited to a term generally 15 months after shipment or 12 months after acceptance of our products, except for fuel cell kits. We warranty fuel cell kits and components for 21 months from the date of shipment due to the additional shipping and customer manufacture time required. We accrue for estimated future warranty costs based on historical experience.

License Agreements and Royalty Income

We receive license fees and royalty income from POSCO Energy related to manufacturing and technology transfer agreements entered into in 2007, 2009 and 2012. The Cell Technology Transfer Agreement ("CTTA"), executed in October 2012, provides POSCO Energy with the technology to manufacture Direct FuelCell power plants in South Korea and the market access to sell power plants throughout Asia for an initial term of 15 years with two renewal options of five years each. In conjunction with the CTTA, the Company receives a 3.0% royalty on POSCO Energy net product sales as well as a royalty on each scheduled fuel cell module replacement under service agreements for modules that were built by POSCO Energy and installed at any plant in Asia under terms of the Master Service Agreement between the Company and POSCO Energy.

We expect royalties to be a growing revenue and margin stream for the Company as POSCO Energy continues to develop the market in Asia and deploy DFC power plants. As we expand into other vertical or geographic markets, we may pursue additional licensing and royalty opportunities.

Advanced Technology Programs (Third Party Funded Research and Development)

We undertake both public and privately-funded research and development to expand the markets for our DFC power plants, reduce costs, and expand our technology portfolio in complementary high-temperature fuel cell systems. This research builds on the versatility of our fuel cell power plants and contributes to the development of potentially new end markets. Our power plants provide various value streams including clean electricity, high quality usable heat, hydrogen suitable for vehicle fueling or industrial purposes as well as use of DFC power plants to concentrate carbon dioxide from coal and natural gas fired power plants. Our Advanced Technology Programs are focused on three strategic areas for commercialization within a reasonable timeframe: (1) Distributed hydrogen production, compression, and recovery, (2) Carbon capture for emissions reduction and power generation and (3) Solid oxide fuel cells (SOFC) for stationary power generation and energy storage. The revenue and associated costs from government and third party sponsored research and development is classified as “Advanced technologies contract revenues” and “Cost of advanced technologies contract revenues”, respectively, in our consolidated financial statements.

We have worked on technology development with various U.S. government departments and agencies, including the Department of Energy (DOE), the Department of Defense (DOD), the Environmental Protection Agency (EPA), the Defense Advanced Research Projects Agency (DARPA), Office of Naval Research (ONR), and the National Aeronautics and Space Administration (NASA). Government funding, principally from the DOE, provided 6%, 6%, and 5% of our revenue for the fiscal years ended 2015, 2014, and 2013, respectively.

Significant commercialization programs on which we are currently working include:

Distributed Hydrogen production, compression, and recovery - On-site or distributed hydrogen generation represents an attractive market for the DFC technology. Our high temperature DFC power plant generates electricity directly from a fuel by reforming the fuel inside the fuel cell to supply hydrogen for the electrical generation process. Gas separation technology can be added to capture hydrogen that is not used by the electrical generation process, and we term this configuration DFC-H2. This value-added proposition may be compelling for industrial users of hydrogen and transportation applications, further summarized as follows:

Industrial Applications: We are currently operating a tri-generation DFC300-H₂ power plant at our Torrington manufacturing facility, utilizing natural gas to supply 1) electricity for the facility, 2) heat for the building, and 3) hydrogen for the manufacturing process, replacing hydrogen that was delivered by diesel truck. The installation is a showcase for industrial users of hydrogen to visit. The project is supported by the DOE and the State of Connecticut.

Vehicle fueling Applications: A tri-generation DFC300-H2 power plant completed a three year demonstration at the Orange County Wastewater Treatment Facility in Irvine, California, utilizing renewable biogas to supply hydrogen for use in fuel cell vehicle fueling and clean renewable electricity. The demonstration was performed under sub-contract to Air Products (NYSE: APD) with funding provided by the DOE, California Air Resources Board, South Coast Air Quality Management District, the Orange County Sanitation District, and Southern California Gas Company.

Carbon Capture - Coal and natural gas are abundant, low cost, domestic resources that are widely used to generate electricity, but with a significant carbon footprint. Cost effective and efficient carbon capture from coal-fired and gas-fired power plants potentially represents a large global market because it could enable clean use of these domestic fuels. Our carbonate fuel cell technology separates and concentrates carbon dioxide (CO₂) as a side reaction during the power generation process. DFC carbon capture research conducted by us has demonstrated that this is a viable technology for the efficient separation of CO₂from coal or natural gas power plant exhaust streams. Capturing CO₂as a side reaction while generating additional valuable power is an approach that could be more cost effective than other systems which are being considered for carbon capture. We recently received an award from the US Department of Energy to design and build the first MW-scale carbon capture system, after having proven the technology in cell and sub-megawatt stack tests. The project will be installed at an operating coal fired power plant, and we are currently in discussions with a number of possible utility site hosts. Following the DOE-supported project - which will be based on one DFC3000 plant modified for carbon capture - a second phase is planned which will involve the installation of up to eleven additional fuel cell power plants, for 25 megawatts of fuel cell power plants in total.

SOFC development and commercialization: We are working towards commercialization of solid oxide fuel cell technology to target sub-megawatt commercial applications including smaller wastewater treatment facilities that do not have enough gas production to support a multi-megawatt solution and storage applications utilizing hydrogen. The potential market opportunity for sub-megawatt applications is for customers that need on-site power generation in either combined heat and power or electric-only configurations. SOFC technology is complementary to our carbonate technology based MW scale DFC product line and affords us the opportunity to leverage our field operating history, existing expertise in power plant design, fuel processing and high volume manufacturing and will leverage our existing installation and service infrastructure.

We have been a prime contractor in the DOE's Solid State Energy Conversion Alliance (SECA) since 2003 and are currently finishing an award that commenced in September 2014 to demonstrate a sub-megawatt solid oxide fuel cell power plant connected to the electric grid at our Danbury, Connecticut facility. We have also recently received additional awards from DOE to design a 200 kilowatt system and to build three power plants, two of which will go to a customer site. SOFC research is also undertaken at our facility in Calgary, Canada.

We see significant market opportunities for Distributed Hydrogen Production, Carbon Capture, Solid Oxide Fuel Cells solutions and energy storage. The demonstration projects described above are steps on the commercialization road map as we prudently leverage third-party resources and funding to accelerate the commercialization and realize the market potential for each of these solutions.

Research and Development (Company Funded Research and Development)

In addition to research and development performed under research contracts, we also fund our own research and development projects including extending module life, increasing the power output of our modules and reducing the cost of our products. Initiatives include increasing the net power output of the fuel cell stacks to 375 kW from 350 kW currently, and extending the stack life to seven years from five years currently. Greater power output and improved longevity will lead to improved gross margin profitability on a per unit basis for each power plant sold and improved profitability of service contracts, which will support expanding gross margins for the Company.

In addition to output and life enhancements, we also invest in cost reduction and improving the performance, quality and serviceability of our plants. We are also developing designs for lower cost multi-megawatt fuel cell parks. These efforts continually improve our value proposition and affordability.

Company-funded research and development is included in Research and development expenses (operating expenses) in our consolidated financial statements. The total research and development expenditures in the consolidated statement of operations, including third party and Company-funded, are as follows:



	Years Ended October 31,
	2015		2014		2013
Cost of advanced technologies contract revenues	$	13,470	$	16,664	$	13,864
Research and development expenses	17,442		18,240		15,717
Total research and development	$	30,912	$	34,904	$	29,581

Competition

The electric generation market is competitive with continually evolving participants. Our DFC power plants compete in the marketplace for stationary distributed generation. In addition to different types of stationary fuel cells, some other technologies that compete in this marketplace include micro-turbines and reciprocating gas engines.

Fuel cell technologies are classified according to the electrolyte used by each fuel cell type. Our DFC technology utilizes a carbonate electrolyte. Carbonate-based fuel cells offer a number of advantages over other types of fuel cells designed for megawatt-class commercial applications. These advantages include carbonate fuel cells' ability to generate electricity directly from readily available fuels such as natural gas or renewable biogas, lower raw material costs as the high temperature of the fuel cell enables the use of commodity metals rather than precious metals, and high-quality heat suitable for CHP applications. We are also actively developing SOFC technology, as discussed in the prior Advanced Technology section. Other fuel cell types that may be used for commercial applications include phosphoric acid (PAFC) and proton exchange membrane (PEM).

The following table illustrates industry estimates of the electrical efficiency, expected capacity range and byproduct heat use of the four principal types of fuel cells as well as highlights of typical market applications:



	MW - Class	Sub-MW-Class		Micro CHP	Mobile
Technology	Carbonate (CFC)	Phosphoric Acid (PAFC)	Solid Oxide (SOFC)	PEM/ SOFC	Polymer Electrolyte Membrane (PEM)
Plant size	300kW - 2.8 MW or higher	400kW	up to 240 kW	< 10 kW	5 - 100 kW
Typical Application	Utilities, universities, industrial - baseload	Commercial buildings - baseload	Commercial buildings - baseload	Residential and small commercial	Transportation
Fuel	Natural gas, Biogas, others	Natural gas	Natural gas	Natural gas	Hydrogen
Advantages	Efficiency, lowest cost, fuel flexible & CHP	CHP	Efficiency	Load following & CHP	Load Following
Electrical efficiency	43% - 47% (or higher w/ hybrid or HEFC configuration)	40% - 42%	50% - 60%	25% - 35%	25% - 35%
CHP	Steam, hot water, chilling & hybrid electrical applications	Hot water, chilling	Depends on technology used	Suitable for facility heating	n/a

Several companies in the U.S. are engaged in fuel cell development, although we believe we are the only domestic company engaged in significant manufacturing and commercialization of stationary carbonate fuel cells. Emerging fuel cell technologies (and the companies developing them) include stationary PEM fuel cells (Ballard Power Systems), portable PEM fuel cells (Ballard Power Systems, Plug Power, and increasing activity by numerous automotive companies including Toyota, Hyundai, Honda and GM), stationary phosphoric acid fuel cells (Doosan), stationary solid oxide fuel cells (LG/Rolls Royce partnership, General Electric,

Bloom Energy), and small residential solid oxide fuel cells (Parker Hannifin, Toyota/Kyocera and Ceramic Fuel Cells Ltd.). Each of these competitors with stationary fuel cell applications has the potential to capture market share in our target markets.

There are other potential fuel cell competitors internationally. In Japan, Fuji Electric has been involved with both PEM and phosphoric acid fuel cells and Panasonic is involved with PEM fuel cells for micro-CHP applications. In the United Kingdom, AFC Energy is engaged in alkaline fuel cell development and Intelligent Energy Holdings is engaged in PEM development for consumer products and transportation.

Other than fuel cell developers, we also compete with companies such as Caterpillar, Cummins, Wartsilla, MTU Friedrichshafen GmbH (MTU), Mitsubishi Heavy Industries and Detroit Diesel, which manufacture more mature combustion-based distributed power generation equipment, including various engines and turbines, and have well-established manufacturing and distribution operations along with product operating and cost features. Competition on larger MW projects may also come from gas turbine companies like General Electric, Caterpillar Solar Turbines and Kawasaki.

We also compete against the electric grid, which is readily available to prospective customers. The electric grid is supplied by traditional centralized power plants including coal, gas and nuclear, with transmission lines used to transport the electricity to the point of use.

Our stationary fuel cell power plants generally do not directly compete against solar and wind, but can complement their intermittency with the continuous power output of the fuel cells. Solar and wind require specific geographies and weather profiles, as well as up to ten times the land requirements of our DFC plants, making them difficult to site in urban areas, unlike fuel cell power plants.

We believe that only carbonate fuel cells are suitable for fuel cell carbon capture applications, so our fuel cell carbon capture solution does not compete against fuel cells from manufacturers utilizing other fuel cell technologies.

Our distributed hydrogen solution competes against traditional centralized hydrogen generation as well as electrolyzers used for distributed applications. Hydrogen is typically generated at a central location in large quantities by combustion-based steam reforming and then distributed to end users by diesel truck. Besides utilizing tri-generation DFC plants for distributed hydrogen, electrolyzers can be used that are in essence, reverse fuel cells. Electrolyzers take electricity and convert it to hydrogen. The hydrogen can be used as it is generated, compressed and stored, or injected into the natural gas pipeline. Companies using fuel cell-based electrolyzer technology for transportation applications include Proton Onsite and H2 Logic. Hydrogenics is pursuing both transportation and utility-scale electrolyzer applications.

Incentive Programs

We are continuing to transition the business towards operating in sustainable markets that do not require specific government subsidies or support programs to compete against more traditional forms of power generation. Support programs for fuel cells, depending on the jurisdiction, include renewable portfolio standards, feed in tariffs and self-generation incentive programs, net energy metering programs and tax incentives. These incentives help to accelerate the adoption of clean, efficient and renewable power generation.

In the United States, the federal government provides an uncapped investment tax credit (ITC) that allows a taxpayer to claim a credit of 30% of qualified expenditures (up to a tax credit limit of $3,000/kW) for eligible power generation technologies, including fuel cell power plants, that are placed in service on or before December 31, 2016. In December 2015, the United States Congress extended the ITC for 5 years, beginning on January 1, 2017, and phased down to 26% in 2020 and 22% in 2021. The intention, as publicly stated by Congressional leaders, was to extend the ITC to all eligible technologies; however, the actual approved language only extended the ITC for solar energy technologies. Senior Congressional leadership, as stated in the Congressional Record on December 18, 2015 and in the media, acknowledged a drafting issue with the legislation and their commitment to correct this oversight in early 2016. The expectation is that a bill will be introduced for vote to include all eligible technologies in the ITC extension, including fuel cells. The ITC is a primary economic driver of fuel cell projects in the USA. The ITC expiration at the end of 2016 (unless extended) underscores the need for the LCOE on our projects to continue to decline to grid parity and below. While the expiration of the 30% ITC poses some potential uncertainty in the USA, we believe that our LCOE reduction plans can off-set the potential impact, if for some reason Congress does not follow through with including all eligible technologies in the ITC extension. The federal government also provides accelerated depreciation for eligible fuel cell projects.

The majority of states in the U.S. have enacted legislation adopting Renewable Portfolio Standards (RPS) mechanisms. Under an RPS, regulated utilities and other load serving entities are required to procure a specified percentage of their total electricity sales to end-user customers from eligible renewable resources, by a specified date. RPS legislation and implementing regulations vary significantly from state to state, particularly with respect to the percentage of renewable energy required to achieve the state’s RPS, the definition of eligible renewable energy resources, and the extent to which renewable energy credits (certificates representing the generation of renewable energy) qualify for RPS compliance. Fuel cells using biogas qualify as renewable power generation technology in all of the RPS states in the U.S., and eight states specify that fuel cells operating on natural gas are also eligible for these initiatives in recognition of the high efficiency of fuel cells and near-zero pollutants.

In addition to RPS programs, states and municipalities in the USA have also adopted programs for which our products qualify. Most notably there are strong programs in California supporting self-generation, clean air power generation and carbon reduction. In the Northeast, Connecticut, New York and New Jersey all have programs supporting on-site power production, combined heat and power applications, carbon reduction, grid resiliency / micro-grids and utility ownership of fuel cell projects.

Internationally, South Korea has adopted an RPS to promote clean energy, reduce carbon emissions, and develop a local green-industry to accelerate economic growth. The RPS is designed to increase renewable power generation to ten percent of total power generation by 2022 from two percent in 2012 by requiring an additional one half of one percent of new & renewable power added annually from 2012 to 2016, increasing to one percent per annum through 2022. This equates to an estimated 350 MW annually through 2016, increasing to about 700 MW annually thereafter. Electric utilities and independent power producers that have in excess of 500 MW of power generation capacity are required to comply with the RPS. In addition, a Renewable Heat Obligation program creation is in process to accelerate the adoption of CHP installations with targeted implementation in 2016. The South Korean government initiated a cap-and-trade system in 2015, targeting about 60 percent of greenhouse gas emissions from industrial operations that produce more than 25,000 tons of CO2 per year. The South Korean government has pledged to reduce greenhouse gas emissions 30 percent by 2020 from projected levels. The cap-and-trade legislation is designed to link internationally with emissions trading systems in other countries.

In Europe, there are a number of renewable energy programs and several feed-in tariffs which contribute to growth in our markets. In addition, there are a variety of research and development funding programs for fuel cells and hydrogen at the European Union-level as well as state-level within specific countries. In Germany, there are several financial incentives for stationary fuel cell power plants operating on either natural gas or renewable biogas. CHP configurations receive additional incentives as the German government is targeting 25% of electricity generation to include CHP by 2020, up from the current level of 22%. Germany uses a power production bonus as the foundational incentive program driving adoption of CHP, and the National Organization Hydrogen and Fuel Cell Technology (NOW) program as the tool to differentiate fuel cells versus combustion-based technology.

Government Regulation

Our Company and its products are subject to various federal, provincial, state and local laws and regulations relating to, among other things, land use, safe working conditions, handling and disposal of hazardous and potentially hazardous substances and emissions of pollutants into the atmosphere. Negligible emissions of SOx and NOx from our power plants are substantially lower than conventional combustion-based generating stations, and are far below existing and proposed regulatory limits. The primary emissions from our power plants, assuming no cogeneration application, are humid flue gas that is discharged at temperatures of 700-800°F, water that is discharged at temperatures of 10-20°F above ambient air temperatures, and CO₂ in per kW hour amounts that are much less than conventional fossil fuel central generation power ~~plants. In light~~plants due to the high efficiency of fuel cells. Due to the high temperature of the flue gas emissions, we are required to site or configure our power plants in a ~~way~~manner that ~~will allow~~allows the flue gas to be vented at acceptable and safe distances. The discharge of water from our power plants requires permits that depend on whether the water is to be discharged into a storm drain or into the local wastewater system. While our products have very low carbon monoxide emissions, there could be additional permitting requirements in smog non-attainment areas with respect to carbon monoxide if a number of our units are aggregated together.

We are also subject to federal, state, provincial or local regulation with respect to, among other things, emissions and siting. In addition, utility companies and several states in the USA have created and adopted or are in the process of creating interconnection regulations covering both technical and financial requirements for interconnection of fuel cell power plants to utility grids. Our power plants are designed to meet all applicable laws, regulations and industry standards for use in their international markets.

We are committed to providing a safe and healthy environment for our employees. All of our employees are required to obey all applicable health, safety and environmental laws and regulations and must observe the proper safety rules and environmental practices in work situations. We are dedicated to seeing that safety and health hazards are adequately addressed through appropriate work practices, training and procedures.

Proprietary Rights and Licensed Technology

Our ~~company was founded as a research company in 1969 and began focusing on high-temperature carbonate fuel cells in the 1980s. After a multi-year period~~intellectual property consists of research and development including installation and operation of demonstration carbonate fuel cell power plants, we began selling fully commercialized Direct FuelCell (DFC) power plants in 2003. Our extensive experience,patents, trade secrets ~~proprietary processes~~ and ~~patents combine to safeguard our intellectual property rights~~institutional knowledge that we feel is a competitive advantage and ~~act as~~represents a significant barrier to entry for potential competitors. Our Company was founded in 1969 as an applied research company and began focusing on carbonate fuel cells in the 1980s with our first fully commercialized Direct FuelCell (DFC) power plant sold in 2003. Over this period of time, we have gained extensive experience in designing, manufacturing, operating and maintaining fuel cell power plants. This experience can’t be easily or quickly replicated and combined with our trade secrets, proprietary processes and patents, safeguard our intellectual property rights.

~~We have 78 current~~As of October 31, 2015, the Company, excluding its subsidiaries, has 93 patents in the U.S. ~~patents~~ and ~~50 international patents~~94 patent in other jurisdictions covering our fuel cell technology (in certain cases covering the same technology in multiple jurisdictions)~~. 74~~, with patents directed to various aspects of ~~our U.S. patents relate to~~ our Direct FuelCell technology, ~~1 patent relates to~~ SOFC technology, ~~and 3 patents relate to~~ PEM fuel cell ~~technology.~~technology, and applications thereof. We also have ~~submitted 20~~10 patent applications pending in the U.S. and ~~84 international patent applications.~~

56 pending in other jurisdictions. Our U.S. patents will expire between ~~2013~~2016 and ~~2031,~~2033, and the current average remaining life of our U.S. patents is approximately 1110.2 years. ~~During 2012, 12 new U.S~~

Our subsidiary, Versa Power Systems, Inc., has 30 current U.S. patents ~~were issued or allowed~~ and no73 international patents covering their SOFC technology (in certain cases covering the same technology in multiple jurisdictions), with an average remaining U.S. patent life of approximately 8.7 years. Versa Power Systems, Inc. also has 3 pending U.S. patent applications and 9 patent applications pending in other jurisdictions. In addition, our subsidiary FuelCell Energy Solutions, GmbH has license rights to use FuelCell Energy's carbonate fuel cell technology as well as 9 U.S. and ~~10 international~~49 patents outside the U.S. for carbonate fuel cell technology licensed from its co-owner, Fraunhofer IKTS.

No patents have expired ~~or were abandoned. The expiration of these patents has no~~that would have any material impact on our current or anticipated operations. ~~We also~~As has historically been the case, we are continually innovating, and have ~~approximately 22~~a significant number of invention disclosures ~~in process with our patent counsel~~that we are reviewing that may result in additional patent applications.

Many of our U.S. patents are the result of government-funded research and development programs, including our Department of Energy (DOE) programs. U.S. patents we own that resulted from government-funded research are subject to the government exercising “march-in” rights. We believe that the likelihood of the U.S. government exercising these rights is remote and would only occur if we ceased our commercialization efforts and there was a compelling national need to use the patents.

Significant Customers and ~~Backlog~~Information about Geographic Areas

We contract with a concentrated number of customers for the sale of our products and for research and development contracts. For the fiscal years ended October 31, ~~2012, 2011~~2015, 2014 and ~~2010,~~2013, our top ~~five~~ customers, POSCO Energy (which is a related party and owns approximately ~~16 percent~~10% of the outstanding common shares of the Company), The United Illuminating Company, Dominion Bridgeport Fuel Cell, LLC, Department of Energy, ~~BioFuels Fuel Cells, LLC, UTS BioEnergy, LLC,~~Pepperidge Farms and ~~Pacific Gas~~NRG Energy (which is a related party and ~~Electric Company,~~owns approximately 5% of the outstanding common shares of the Company), accounted for ~~86 percent, 71 percent~~an aggregate of 94%, 88% and ~~68 percent,~~88%, respectively, of our total annual consolidated revenue. Revenue percentage by major customer for the last three fiscal years is as follows:

2012 2011 2010
POSCO 76 % 44 % 58 %
Department of Energy 7 % — % — %
BioFuels Fuel Cells, LLC — % 12 % — %
UTS BioEnergy, LLC 2 % 10 % — %
Pacific Gas and Electric Company 1 % 5 % 10 %
Total 86 % 71 % 68 %



	Years Ended October 31,
	2015		2014		2013
POSCO Energy	67	%	69	%	54	%
The United Illuminating Company	14	%	9	%	—	%
Dominion Bridgeport Fuel Cell, LLC	3	%	3	%	29	%
Department of Energy	5	%	4	%	5	%
Pepperidge Farms	3	%	—	%	—	%
NRG Energy	2	%	3	%	—	%
Total	94	%	88	%	88	%

See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8 - Consolidated Financial Statements and Supplementary Data for further information regarding our revenue and revenue recognition policies.

~~Backlog refers to~~

We have marketing and manufacturing operations both within and outside the ~~aggregate revenues remaining to be earned at~~United States. We source raw materials and balance of plant components from a ~~specified date under contracts~~diverse global supply chain. In 2015, the foreign country with the greatest concentration risk was South Korea, accounting for 67% of our consolidated net sales. As part of our Strategic Plan, we ~~have entered into. Revenue backlog is as follows:~~

Product sales and service backlog totaled $306.6 million as of October 31, 2012 compared to $209.9 million as of October 31, 2011. Product backlog was $228.1 million or 150.7 MW as of October 31, 2012 and $131.8 million or 72.9 MW as of October 31, 2011. Service agreement backlog was $78.5 million and $78.1 million as of October 31, 2012 and 2011, respectively. The 14.9 MW Bridgeport fuel cell park project that was closed subsequent to fiscal year end 2012 will increase product and service backlogare in the ~~first quarter~~process of ~~2013 by approximately $125 million, including approximately $56 million for product backlog~~diversifying our sales mix from both a customer specific and ~~$69 million for service backlog. Although backlog reflects business that is considered firm, cancellations or scope adjustments may occur and will be reflected in our backlog when known.~~

geographic perspective. See Item 1A: “Risk Factors - We are substantially

1922

~~For research~~dependent on a concentrated number of customers and ~~development contracts, we include~~ the ~~total contract value~~loss of any one of these customers could adversely affect our business, financial condition and results of operations" and "Risk Factors - We depend on relationships with strategic partners, and the terms and enforceability of many of these relationships are not certain."

The international nature of our operations subjects us to a number of risks, including ~~any unfunded portion~~fluctuations in exchange rates, adverse changes in foreign laws or regulatory requirements and tariffs, taxes, and other trade restrictions. See Item 1A: “Risk Factors - We are subject to risks inherent in international operations”.” See also Note 13 “Segment and Geographical Information,” to the consolidated financial statements in Part II, Item 8, “Consolidated Financial Statements And Supplementary Data” of the ~~total contract value in backlog. Research and development contract backlog totaled $12.2 million as of~~Form 10-K Report for information about our net sales by geographic region for the years ended October 31, ~~2012 compared~~2015 , 2014, and 2013. See also Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for other information about our operations and activities in various geographic regions.

Sustainability

FuelCell Energy’s ultra-clean, efficient and reliable fuel cell power plants help our customers achieve their sustainability goals. These highly efficient and environmentally friendly products support the “Triple Bottom Line” concept of sustainability, consisting of Environmental, Social and Economic considerations.

We value sustainability just as seriously as our customers. We continue to ~~$15.8 million~~incorporate sustainability best practices into our corporate culture and into the design, manufacture, installation and servicing of our stationary fuel cell power plants. For example, at the end-of-life for our power plants, we refurbish and re-use certain parts of the power plant and we are able to recycle most of what we cannot re-use, supporting the sustainability concept of ‘cradle-to-cradle’. Some of the parts in the fuel cell module can be re-furbished, such as end plates, while the individual fuel cell components are sent to a smelter for recycling. The balance of plant has an operating life of twenty to twenty-five years, at which time metals such as steel and copper are reclaimed for scrap value. By weight, approximately 93% of the entire power plant is either re-used or recycled.

We have a designated Sustainability Officer who promotes sustainable business practices in our manufacturing and administrative functions. For example, on the production floor, we reuse scrap from the manufacturing process, minimizing production waste. We have a tri-generation fuel cell power plant at our North American manufacturing plant, efficiently and cleanly generating power and heat for the facility and hydrogen for the manufacturing process. From a sustainability standpoint, on-site tri-generation avoids the use of a combustion-based boiler for heat and its associated emissions and reduces pollutants from the diesel truck needed for hydrogen delivery, reducing our carbon footprint and benefiting the surrounding community. Other examples include routing excess heat from production processes throughout the facility to reduce both heating costs and associated emissions, installation of high efficiency lighting, partially powering the corporate offices with power generated by the various fuel cell configurations undergoing development in the research area, and utilizing cross-functional teams to evaluate additional areas for improvement.

While we continue to enhance and adopt sustainable business practices, we recognize this is an ongoing effort with more to be accomplished; such as further reducing the direct and indirect aspects of our carbon footprint. Our manufacturing process has a very low carbon footprint, utilizing an assembly oriented production strategy and obtaining low carbon power and heat from DFC power plants located at both the North American manufacturing plant operated by the Company and the Asian manufacturing plant operated by POSCO Energy.

Sustainability also incorporates social risks and human rights and we will not knowingly support or do business with suppliers that treat workers improperly or unlawfully, including, without limitation, those that engage in human trafficking, child labor, slavery or other unlawful or morally reprehensible employment practices. We have begun and are continuing to implement comprehensive monitoring of our global supply chain to eliminate social risks and ensure respect for human rights. We contractually ensure that all qualified suppliers in our supply chain comply with the Fair Labor Standards Act (FLSA) of 1938, as amended. Our employees with supply chain responsibilities are trained on sustainability, social risks and human rights and utilize this knowledge to evaluate existing suppliers and new potential suppliers on social and sustainable metrics to ensure compliance with our requirements and congruence with our company values.

Associates

At October 31, 2011. The unfunded portion of our research and development contracts amounted to $4.7 million and $6.8 million as of October 31, 2012 and 2011, respectively. Due to the long-term nature of these contracts, fluctuations from year to year are not an indication of any future trend.

~~As of October 31, 2012~~2015, we had contracts for power plants totaling 1.5 MW under PPAs ranging from five to seven years. Revenue under these agreements is recognized as electricity is produced. This revenue is not included in backlog described above.

~~Employees~~

~~As of October 31, 2012, we had 484~~596 full-time ~~employees,~~associates, of whom ~~226~~279 were located at the Torrington, Connecticut manufacturing plant, ~~243~~273 were located at the Danbury, Connecticut facility or various field offices, and 1544 were located at our foreign locations. In addition, ~~as of~~at October 31, ~~2012,~~2015, the Company had 1623 temporary ~~workers, with the majority located at the Torrington manufacturing plant.~~workers. None of our ~~employees are~~associates is represented by a labor union or covered by a collective bargaining agreement. We believe our relations with our associates are good.

~~The Versa acquisition adds an additional 41 full-time employees, 10 located in Littleton, CO and 31 located in Calgary, Canada.~~

Available Information

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports will be made available free of charge through the Investor Relations section of the Company’s Internet website (http://www.fuelcellenergy.com) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Material contained on our website is not incorporated by reference in this report. Our executive offices are located at 3 Great Pasture Road, Danbury, CT ~~06813.~~

06810. The public may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports and other information regarding issuers that file electronically with the SEC located at http://www.sec.gov .

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Executive Officers of the Registrant



NAME	AGE	PRINCIPAL OCCUPATION
Arthur A. Bottone President and Chief Executive Officer	5255	Mr. Bottone joined FuelCell Energy in February 2010 as Senior Vice President and Chief Commercial Officer and was promoted to President and Chief Executive Officer in February 2011. Mr. Bottone's focus is to accelerate and diversify global revenue growth to achieve profitability by capitalizing on heightened global demand for clean and renewable energy. Mr. Bottone has broad experience in the power generation field including traditional central generation and alternative energy. Prior to joining FuelCell Energy, Mr. Bottone spent 25 years at Ingersoll Rand, a diversified global industrial company, including as President of the Energy Systems business. Mr. Bottone's qualifications include extensive global business development, technology commercialization, power generation project development as well as acquisition and integration experience. Mr. Bottone received an undergraduate degree in Mechanical Engineering from Georgia Institute of Technology in 1983, and received a Certificate of Professional Development from The Wharton School, University of Pennsylvania in 2004.
Michael Bishop Senior Vice President, Chief Financial Officer, Treasurer and Corporate Secretary	4447	Mr. Bishop was appointed Vice President, Chief Financial Officer, Corporate Secretary, and Treasurer in June 2011. He ~~nearly~~has more than 20 years of experience in financial operations and management with public high growth technology companies with a focus on capital raising, project finance, debt/treasury management, acquisition integration, strategic planning, internal controls, and organizational development. Since joining the Company in 2003, Mr. Bishop has held a succession of financial leadership roles including Assistant Controller, Corporate Controller and Vice President and Controller. Prior to joining FuelCell Energy, ~~Inc.,~~ Mr. Bishop held finance and accounting positions at TranSwitch Corporation, Cyberian Outpost, Inc. and United Technologies, Inc. He is a certified public accountant and began his professional career at McGladrey and Pullen, LLP. Mr. Bishop also served four years in the United States Marine Corps. Mr. Bishop received a Bachelor of Science in Accounting from Boston University in 1993 and a MBA from the University of Connecticut in 1999.



Anthony F. Rauseo Senior Vice President, Chief Operating Officer	5356	Mr. Rauseo was appointed Chief Operating Officer in July 2010. In this position, Mr. Rauseo has responsibility for closely integrating the manufacturing operations with the supply chain, product development and quality initiatives. Mr. Rauseo is an organizational leader with a strong record of achievement in product development, business development, manufacturing, operations, and customer support. Mr. Rauseo joined the Company in 2005 as Vice President of Engineering and Chief Engineer. Prior to joining Fuel Cell Energy, Mr. Rauseo held a variety of key management positions in manufacturing, quality and engineering including five years with CiDRA Corporation. Prior to joining CiDRA, Mr. Rauseo was with Pratt and Whitney for 17 years where he held various leadership positions in product development, production and customer support of aircraft turbines. Mr. Rauseo received a Bachelor of Science in Mechanical Engineering from Rutgers University in 1983 and received a Masters of Science in Mechanical Engineering from Rensselaer Polytechnic Institute in 1987.

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Item 1A.		RISK FACTORS

You should carefully consider the following risk factors before making an investment decision. If any of the following risks actually occur, our business, financial condition, or results of operations could be materially and adversely affected. In such cases, the trading price of our common stock could decline, and you may lose all or part of your investment.

We have incurred losses and anticipate continued losses and negative cash flow.

We have ~~been transitioning~~transitioned from a ~~contract~~ research and development company to a commercial products ~~developer,~~ manufacturer, and services ~~provider. As such, we~~provider and developer. We have not been profitable since our fiscal year ended October 31, 1997. We expect to continue to incur net losses and generate negative cash flows until we can produce sufficient revenues to cover our costs. We may never become profitable. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future. For the reasons discussed in more detail below, there are substantial uncertainties associated with our achieving and sustaining profitability. We have, from time to time, sought financing in the public markets in order to fund operations. Our future ability to obtain such financing, if required, could be impaired by a variety of factors, including, but not limited to, the price of our common stock and general market conditions.

Our cost reduction strategy may not succeed or may be significantly delayed, which may result in our inability to ~~offer our products at competitive prices and may adversely affect our sales.~~deliver improved margins.

Our cost reduction strategy is based on the assumption that continued increases in production will result in economies of scale. In addition, our cost reduction strategy relies on advancements in our manufacturing process, global competitive sourcing, engineering design, reducing the cost of capital and technology improvements (including stack life and projected power output). Failure to achieve our cost reduction targets could have a material adverse effect on our results of operations and financial condition.

Our products compete with products using other energy sources, and if the prices of the alternative sources are lower than energy sources used by our products, sales of our products will be adversely affected. Volatility of electricity and fuel prices may impact sales of our products and services in the markets in which we compete.

Our ~~DFC Power Plants~~products can operate using a variety of fuels, including primarily natural gas and biogas and also methanol, diesel, ~~biogas,~~ coal gas, coal mine methane, and propane. If these fuels are not readily available or if their prices increase such that electricity produced by our products costs more than electricity provided by other generation sources, our products would be less economically attractive to potential customers. In addition, we have no control over the prices of several types of competitive energy sources such as oil, gas or coal as well as local utility electricity costs. Significant decreases (or short term increases) in the price of these fuels or grid delivered prices for electricity could also have a material adverse effect on our business because other generation sources could be more economically attractive to consumers than our products.

The reduction or elimination of government subsidies and economic incentives for alternative energy technologies, including our fuel cell power plants, could reduce demand for our products and services, lead to a reduction in our revenues and adversely impact our operating results.

We believe that the near-term growth of alternative energy technologies, including our fuel cells, relies on the availability and size of government and economic incentives (including, but not limited to, the U.S. Federal ~~ITC,~~investment tax credit (ITC), the incentive programs in South Korea and ~~the~~ state ~~of California and state RPS~~renewable portfolio standard programs). ~~Many~~The U.S. ITC allows a taxpayer to claim a credit of ~~these~~30% of qualified expenditures (up to a tax credit limit of $3,000/kW) for eligible power generation technologies, including fuel cell power plants, which are placed in service on or before December 31, 2016. In December 2015, the United States Congress extended the ITC for 5 years, beginning on January 1, 2017, and phased down to 26% in 2020 and 22% in 2021. The intention, as publicly stated by Congressional leaders, was to extend the ITC to all eligible technologies; however, the actual approved language only extended the ITC for solar energy technologies. Senior Congressional leadership, as stated in the Congressional Record on December 18, 2015 and in the media, acknowledged a drafting issue with the legislation and their commitment to correct this oversight in early 2016. The expectation is that a bill will be introduced for vote to include all eligible technologies in the ITC extension, including fuel cells. There can be no assurance regarding the timing of and ultimate passage of a bill to extend the ITC. Other government incentives expire, phase out over time, exhaust the allocated funding, or require renewal by the applicable authority. In addition, these incentive programs could be challenged by utility companies, or ~~for other reasons~~be found to be unconstitutional, and/or could be reduced or discontinued for other reasons. The reduction, elimination, or expiration of government subsidies and economic incentives may result in the diminished economic competitiveness of our power plants to our customers and could materially and adversely affect the growth of alternative energy technologies, including our fuel cells, as well as our future operating results.

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Financial markets worldwide have experienced ~~increased~~heightened volatility and instability which may have a material adverse impact on our Company, our customers and our suppliers.

Financial market volatility can affect both the debt, equity and ~~instability affects both debt and equity~~project finance markets. This may impact the amount of financing available to all companies, including companies with substantially greater resources, better credit ratings and more successful operating histories than ours. It is impossible to predict future financial market volatility and instability and the impact on our Company and it may have a materially adverse effect on us for a number of reasons, such as:

The long term nature of our sales cycle ~~often requires~~can require long lead times between application design, order booking and product fulfillment. For this, we often require substantial cash down payments in advance of delivery. Our growth strategy assumes that financing will be available for the Company to finance working capital or for our customers to provide ~~for such~~ down payments and to pay for our products. Financial market issues may delay, cancel or restrict the construction budgets and funds available to the Company or our customers ~~that we expect to be~~for the ~~ultimate purchasers~~deployment of our products and services.

Projects using our products are, in part, financed by equity investors interested in tax benefits as well as by the commercial and governmental debt markets. The significant volatility in the U.S. and international stock markets cause significant uncertainty and may result in an increase in the return required by investors in relation to the risk of such projects.

If we, our customers and suppliers cannot obtain financing under favorable terms, our business may be negatively impacted.



	Ÿ	The long term nature of our sales cycle often requires long lead times between order booking and product fulfillment. For this, we often require substantial cash down payments in advance of delivery. Our growth strategy assumes that financing will be available for our customers to provide for such down payments and to pay for our products. Financial market issues may delay, cancel or restrict the construction budgets and funds available to our customers that we expect to be the ultimate purchasers of our products and services.

	Ÿ	Projects using our products are, in part, financed by equity investors interested in tax benefits as well as by the commercial and governmental debt markets. The significant volatility in the U.S. and international stock markets since 2008, has caused significant uncertainty and may result in an increase in the return required by investors in relation to the risk of such projects.

	Ÿ	~~If we, or our customers and suppliers, cannot obtain financing under favorable terms, our business may be negatively impacted.~~

Our contracted products may not convert to revenue, and our project pipeline may not convert to contracts, which may have a material adverse effect on our revenue and cash flow.

Some of the orders we accept from customers require certain conditions or contingencies (such as permitting, interconnection or financing) to be satisfied, some of which are outside of our control. The time periods from receipt of a contract to installation may vary widely and are determined by a number of factors, including the terms of the customer contract and the customer’s site requirements. This could have an adverse impact on our revenue and cash flow.

We have signed product sales contracts, ~~long-term service~~engineering, procurement and construction contracts (EPC), power purchase agreements and ~~power purchase~~long-term service agreements with customers subject to contractual, technology and operating risks as well as market conditions that may affect our operating results.

The Company applies the percentage of completion revenue recognition method to certain product sales contracts which are subject to estimates. On a quarterly basis, the Company performs a review process to help ensure that total estimated contract costs include estimates of costs to complete that are based on the most recent available information. The percentage of completion for the customer ~~contract~~contracts based on this cost analysis is then applied to the total customer contract ~~value~~values to determine the total revenue to be recognized to date.

In certain instances, we have executed power purchase agreements (PPA) with the end-user of the power and site host of the fuel cell power plant. We may then sell the PPA to project investor or retain the project and collect revenue from the sale of power over the term of the PPA, recognizing electricity revenue as power is generated and sold.

We have contracted under long-term service agreements with certain customers to provide service on our products over terms ~~ranging from one~~up to 20 years. Under the provisions of these contracts, we provide services to maintain, monitor, and repair customer power plants to meet minimum operating levels. Pricing for service contracts is based upon estimates of future costs including future stack replacements. While we have conducted tests to determine the overall life of our products, we have not run our products over their projected useful life prior to large-scale commercialization. As a result, we cannot be sure that our products will last to their expected useful life, which could result in warranty claims, performance penalties, maintenance and stack replacement costs in excess of our estimates and losses on service contracts.

The Company has one customer who purchases power under a Power purchase agreement (“PPA”), whereby the customer agrees to purchase power from our fuel cell power plants at negotiated rates. Electricity rates are generally a function of the customer's current and future electricity pricing available from the grid. Should electricity rates decrease or operating costs increase from our original estimates, our results of operations could be negatively impacted. We are not required to produce minimum amounts of power under this PPA agreement. We provide termination rights by giving written notice to the customer, subject to certain exit costs.

We extend product warranties, which could affect our operating results.

We provide for a warranty of our products for a specific period of time against manufacturing or performance defects. We accrue for warranty costs based on historical warranty claim experience, however actual future warranty expenses may be greater than ~~we've~~we’ve assumed in our estimates. As a result, operating results could be negatively impacted should there be product manufacturing or performance defects in excess of our estimates.

Our products are complex and could contain defects and may not operate at expected performance levels which could impact sales and market adoption of our products or result in claims against us.

We develop complex and evolving products. Our initial installations were demonstration power plants intended to test the technology in real-world applications. We learned extensively from these demonstration installations, enhancing the technology

and improving the operation of the power plants. Our first commercial Direct FuelCell power plant installation in 2003 had a rated power output of 250 kW and a 3three year stack life. ~~Most of these 250 kW~~These demonstration installations were terminated at contract conclusion or earlier as the costs were too high to justify continuation and the ~~customer's~~customer’s power needs did not support a ~~megawatt-class~~sub-megawatt-class power plant. Certain of these early product designs did not meet our expectations resulting in mixed performance history, impacting the adoption rate of our products. Costs arelower for our newer megawatt-class plants compared to sub-megawatt plants due to scale. With the growing expertise gained from an expanding installed base, we continue to advance the capabilities of the fuel cell stacks and are now producing stacks with a net rated power output of 350 kW and an expected five year life.

We ~~have limited~~are still gaining field operating experience on our products, and despite experience gained from our growing installed base and testing performed by us, our customers and our suppliers, issues may be found in existing or new products. This could result in a delay in recognition or loss of revenues, loss of market share or failure to achieve broad market acceptance. The occurrence of defects could also cause us to incur significant warranty, support and repair costs, could divert the attention of our engineering personnel from our product development efforts, and could harm our relationships with our customers. The occurrence of these problems could result in the delay or loss of market acceptance of our products and would likely harm our business. Defects or performance problems with our products could result in financial or other damages to our customers. From time to time, we have been involved in disputes regarding product warranty issues. Although we seek to limit our liability, a product liability claim brought against us, even if unsuccessful, would likely be time consuming and could be costly to defend. Our customers could also seek and obtain damages from us for their losses. We have ~~reserved~~accrued liabilities for potential damages related to performance problems, however actual results may be different than the assumptions used in our ~~reserve~~accrual calculations.

We currently face and will continue to face significant competition.

We compete on the basis of our ~~products'~~products’ reliability, efficiency, environmental considerations and cost. Technological advances in alternative energy products or improvements in the electric grid or other sources of power generation, or other fuel cell technologies may negatively affect the development or sale of some or all of our products or make our products non-competitive or obsolete prior to commercialization or afterwards. Other companies, some of which have substantially greater resources than ours, are currently engaged in the development of products and technologies that are similar to, or may be competitive with, our products and technologies.

Several companies are involved in fuel cell development, although we believe we are the only domestic company engaged in significant manufacturing and commercialization of carbonate fuel cells. Emerging fuel cell technologies (and companies developing them) include PEM stationary fuel cells (Ballard Power Systems, Inc. and Plug Power), phosphoric acid fuel cells ~~(UTC Power/~~(Doosan Fuel Cells America, formerly ClearEdge Power) and solid oxide fuel cells ~~(Delphi,~~ (LG/Rolls Royce ~~LG,~~partnership, GE and Bloom ~~Energy, and Acumentrics)~~Energy). Each of these competitors has the potential to capture market share in our target markets. There are also other potential fuel cell competitors internationally that could capture market share. ~~In Japan, Fuji Electric has been involved with both PEM and phosphoric acid fuel cells. In Korea, Doosan Corporation is engaged in carbonate fuel cell development.~~

Other than fuel cell developers, we must also compete with companies that manufacture more mature combustion-based equipment, including various engines and turbines, and have well-established manufacturing, distribution, and operating and cost features. Electrical efficiency of these products can be competitive with our DFC Power Plants in certain applications. Significant competition may also come from gas turbine companies.

We have atwo large and influential ~~stockholder,~~stockholders, which may make it difficult for a third party to acquire our common stock.

POSCO Energy currently owns approximately ~~16 percent~~10% of our outstanding common stock and NRG Energy owns approximately 5% of our outstanding common stock, which could make it difficult for a third party to acquire our common stock. POSCO Energy is also a licensee of our technology and purchaser of our products and NRG is a purchaser of our products. Therefore, it may be in their ~~interests~~interest to ~~possess~~exert their substantial influence over matters concerning our overall strategy and technological and commercial development.

~~We have limited experience manufacturing our products on a commercial basis, which may adversely affect our planned increases in production capacity and our ability to satisfy customer requirements.~~

Our first commercial power plant installation was in 2003 so we have limited experience manufacturing our products on a commercial basis. With full utilization under its current configuration, our overall manufacturing process has a production capacity of 90 MW per year depending on product mix and other factors. We expect that we will further increase our manufacturing capacity based on market demand. We cannot be sure that we will be able to achieve any planned increases in

~~production capacity. Also, as we scale up our production capacity, we cannot be sure that unplanned failures or other technical problems relating to the manufacturing process will not occur.~~

Even if we are successful in achieving our planned increases in production capacity, we cannot be sure that we will do so in time to satisfy the requirements of our customers. Our failure to develop advanced manufacturing capabilities and processes, or meet our cost goals, could have a material adverse effect on our business prospects, results of operations and financial condition.

Unanticipated increases or decreases in business growth may result in adverse financial consequences for us.

If our business grows more quickly than we anticipate, our existing and planned manufacturing facilities may become inadequate and we may need to seek out new or additional space, at considerable cost to us. If our business does not grow as quickly as we expect, our existing and planned manufacturing facilities would, in part, represent excess capacity for which we may not recover the cost; in that circumstance, our revenues may be inadequate to support our committed costs and our planned growth, and our gross margins, and business strategy would be adversely affected.

Our plans are dependent on market acceptance of our products.

Our plans are dependent upon market acceptance of, as well as enhancements to, our products. Fuel cell systems represent an emerging market, and we cannot be sure that potential customers will accept fuel cells as a replacement for traditional power

sources. As is typical in a rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. Since the distributed generation market is still evolving, it is difficult to predict with certainty the size of the market and its growth rate. The development of a market for our products may be affected by many factors that are out of our control, including:



	Ÿž		the cost competitiveness of our fuel cell products including availability and output expectations and total cost of ownership;



	Ÿž		the future costs of natural gas and other fuels used by our fuel cell products;



	Ÿž		customer reluctance to try a new product;



	Ÿž		the market for distributed generation;



	Ÿž		local permitting and environmental requirements; and



	Ÿž		the emergence of newer, more competitive technologies and products.

If a sufficient market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred in the development of our products and may never achieve profitability.

As we continue to expand markets for our products, we intend to continue ~~to develop warranties,~~offering power production guarantees and other terms and conditions relating to our products that will be acceptable to the marketplace, and continue to develop a service organization that will aid in servicing our products and obtain self-regulatory certifications, if available, with respect to our products. Failure to achieve any of these objectives may also slow the development of a sufficient market for our products and, therefore, have a material adverse effect on our results of operations and financial condition.

We are substantially dependent on a concentrated number of customers and the loss of any one of these customers could adversely affect our business, financial condition and results of operations.

We contract with a concentrated number of customers for the sale of products and for research and development contracts. ~~Significant revenue from individual customers is included in Note 1 of Notes to Consolidated Financial Statements.~~ This includes ~~revenues from~~ POSCO Energy, which is a related party and owns approximately ~~16 percent~~10% of the outstanding common shares of the Company.

POSCO Energy accounted for 67% of the Company's total revenues in fiscal year 2015.

There can be no assurance that we will continue to achieve the current level 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~~ canceled if we fail to meet certain product specifications or materially breach the ~~agreement,~~agreements, and our customers may seek to renegotiate the terms of current agreements or renewals. The loss of, or a reduction in sales to, one or more of our larger customers could have a material adverse effect on our business, financial condition and results of operations.

~~Our~~If our goodwill and other intangible assets, long-lived assets, inventory or project assets become impaired, we may be required to record a significant charge to earnings.

We may be required to record a significant charge to earnings in our financial statements should we determine that our goodwill, other intangible assets (i.e., in process research and development (“IPR&D”)), long-lived assets (i.e. property, plant and equipment), inventory, or project assets are impaired. Such a charge might have a significant impact on our financial position and results of operations.

As required by accounting rules, we review our goodwill for impairment at least annually as of July 31 or more frequently if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill might not be recoverable include a significant decline in projections of future cash flows and lower future growth rates in our industry. We review IPR&D for impairment on an annual basis. If the technology has been determined to be abandoned or not recoverable, we would be required to impair the asset. We review inventory and project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider a project commercially viable and recoverable

if it is anticipated to be sellable for a profit once it is either fully developed or fully constructed. If our projects are not considered commercially viable, we would be required to impair the respective project assets.

Our Advanced Technologies contracts are subject to the risk of termination by the contracting party and we may not realize the full amounts allocated under the contracts due to the lack of Congressional appropriations.

A portion of our fuel cell revenues have been derived from long-term cooperative agreements and other contracts with the U.S. Department of Energy, the U.S. Department of Defense, the U.S. Navy, and other U.S. ~~government~~Government agencies. These agreements are important to the continued development of our technology and our products.

We also contract and partner with private sector companies under certain Advanced Technology contracts to develop strategically important and complementary offerings.

Generally, our government research and development contracts are subject to the risk of termination at the convenience of the contracting agency. Furthermore, these contracts, irrespective of the amounts allocated by the contracting agency, are subject to annual Congressional appropriations and the results of government or agency sponsored reviews and audits of our cost reduction projections and efforts. We can only receive funds under these contracts ultimately made available to us annually by Congress as a result of the appropriations process. Accordingly, we cannot be sure whether we will receive the full amounts awarded under our government research and development or other contracts. Failure to receive the full amounts under any of our government research and development contracts could materially and adversely affect our business prospects, results of operations and financial condition.

A negative government audit could result in an adverse adjustment of our revenue and costs and could result in civil and criminal penalties.

Government agencies, such as the Defense Contract Audit Agency, routinely audit and investigate government contractors. These agencies review a ~~contractor's~~contractor’s performance under its contracts, cost structure, and compliance with applicable laws, regulations, and standards. If the agencies determine through these audits or reviews that we improperly allocated costs to specific contracts, they will not reimburse us for these costs. Therefore, an audit could result in adjustments to our revenue and costs.

Further, although we have internal controls in place to oversee our government contracts, no assurance can be given that these controls are sufficient to prevent isolated violations of applicable laws, regulations and standards. If the agencies determine that we or one of our subcontractors engaged in improper conduct, we may be subject to civil or criminal penalties and administrative sanctions, payments, fines, and suspension or prohibition from doing business with the government, any of which could materially affect our results of operations and financial condition.

The U.S. government has certain rights relating to our intellectual property, including restricting or taking title to certain patents.

Many of our U.S. patents relating to our fuel cell technology are the result of government-funded research and development programs. We own all patents resulting from research funded by our DOE contracts awarded to ~~date, based on our “small business” status when each contract was awarded.~~date. Under current regulations, patents resulting from research funded by government agencies other than the DOE are owned by ~~us, whether or not we are a “small business.”~~us.

~~Nine~~Eight U.S. patents that we own have resulted from government-funded research and are subject to the risk of exercise of “march-in” rights by the government. March-in rights refer to the right of the U.S. government or a government agency to exercise its non-exclusive, royalty-free, irrevocable worldwide license to any technology developed under contracts funded by the government if the contractor fails to continue to develop the technology. These “march-in” rights permit the U.S. government to take title to these patents and license the patented technology to third parties if the contractor fails to utilize the patents. In addition, one of our DOE-funded research and development agreements also required us to agree that we will not provide to a foreign entity any fuel cell technology subject to that agreement unless the fuel cell technology will be substantially manufactured in the U.S.

We ~~now qualify~~are classified for Government contracting as a “Large Business”, which could adversely affect our rights to own future patents under DOE-funded contracts.

~~This year, we qualify~~We are classified as a “large business” under DOE contracts. This allows us to own the patents that we develop under new DOE contracts if we obtain a waiver from DOE. A “large business” under applicable government regulations generally consists of more than 500 employees averaged over a one year period. We will ~~no longer~~not own future patents we develop under new contracts, grants or cooperative agreements funded by the DOE, unless we obtain a patent waiver from the DOE. Should we not obtain a patent waiver and outright ownership, we would nevertheless retain exclusive rights to any such patents, so long as we continue to commercialize the technology covered by the patents.

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Our future success and growth is dependent on our market strategy.

We cannot assure you that we will enter into partnerships that are consistent with, or sufficient to support, our commercialization plans, and our growth strategy or that these relationships will be on terms favorable to us. Even if we enter into these types of relationships, we cannot assure you that the partners with which we form relationships will focus adequate resources on selling our products or will be successful in selling them. Some of these arrangements have or will require that we grant exclusive rights to companies in defined territories. These exclusive arrangements could result in our being unable to enter into other arrangements at a time when the partner with which we form a relationship is not successful in selling our products or has reduced its commitment to marketing our products. In addition, ~~certain arrangements include, and some~~ future arrangements may also include the issuance of equity and warrants to purchase our equity, which may have an adverse effect on our stock price. To the extent we enter into partnerships or relationships, the failure of these partners to assist us with the deployment of our products may adversely affect our results of operations and financial condition.

We depend on third party suppliers for the development and supply of key raw materials and components for our products.

We use various raw materials and components to construct a fuel cell module, including nickel and stainless steel which are critical to our manufacturing process. We also rely on third-party suppliers for the balance-of-plant components in our products. Suppliers must undergo a qualification process, which takes four to twelve months. We continually evaluate new suppliers and we are currently qualifying several new suppliers. There are a limited number of suppliers for some of the key components of products. A ~~supplier's~~supplier’s failure to develop and supply components in a timely manner, supply components that meet our quality, quantity or cost requirements, technical specifications, or our inability to obtain alternative sources of these components on a timely basis or on terms acceptable to us could harm our ability to manufacture our Direct FuelCell products. In addition, to the extent the processes that our suppliers use to manufacture components are proprietary; we may be unable to obtain comparable components from alternative suppliers.

We do not know whether we will be able to maintain long-term supply relationships with our critical suppliers, or secure new long-term supply relationships, or whether such relationships will be on terms that will allow us to achieve our objectives. Our business prospects, results of operations and financial condition could be harmed if we fail to secure long-term relationships with entities that will supply the required components for our Direct FuelCell products.

We depend on our intellectual property, and our failure to protect that intellectual property could adversely affect our future growth and success.

Failure to protect our existing intellectual property rights may result in the loss of our exclusivity or the right to use our technologies. If we do not adequately ensure our freedom to use certain technology, we may have to pay others for rights to use their intellectual property, pay damages for infringement or misappropriation, or be enjoined from using such intellectual property. We rely on patent, trade secret, trademark and copyright law to protect our intellectual property. In addition, we have licensed ~~much of~~ our carbonate fuel cell manufacturing intellectual property to ~~carefully selected third parties,~~POSCO Energy, and we depend on ~~those third parties~~POSCO Energy to also protect our intellectual property ~~rights.~~ ~~As of~~rights as licensed. At October 31, ~~2012, we~~2015, the Company, excluding its subsidiaries, had 7893 current U.S. patents and 5094 international patents covering our fuel cell technology. ~~These~~The U.S. patents ~~will expire between 2013 and 2031 and~~ have an average remaining life of approximately 1110.2 years.

Our subsidiary, Versa, has 30 current U.S. patents and 73 international patents covering their SOFC technology, with an average remaining U.S. patent life of approximately 8.7 years. In addition, our subsidiary, FuelCell Energy Solutions, GmbH, has 9 current U.S. patents and 49 international patents for carbonate fuel cell technology licensed from its co-owner, Fraunhofer IKTS.

Some of our intellectual property is not covered by any patent or patent application and includes trade secrets and other know-how that is not able to be patented, particularly as it relates to our manufacturing processes and engineering design. In addition, some of our intellectual property includes technologies and processes that may be similar to the patented technologies and processes of third parties. If we are found to be infringing third-party patents, we do not know whether we will be able to obtain licenses to use such patents on acceptable terms, if at all. Our patent position is subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope, and enforceability of a particular patent.

We cannot assure you that any of the U.S. or international patents owned by us or other patents that third parties license to us will not be invalidated, circumvented, challenged, rendered unenforceable or licensed to others, or any of our pending or future patent applications will be issued with the breadth of claim coverage sought by us, if issued at all. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in certain foreign countries.

We also seek to protect our proprietary intellectual property, including intellectual property that may not be patented or able to be patented, in part by confidentiality agreements and, if applicable, ~~inventors'~~inventors’ rights agreements with our subcontractors, vendors, suppliers, consultants, strategic partners and employees. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of these relationships. Certain of our intellectual property have been licensed to us on a non-exclusive basis from third

parties that may also license such intellectual property to others, including our competitors. If our licensors are found to be infringing third-party patents, we do not know whether we will be able to obtain licenses to use the intellectual property licensed to us on acceptable terms, if at all.

If necessary or desirable, we may seek extensions of existing licenses or further licenses under the patents or other intellectual property rights of others. However, we can give no assurances that we will obtain such extensions or further licenses or that the terms of any offered licenses will be acceptable to us. The failure to obtain a license from a third party for intellectual property that we use at present could cause us to incur substantial liabilities, and to suspend the manufacture or shipment of products or our use of processes requiring the use of that intellectual property.

While we are not currently engaged in any intellectual property litigation, we could become subject to lawsuits in which it is alleged that we have infringed the intellectual property rights of others or commence lawsuits against others who we believe are infringing upon our rights. Our involvement in intellectual property litigation could result in significant expense to us, adversely affecting the development of sales of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not that litigation is resolved in our favor.

Our future success will depend on our ability to attract and retain qualified management and technical personnel.

Our future success is substantially dependent on the continued services and on the performance of our executive officers and other key management, engineering, scientific, manufacturing and operating personnel, particularly Arthur Bottone, our Chief Executive Officer. The loss of the services of any executive officer, including Mr. Bottone, or other key management, engineering, scientific, manufacturing and operating personnel, could materially adversely affect our business. Our ability to achieve our commercialization plans will also depend on our ability to attract and retain additional qualified management and technical personnel. Recruiting personnel for the fuel cell industry is competitive. We do not know whether we will be able to attract or retain additional qualified management and technical personnel. Our inability to attract and retain additional qualified management and technical personnel, or the departure of key employees, could materially and adversely affect our development and commercialization plans and, therefore, our business prospects, results of operations and financial condition.

Our management may be unable to manage rapid growth effectively.

We may rapidly expand our facilities and manufacturing capabilities, accelerate the commercialization of our products and enter a period of rapid growth, which will place a significant strain on our senior management team and our financial and other resources. Any expansion may expose us to increased competition, greater overhead, marketing and support costs and other risks associated with the commercialization of a new product. We would need to obtain sufficient backlog in order to maintain the use of the expanded capacity. Our ability to manage rapid growth effectively will require us to continue to secure adequate sources of capital and financing, improve our operations, to improve our financial and management information systems and to train, motivate and manage our employees. Difficulties in effectively managing issues presented by such a rapid expansion could harm our business prospects, results of operations and financial condition.

We may be affected by environmental and other governmental regulation.

We are subject to various federal, state and local laws and regulations relating to, among other things, land use, safe working conditions, handling and disposal of hazardous and potentially hazardous substances and emissions of pollutants into the atmosphere. In addition, it is possible that industry-specific laws and regulations will be adopted covering matters such as transmission scheduling, distribution, and the characteristics and quality of our products, including installation and servicing. These regulations could limit the growth in the use of carbonate fuel cell products, decrease the acceptance of fuel cells as a commercial product and increase our costs and, therefore, the price of our products. Accordingly, compliance with existing or future laws and regulations could have a material adverse effect on our business prospects, results of operations and financial condition.

Utility companies may resist the adoption of distributed generation and could impose customer fees or interconnection requirements on our customers that could make our products less desirable.

Investor-owned ~~electric~~ utilities may resist adoption of distributed generation fuel cell plants as the power plants are disruptive to the utility business model that primarily utilizes large central generation power plants and associated transmission and distribution. On-site distributed generation that is on the customer-side of the electric meter competes with the utility. Distributed generation on the utility-side of the meter generally has power output that is significantly less than central generation power plants and may be perceived by the utility as too small to materially impact their business, limiting their interest. Additionally, perceived technology risk may limit utility interest in stationary fuel cell power plants.

Utility companies commonly charge fees to larger, industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back up purposes. These fees could increase the cost to our customers of using our Direct FuelCell products and could make our products less desirable, thereby harming our business prospects, results of operations and financial condition.

Several U.S. states have created and adopted, or are in the process of creating, their own interconnection regulations covering both technical and financial requirements for interconnection to utility grids. Depending on the complexities of the

requirements, installation of our systems may become burdened with additional costs that might have a negative impact on our ability to sell systems. The Institute of Electrical and Electronics Engineers has been working to create an interconnection standard addressing the technical requirements for distributed generation to interconnect to utility grids. Many parties are hopeful that this standard will be adopted nationally to help reduce the barriers to deployment of distributed generation such as fuel cells; however this standard may not be adopted nationally thereby limiting the commercial prospects and profitability of our fuel cell systems.

We could be liable for environmental damages resulting from our research, development or manufacturing operations.

Our business exposes us to the risk of harmful substances escaping into the environment, resulting in personal injury or loss of life, damage to or destruction of property, and natural resource damage. Depending on the nature of the claim, our current insurance policies may not adequately reimburse us for costs incurred in settling environmental damage claims, and in some instances, we may not be reimbursed at all. Our business is subject to numerous federal, state, and local laws and regulations that govern environmental protection and human health and safety. We believe that our businesses are operating in compliance in all material respects with applicable environmental laws, however these laws and regulations have changed frequently in the past and it is reasonable to expect additional and more stringent changes in the future.

Our operations may not comply with future laws and regulations and we may be required to make significant unanticipated capital and operating expenditures. If we fail to comply with applicable environmental laws and regulations, governmental authorities may seek to impose fines and penalties on us or to revoke or deny the issuance or renewal of operating permits and private parties may seek damages from us. Under those circumstances, we might be required to curtail or cease operations, conduct site remediation or other corrective action, or pay substantial damage claims.

Our products use inherently dangerous, flammable fuels, operate at high temperatures and use corrosive carbonate material, each of which could subject our business to product liability claims.

Our business exposes us to potential product liability claims that are inherent in products that use hydrogen. Our products utilize fuels such as natural gas and convert these fuels internally to hydrogen that is used by our products to generate electricity. The fuels we use are combustible and may be toxic. In addition, our Direct FuelCell products operate at high temperatures and use corrosive carbonate material, which could expose us to potential liability claims. Although we have incorporated a robust design and redundant safety features in our power plants and have established ~~and~~ comprehensive safety, maintenance, and training programs in place, ~~and~~ follow third-party certification protocols, codes and standards, and do not store natural gas or hydrogen at our power plants, we cannot guarantee that there will not be accidents. Any accidents involving our products or other hydrogen-using products could materially impede widespread market acceptance and demand for our products. In addition, we might be held responsible for damages beyond the scope of our insurance coverage. We also cannot predict whether we will be able to maintain adequate insurance coverage on acceptable terms.

We are subject to risks inherent in international operations.

Since we market our products both inside and outside the U.S., our success depends in part on our ability to secure international customers and our ability to manufacture products that meet foreign regulatory and commercial requirements in target markets. Sales to customers located outside the U.S. accounts for a significant portion of our consolidated revenue. Sales to customers in South Korea represent the majority of our international sales. We have limited experience developing and manufacturing our products to comply with the commercial and legal requirements of international markets. In addition, we are subject to tariff regulations and requirements for export licenses, particularly with respect to the export of some of our technologies. We face numerous challenges in our international expansion, including unexpected changes in regulatory requirements, potential conflicts or disputes that countries may have to deal with, fluctuations in currency exchange rates, longer accounts receivable requirements and collections, difficulties in managing international operations, potentially adverse tax consequences, restrictions on repatriation of earnings and the burdens of complying with a wide variety of international laws. Any of these factors could adversely affect our results of operations and financial condition.

Although our reporting currency is the U.S. dollar, we conduct our business and incur costs in the local currency of most countries in which we operate. As a result, we are subject to currency translation and transaction risk. Joint ventures or other business arrangements with strategic partners outside of the United States have and are expected in the future to involve investments denominated in the local currency. Changes in exchange rates between foreign currencies and the U.S. dollar could affect our net

2934

~~Our stock price has been~~sales and ~~could remain volatile.~~

~~The market price for our common stock has been~~cost of sales and ~~may continue to be volatile and subject to extreme price and volume fluctuations in response to market and other factors, including the following, some of which are beyond our control:~~



	Ÿ	~~failure to meet our product development and commercialization milestones;~~

	Ÿ	~~variations in our quarterly operating results from the expectations of securities analysts or investors;~~

	Ÿ	~~downward revisions in securities analysts' estimates or changes in general market conditions;~~

	Ÿ	~~announcements of technological innovations or new products or services by us or our competitors;~~

	Ÿ	~~announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;~~

	Ÿ	~~additions or departures of key personnel;~~

	Ÿ	~~investor perception of our industry or our prospects;~~

	Ÿ	~~insider selling or buying;~~

	Ÿ	~~demand for our common stock; and~~

	Ÿ	~~general technological or economic trends.~~

In the past, following periods of volatility in the market price of their stock, many companies have been the subjects of securities class action litigation. If we became involved in securities class action litigation in the future, it could result in ~~substantial costs and diversion~~exchange gains or losses. We cannot accurately predict the impact of ~~management's attention and resources and could harm~~future exchange rate fluctuations on our ~~stock price, business prospects,~~ results of ~~operations~~operations.

We could also expand our business into new and emerging markets, many of which have an uncertain regulatory environment relating to currency policy. Conducting business in such markets could cause our exposure to changes in exchange rates to increase, due to the relatively high volatility associated with emerging market currencies and potentially longer payment terms for our proceeds. Our ability to hedge foreign currency exposure is dependent on our credit profile with financial ~~condition.~~

~~Provisions of Delaware~~institutions that are willing and ~~Connecticut law and of our charter and by-laws may make a takeover more difficult.~~

~~Provisions~~able to do business with us. Deterioration in our ~~certificate~~credit position or a significant tightening of ~~incorporation~~the credit market conditions could limit our ability to hedge our foreign currency exposure; and ~~by-laws and~~therefore, result in ~~Delaware and Connecticut corporate law may make it difficult and expensive for a third-party to pursue a tender offer, change in control~~exchange gains or takeover attempt that is opposed by our management and board of directors. Public stockholders who might desire to participate in such a transaction may not have an opportunity to do so. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or change in our management and board of directors.losses.

We depend on relationships with strategic partners, and the terms and enforceability of many of these relationships are not certain.

We have entered into relationships with strategic partners for design, product development, sale and service of our existing products, and products under development, some of which may not have been documented by a definitive agreement. The terms and conditions of many of these agreements allow for termination by the partners. Termination of any of these agreements could adversely affect our ability to design, develop and distribute these products to the marketplace. We cannot assure you that we will be able to successfully negotiate and execute definitive agreements with any of these partners, and failure to do so may effectively terminate the relevant relationship.

~~Future sales of substantial amounts of our common stock could affect the market price of our common stock.~~

Future sales of substantial amounts of our common stock, or securities convertible or exchangeable into shares of our common stock, into the public market, including shares of our common stock issued upon exercise of options and warrants, or perceptions that those sales could occur, could adversely affect the prevailing market price of our common stock and our ability to raise capital in the future.

~~The rights of the Series 1 preferred shares and Series B preferred stock could negatively impact our cash flows.~~

The terms of the Series 1 preferred shares issued by FCE FuelCell Energy, Ltd. (“FCE Ltd.”), our wholly-owned, indirect subsidiary, provide rights to the holder, Enbridge Inc. (“Enbridge”), which could negatively impact us.

On March 31, 2011, the Company entered into an agreement with Enbridge to modify the provisions of the Class A Cumulative Redeemable Exchangeable Preferred Shares (the “Series 1 Preferred Shares”) of FCE Ltd. 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. 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. 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 of Cdn. $21.1 million and the balance of the principal redemption price of Cdn. $4.4 million 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.

We are also required to issue common stock to the holder of the Series 1 preferred shares if and when the holder exercises its conversion rights. The number of shares of common stock that we may issue upon conversion could be significant and dilutive to our existing stockholders. For example, assuming the holder of the Series 1 preferred shares exercises its conversion rights after July 31, 2020 and assuming our common stock price is $0.93 (our common stock closing price on October 31, 2012) and an exchange rate of Cdn. $1.00 to U.S.$1.00 at the time of conversion, we would be required to issue approximately 5,030,891 shares of our common stock.

The terms of the Series B preferred stock also provide rights to their holders that could negatively impact us. Holders of the Series B preferred stock are entitled to receive cumulative dividends at the rate of $50 per share per year, payable either in cash or in shares of our common stock. To the extent the dividend is paid in shares, additional issuances could be dilutive to our existing stockholders and the sale of those shares could have a negative impact on the price of our common stock. A share of our Series B preferred stock may be converted at any time, at the option of the holder, into 85.1064 shares of our common stock (which is equivalent to an initial conversion price of $11.75 per share), plus cash in lieu of fractional shares. Furthermore, the conversion rate applicable to the Series B preferred stock is subject to adjustment upon the occurrence of certain events.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud, which could harm our brand and operating results.

Effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act of 2002. In addition, Section 404 under the Sarbanes-Oxley Act of 2002 requires that we assess, and that our auditors attest to, the design and operating effectiveness of our controls over financial reporting. Our compliance with the annual internal control report requirement for each fiscal year will depend on the effectiveness of our financial reporting and data systems and controls. Inferior internal controls could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.

Our results of operations could vary as a result of methods, estimates and judgments we use in applying our accounting policies.

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” in ~~Part II,~~ Item 7). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that could lead us to reevaluate our methods, estimates and judgments.

As we gain experience in future periods, management will continue to reevaluate its estimates for contract margins, service agreements, loss accruals, warranty, performance guarantees, liquidated damages and inventory ~~reserves.~~valuation allowances. Changes in those estimates and judgments could significantly affect our results of operations and financial condition. We may also adopt changes required by the Financial Accounting Standards Board and the Securities and Exchange Commission.

Our stock price has been and could remain volatile.

The market price for our common stock has been and may continue to be volatile and subject to extreme price and volume fluctuations in response to market and other factors, including the following, some of which are beyond our control:



	ž		failure to meet commercialization milestones;



	ž		variations in our quarterly operating results from the expectations of securities analysts or investors;



	ž		downward revisions in securities analysts’ estimates or changes in general market conditions;



	ž		changes in the securities analysts' that cover us or failure to regularly publish reports;



	ž		announcements of technological innovations or new products or services by us or our competitors;



	ž		announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;



	ž		additions or departures of key personnel;



	ž		investor perception of our industry or our prospects;



	ž		insider selling or buying;



	ž		demand for our common stock; and



	ž		general technological or economic trends.

In the past, following periods of volatility in the market price of their stock, many companies have been the subject of securities class action litigation. If we became involved in securities class action litigation in the future, it could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business prospects, results of operations and financial condition.

The recent reverse stock split of our shares of common stock may decrease the market trading liquidity of the shares due to the reduced number of shares outstanding or otherwise adversely affect the value of our shares.

On December 3, 2015, we effected a one-for-twelve reverse stock split of our shares of common stock in order to make our common stock more attractive to a broader range of institutional and other investors, as we have been advised that the pre-reverse stock split market price of our common stock potentially affected its acceptability to certain institutional investors, professional investors and other members of the investing public, and to increase the bid price to more than $1.00 per share to maintain compliance the listing requirements for our common stock on the NASDAQ Capital Market.

While the reverse stock split has resulted in an increase in the market price of our common stock, the total future market capitalization of our common stock following the reverse stock split may not exceed or remain higher than the market price prior to the reverse stock split. The ongoing effect of the reverse stock split upon the market price of our common stock cannot be predicted with any certainty, and the history of similar reverse stock splits for companies in similar circumstances to ours is varied. The market price of our common stock is dependent on many factors, including our business and financial performance, general market conditions, prospects for future success and other factors detailed from time to time in the reports we file with the SEC. If the market price of our common stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of the reverse stock split. The reverse stock split has also resulted in some shareholders owning “odd lots” (fewer than 100 shares) that may be more difficult to sell or require greater transaction costs per share to sell. While we believe that a higher stock price may help generate investor interest, there can be no assurance that the reverse stock split will result in a per share price that will attract institutional investors or investment funds or that such share price will satisfy the investing guidelines of institutional investors or investment funds. As a result, the trading liquidity of our common stock may not improve.

Provisions of Delaware and Connecticut law and of our charter and by-laws and our outstanding securities may make a takeover more difficult.

Provisions in our certificate of incorporation and by-laws and in Delaware and Connecticut corporate law may make it difficult and expensive for a third-party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and board of directors. In addition, certain provisions of our Series 1 Preferred Shares and our Series B preferred stock could make it more difficult or more expensive for a third party to acquire us. Public stockholders who might desire to participate in such a transaction may not have an opportunity to do so. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or change in our management and board of directors.

Future sales of substantial amounts of our common stock could affect the market price of our common stock.

Future sales of substantial amounts of our common stock, or securities convertible or exchangeable into shares of our common stock, into the public market, including shares of our common stock issued upon exercise of options, or perceptions that those sales could occur, could adversely affect the prevailing market price of our common stock and our ability to raise capital in the future.

The rights of the Series 1 preferred shares and Series B preferred stock could negatively impact our cash flows and could dilute the ownership interest of our stockholders.

The provisions of the Series 1 Preferred Shares require that FCE Ltd. make annual payments totaling Cdn. $1,250,000, including (i) annual dividend payments of Cdn. $500,000 and (ii) annual return of capital payments of Cdn. $750,000. These payments will end on December 31, 2020. Additional dividends accrue on cumulative unpaid dividends at a 1.25% 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 of Cdn. $21.1 million and the balance of the principal redemption price of Cdn. $4.4 million 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.

We are also required to issue common stock to the holder of the Series 1 preferred shares if and when the holder exercises its conversion rights. The number of shares of common stock that we may issue upon conversion could be significant and dilutive to our existing stockholders. For example, giving effect to the December 3, 2015 reverse stock split, assuming the holder of the Series 1 preferred shares exercises its conversion rights after July 31, 2020 and assuming our common stock price is $10.614 (our common stock closing price on October 31, 2015), and an exchange rate of U.S. $1.00 to Cdn. $1.31 at the time of conversion, we would be required to issue approximately 337,200 shares of our common stock.

The terms of the Series B preferred stock also provide rights to their holders that could negatively impact us. Holders of the Series B preferred stock are entitled to receive cumulative dividends at the rate of $50 per share per year, payable either in cash or in shares of our common stock. To the extent the dividend is paid in shares, additional issuances could be dilutive to our existing stockholders and the sale of those shares could have a negative impact on the price of our common stock. A share of our Series B preferred stock, after giving effect to the December 3, 2015 reverse stock split may be converted at any time, at the option of the holder, into 7.0922 shares of our common stock (which is equivalent to an initial conversion price of $141 per share), plus cash in lieu of fractional shares. Furthermore, the conversion rate applicable to the Series B preferred stock is subject to additional adjustment upon the occurrence of certain events.

Exports of certain of our products are subject to various export control regulations and may require a license or permission from the U.S. Department of State, the U.S. Department of Energy or other agencies.

As an exporter, we must comply with various laws and regulations relating to the export of products, services and technology from the U.S. and other countries having jurisdiction over our operations. We are subject to export control laws and regulations, including the International Traffic in Arms Regulation “ITAR”, the Export Administration Regulation “EAR”, and the Specially Designated Nationals and Blocked Persons List, which generally prohibit U.S. companies and their intermediaries from exporting certain products, importing materials or supplies, or otherwise doing business with restricted countries, businesses or individuals, and require companies to maintain certain policies and procedures to ensure compliance. We are also subject to the Foreign Corrupt Practices Act which prohibits improper payments to foreign governments and their officials by U.S. and other business entities. Under these laws and regulations, U.S. companies may be held liable for their actions and actions taken by their strategic or local partners or representatives. If we, or our intermediaries, fail to comply with the requirements of these laws and regulations, or similar laws of other countries, governmental authorities in the United States or elsewhere, as applicable, could seek to impose civil and/or criminal penalties, which could damage our reputation and have a material adverse effect on our business, financial condition and results of operations.

We are also subject to registration under the U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”). Due to the nature of certain of our products and technology, we must obtain licenses or authorizations from various U.S. Government agencies such as DDTC or DOE, before we are permitted to sell such products or license such technology outside of the U.S. We can give no assurance that we will continue to be successful in obtaining the necessary licenses or authorizations or that certain sales will not be prevented or delayed. Any significant impairment of our ability to sell products or license technology outside of the U.S. could negatively impact our results of operations, financial condition or liquidity.

3137




Item 1B.		UNRESOLVED STAFF COMMENTS

None




Item 2.		PROPERTIES

The following is a summary of our offices and locations:



		Square	Lease Expiration
Location	Business Use	Footage	Dates
Danbury, Connecticut	Corporate Headquarters, Research and Development, Sales, Marketing, Service, Purchasing and Administration ~~and administrative~~	72,000	Company owned
Torrington, Connecticut	Manufacturing and ~~administrative~~Administrative	65,000⁽¹⁾	~~December-2015~~December-2020
Danbury, Connecticut	Manufacturing and Operations	38,000	~~October-2014~~October-2019
~~Ottobrunn,~~Taufkirchen, Germany	Manufacturing and ~~administrative~~Administrative	20,000	~~June-2014~~June-2017
Dresden, Germany	Central European Office, Sales, Marketing, Purchasing and Administrative	420	February-2016
Calgary, Canada	Research and Development	32,220	January-2017
Littleton, Colorado	Research and Development	18,464	August-2018⁽²⁾

⁽¹⁾The ~~acquisition of Versa adds~~Company plans to expand the Torrington facility by adding an additional 102,000 square ~~footage~~feet. See Note 20 of ~~70,684. This includes a leased property in~~the Notes to Consolidated Financial Statements for additional information.

⁽²⁾ The Littleton, ~~CO of approximately 18,464 square footage with a~~Colorado lease ~~that expires~~was terminated on ~~August 1, 2018 and a leased property in Calgary, Canada of approximately 52,220 square feet with a lease that expires on January~~December 31, ~~2014.~~

2015.




Item 3.		LEGAL PROCEEDINGS

None

3238

PART II




Item 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

FuelCell Common Stock

Our common stock has been publicly traded since June 25, 1992. ~~From September 21, 1994 through February 25, 1997, it was quoted on the NASDAQ National Market, and from February 26, 1997 through June 6, 2000 it was traded on the American Stock Exchange.~~ Our common stock trades under the symbol “FCEL” on the Nasdaq Global Market. The following table sets forth the high and low sale prices for our common stock for the fiscal periods indicated as reported by the Nasdaq Global Market during the indicated quarters.

On December 3, 2015, we effected a 1-for-12 reverse stock split, reducing the number of our common shares outstanding from 314.5 million shares to approximately 26.2 million shares. Concurrently with the reverse stock split, the number of authorized shares of our common stock was reduced proportionately, from 475 million shares to 39.6 million shares. Additionally, the conversion price of our Series B Preferred Stock, and the exchange price of our Series 1 Preferred Shares, the exercise price of all outstanding options and warrants, and the number of shares reserved for future issuance pursuant to our equity compensation plans were all adjusted proportionately to the reverse stock split.

The following table has been retroactively adjusted to give effect to the reverse stock split.


	Common Stock Price				Common Stock Price
	High		Low		High		Low
First quarter (through January 7, 2013)	$	1.18	$	0.83
Year Ended October 31, 2012
First quarter 2016 (through December 31, 2015)					$	12.24	$	4.90
Year Ended October 31, 2015
First Quarter	$	1.12	$	0.83	$	27.60	$	12.60
Second Quarter	$	1.95	$	0.97	$	17.40	$	13.68
Third Quarter	$	1.39	$	0.92	$	15.36	$	9.72
Fourth Quarter	$	1.10	$	0.85	$	12.00	$	7.68
Year Ended October 31, 2011
Year Ended October 31, 2014
First Quarter	$	2.41	$	1.12	$	23.40	$	15.36
Second Quarter	$	2.23	$	1.55	$	56.88	$	16.44
Third Quarter	$	1.97	$	1.25	$	31.80	$	22.32
Fourth Quarter	$	1.42	$	0.80	$	34.08	$	18.60





Delaware		06-0853042
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3 Great Pasture Road
Danbury, Connecticut		~~06813~~06810
(Address of principal executive offices)		(Zip Code)




Title of each class		Name of each exchange on which registered
Common Stock, $.0001 par value per share		The Nasdaq Stock Market LLC (Nasdaq Global Market)




Class		Outstanding at ~~January 7, 2013~~December 31, 2015
Common Stock, $.0001 par value per share		~~189,481,834~~26,593,128 shares




Document		Parts Into Which Incorporated

~~Annual Report to Shareholders for the Fiscal Year Ended October 31, 2012 (Annual Report)~~		~~Parts I, II, and IV~~

Proxy Statement for the Annual Meeting of Shareholders to be held ~~March 28, 2013~~April 7, 2016 (Proxy Statement)		Part III




þ		ANNUAL 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



	Page
Description	Number
Part I

Item 1 Business	4

Item 1A Risk Factors	2227

Item 1B Unresolved Staff Comments	3238

Item 2 Properties	3238

Item 3 Legal Proceedings	3238

Part II

Item 5 Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	3339

Item 6 Selected Financial Data	3743

Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations	3945

Item 7A Quantitative and Qualitative Disclosures About Market Risk	6063

Item 8 Consolidated Financial Statements and Supplementary Data	6164

Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	91

Item 9A Controls and Procedures	91

Item 9B Other Information	9192

Part III

Item 10 Directors, Executive Officers and Corporate Governance	92

Item 11 Executive Compensation	92

Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	92

Item 13 Certain Relationships and Related Transactions, and Director Independence	92

Item 14 Principal Accountant Fees and Services	92

Part IV

Item 15 Exhibits and Financial Statement Schedules	93

Signatures	99




Index to Item 1. BUSINESS	Page

Forward-Looking Statement Disclaimer	5

Background	6

Additional Technical Terms and Definitions	6

Overview	7

Markets	8

Strategic Alliances	10

Business Strategy	11

Products	13

Manufacturing	15

Services and Warranty Agreements	17

License Agreements and Royalty Income	17

Advanced Technology Programs (Third Party Funded Research and Development)	17

Research and Development (Company Funded Research and Development)	18

Competition	19

Incentive Programs	20

Government Regulation	21

Proprietary Rights and Licensed Technology	22

Significant Customers and Information about Geographic Areas	22

Sustainability	23

Associates	23

Available Information	24


1)	~~Electric Utilities and IPPs (Independent Power Producers)~~



	Years Ended October 31,
	2012		2011		2012
Research and development contracts	$	7,237	$	7,830	$	10,370
Cost of research and development contracts	14,354		16,768		18,562
Total research and development	$	21,591	$	24,598	$	28,932



	2012		2011		2010
POSCO	76	%	44	%	58	%
Department of Energy	7	%	—	%	—	%
BioFuels Fuel Cells, LLC	—	%	12	%	—	%
UTS BioEnergy, LLC	2	%	10	%	—	%
Pacific Gas and Electric Company	1	%	5	%	10	%
Total	86	%	71	%	68	%


(1)	Includes short-term and long-term restricted cash and cash equivalents.


(2)	Calculated as total equity (deficit) ~~equity~~ divided by common shares issued and outstanding as of the balance sheet ~~date.~~date (after giving effect to the December 3, 2015 1-for-12 reverse stock split).



Item 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


2)	~~Education and Healthcare~~


3)	~~Gas Transmission~~


4)	~~Industrial~~


5)	~~Commercial and Hospitality~~



	Years Ended October 31,					Change
	2012		2011			$			%
Total revenues	$	120,603	$	122,570		$	(1,967	)	(2	)

Total cost of revenues	$	120,158	$	135,180		$	(15,022	)	(11	)

Total gross profit (loss)	$	445	$	(12,610	)	$	13,055		(104	)

Total Sales Cost-to-revenue ratio ⁽¹⁾	1.00		1.10						(9	)



	Years Ended October 31,						Change
(dollars in thousands)	2015			2014			$			%
Total revenues	$	163,077		$	180,293		$	(17,216	)	(10	)

Total costs of revenues	$	150,301		$	166,567		$	(16,266	)	(10	)

Gross profit	$	12,776		$	13,726		$	(950	)	(7	)

Gross margin	7.8		%	7.6		%


~~(1)~~	~~Cost-to-revenue ratio is calculated as total cost of revenues divided by total revenues.~~



	Years Ended October 31,					Percentage
	2012		2011			change
Research and development contracts	$	7,470	$	7,466		—	%
Cost of research and development contracts	7,237		7,830			(8	)%
Gross profit (loss)	$	233	$	(364	)	(164	)%


			Payments Due by Period
(dollars in thousands)													Payments Due by Period
					Less than		1 - 3		3 - 5		More Than				Less than		1 - 3		3 - 5		More Than
Contractual Obligations			Total		1 year		years		years		5 years		Total		1 year		years		years		5 years
Purchase Commitments	⁽¹	⁾	$	54,895	$	50,180	$	4,715	$	—	$	—
Purchase commitments ⁽¹⁾													$	57,108	$	56,460	$	613	$	35	$	—
Series 1 Preferred obligation(2)	⁽²	⁾	14,437		1,249		2,499		2,499		8,190		8,176		956		1,911		1,911		3,398
Term loans (principal and interest)			4,314		1,027		422		466		2,399		15,619		4,435		3,414		612		7,158
Capital and operating lease commitments(3)	⁽³	⁾	3,171		1,203		1,874		94		—		5,939		2,193		2,555		1,129		62
Revolving Credit Facility	⁽⁴	⁾	4,000		4,000		—		—		—
Revolving credit facility ⁽⁴⁾													2,945		2,945		—		—		—
Series B Preferred dividends payable(5)	⁽⁵	⁾	—		—		—		—		—		—		—		—		—		—
Total			$	80,817	$	57,659	$	9,510	$	3,059	$	10,589	$	89,787	$	66,989	$	8,493	$	3,687	$	10,618


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


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




Item 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Item 8.		CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




Index to the Consolidated Financial Statements	Page

Report of Independent Registered Public Accounting Firm	6265

Consolidated Balance Sheets at October 31, ~~2012~~2015 and ~~2011~~2014	6366

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended October 31, ~~2012, 2011~~2015, 2014 and ~~2010~~2013	6467

Consolidated Statements of Changes in Equity (Deficit) for the Years Ended October 31, ~~2012, 2011~~2015, 2014 and ~~2010~~2013	6568

Consolidated Statements of Cash Flows for the Years Ended October 31, ~~2012, 2011~~2015, 2014 and ~~2010~~2013	6669

Notes to Consolidated Financial Statements	6770


	October 31, 2012			October 31, 2011			2015			2014
ASSETS
Current assets:
Cash and cash equivalents	$	57,514		$	51,415		$	58,852		$	83,710
Investments — U.S. treasury securities	—			12,016
License fee receivable	10,000			—
Accounts receivable, net of allowance for doubtful accounts of $586 and $555, respectively	25,984			21,950
Inventories, net	47,701			40,101
Restricted cash and cash equivalents - short-term							6,288			5,523
Accounts receivable, net of allowance for doubtful accounts of $544 and $132 at October 31, 2015 and 2014, respectively							60,790			64,375
Inventories							65,754			55,895
Project assets current							5,260			—
Other current assets	4,727			7,466			6,954			7,528
Total current assets	145,926			132,948			203,898			217,031
Restricted cash and cash equivalents - long-term							20,600			19,600
Project assets noncurrent							6,922			784
Property, plant and equipment, net	23,258			23,925			29,002			25,825
Investment in and loans to affiliate	6,115			10,466
Goodwill							4,075			4,075
Intangible assets							9,592			9,592
Other assets, net	16,186			16,291			3,142			3,729
Total assets	$	191,485		$	183,630		$	277,231		$	280,636
LIABILITIES AND EQUITY (DEFICIT)
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	5,161		$	5,056		$	7,358		$	1,439
Accounts payable	12,254			14,143			15,745			22,969
Accounts payable due to affiliate	203			104
Accrued liabilities	20,265			26,894			19,175			12,066
Deferred revenue	45,939			64,114			31,787			37,626
Preferred stock obligation of subsidiary	1,075			3,854			823			961
Total current liabilities	84,897			114,165			74,888			75,061
Long-term deferred revenue	15,533			7,000			22,646			20,705
Long-term preferred stock obligation of subsidiary	13,095			12,878			12,088			13,197
Long-term debt and other liabilities	3,975			4,105			12,998			13,367
Total liabilities	117,500			138,148			122,620			122,330
Redeemable preferred stock (liquidation preference of $64,020 at October 31, 2012 and October 31, 2011)	59,857			59,857
Total Equity (Deficit):
Shareholders’ equity (deficit)
Common stock ($.0001 par value; 275,000,000 and 225,000,000 shares authorized at October 31, 2012 and 2011, respectively; 185,856,123 and 138,400,497 shares issued and outstanding at October 31, 2012 and 2011, respectively)	18			13
Redeemable preferred stock (liquidation preference of $64,020 at October 31, 2015 and October 31, 2014)							59,857			59,857
Total equity:
Shareholders’ equity
Common stock ($.0001 par value; 39,583,333 and 33,333,333 shares authorized at October 31, 2015 and 2014, respectively; 25,964,710 and 23,930,000 shares issued and outstanding at October 31, 2015 and 2014, respectively)							3			2
Additional paid-in capital	751,256			687,857			934,488			909,458
Accumulated deficit	(736,831		)	(701,336		)	(838,673		)	(809,314		)
Accumulated other comprehensive income	66			15
Treasury stock, Common, at cost (5,679 shares at October 31, 2012 and 2011)	(53		)	(53		)
Accumulated other comprehensive loss							(509		)	(159		)
Treasury stock, Common, at cost (5,845 and 3,796 shares at October 31, 2015 and 2014, respectively)							(78		)	(95		)
Deferred compensation	53			53			78			95
Total shareholders’ equity (deficit)	14,509			(13,451		)
Total shareholders’ equity							95,309			99,987
Noncontrolling interest in subsidiaries	(381		)	(924		)	(555		)	(1,538		)
Total equity (deficit)	14,128			(14,375		)
Total liabilities and equity (deficit)	$	191,485		$	183,630
Total equity							94,754			98,449
Total liabilities and equity							$	277,231		$	280,636


	Common Stock																							Common Stock
	Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Deferred Compensation		Noncontrolling interest in subsidiaries			Total Equity (Deficit)			Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Deferred Compensation			Noncontrolling Interest in Subsidiaries			Total Equity (Deficit)
Balance, October 31, 2009	84,387,741	$	8	$	631,296		$	(599,960	)	$	(2	)	$	(53	)	$	53	$	—		$	31,342
Balance, October 31, 2012																								15,488,010		$	2	$	751,272		$	(736,831	)	$	66		$	(53	)	$	53		$	(381	)	$	14,128
Sale of common stock	27,600,000	3		32,077			—			—			—			—		—			32,080			357,983		—		5,548			—			—			—			—			—			5,548
Common stock issued for acquisition																								293,897		—		3,563			—			—			—			—			—			3,563
Share based compensation	—	—		2,965			—			—			—			—		—			2,965			—		—		2,226			—			—			—			—			—			2,226
Conversion of Series B preferred stock to common stock, net of original issuance costs	8,510	—		93			—			—			—			—		—			93
Stock issued under benefit plans	969,474	—		721			—			—			—			—		—			721
Taxes paid upon vesting of restricted stock awards, net of stock issued under benefit plans																								219,310		—		(173		)	—			—			—			—			—			(173		)
Reclass of noncontrolling interest due to liquidation of subsidiaries																								—		—		(562		)	—			—			—			—			562			—
Preferred dividends — Series B	—	—		(3,201		)	—			—			—			—		—			(3,201		)	—		—		(3,200		)	—			—			—			—			—			(3,200		)
Noncontrolling interest in subsidiaries	—	—		—			—			—			—			—		(663		)	(663		)	—		—		—			—			—			—			—			(961		)	(961		)
Effect of foreign currency translation	—	—		—			—			13			—			—		—			13			—		—		—			—			35			—			—			—			35
Net loss attributable to FuelCell Energy, Inc.	—	—		—			(55,663		)	—			—			—		—			(55,663		)	—		—		—			(34,358		)	—			—			—			—			(34,358		)
Balance, October 31, 2010	112,965,725	$	11	$	663,951		$	(655,623	)	$	11		$	(53	)	$	53	$	(663	)	$	7,687
Balance, October 31, 2013																								16,359,200		$	2	$	758,674		$	(771,189	)	$	101		$	(53	)	$	53		$	(780	)	$	(13,192	)
Sale of common stock																								4,973,604		—		105,966			—			—			—			—			—			105,966
Common stock issued for convertible note conversions including interest																								2,063,896		—		33,306			—			—			—			—			—			33,306
Common stock issued to settle make-whole obligation																								459,523		—		12,883			—			—			—			—			—			12,883
Share based compensation																								—		—		2,908			—			—			—			—			—			2,908
Taxes paid upon vesting of restricted stock awards, net of stock issued under benefit plans																								76,136				(1,079		)	—			—			—			—			—			(1,079		)
Noncontrolling interest in subsidiaries																								—		—		—			—			—			—			—			(758		)	(758		)
Preferred dividends — Series B																								—		—		(3,200		)	—			—			—			—			—			(3,200		)
Adjustment for deferred compensation																								(2,359	)	—		—			—			—			(42		)	42			—			—
Effect of foreign currency translation																								—		—		—			—			(260		)	—			—			—			(260		)
Net loss attributable to FuelCell Energy, Inc.																								—		—		—			(38,125		)	—			—			—			—			(38,125		)
Balance, October 31, 2014																								23,930,000		$	2	$	909,458		$	(809,314	)	$	(159	)	$	(95	)	$	95		$	(1,538	)	$	98,449
Sale of common stock	24,064,924	2		32,862			—			—			—			—		—			32,864			1,845,166		1		$	26,920		—			—			—			—			—			26,921
Share based compensation	—	—		2,577			—			—			—			—		—			2,577			—		—		3,157			—			—			—			—			—			3,157
Stock issued under benefit plans	1,369,848	—		654			—			—			—			—		—			654
Preferred dividends — Series B	—	—		(3,200		)	—			—			—			—		—			(3,200		)
FuelCell Ltd. (adjustment from Series 1 modification)	—	—		(8,987		)	—			—			—			—		—			(8,987		)
Taxes paid upon vesting of restricted stock awards, net of stock issued under benefit plans																								191,593		—		(539		)	—			—			—			—			—			(539		)
Reclassification of noncontrolling interest due to liquidation of subsidiary																								—		—		(1,308		)	—			—			—			—			1,308			—
Noncontrolling interest in subsidiaries	—	—		—			—			—			—			—		(261		)	(261		)	—		—		—			—			—			—			—			(325		)	(325		)
Preferred dividends - Series B																								—		—		(3,200		)	—			—			—			—			—			(3,200		)
Adjustment for deferred compensation																								(2,049	)	—		—			—			—			17			(17		)	—			—
Effect of foreign currency translation	—	—		—			—			4			—			—		—			4			—		—		—			—			(350		)	—			—			—			(350		)
Net loss attributable to FuelCell Energy, Inc.	—	—		—			(45,713		)	—			—			—		—			(45,713		)	—		—		—			(29,359		)	—			—			—			—			(29,359		)
Balance, October 31, 2011	138,400,497	$	13	$	687,857		$	(701,336	)	$	15		$	(53	)	$	53	$	(924	)	$	(14,375	)
Sale of common stock	45,012,306	$	5	$	63,998		—			—			—			—		—			64,003
Share based compensation	—	—		2,054			—			—			—			—		—			2,054
Stock issued under benefit plans	2,443,320	—		548			—			—			—			—		—			548
Noncontrolling interest in subsidiaries	—	—		—			—			—			—			—		(411		)	(411		)
Sale of noncontrolling interest in subsidiary	—	—		—			—			—			—			—		954			954
Preferred dividends - Series B	—	—		(3,201		)	—			—			—			—		—			(3,201		)
Effect of foreign currency translation	—	—		—			—			51			—			—		—			51
Net loss attributable to FuelCell Energy, Inc.	—	—		—			(35,495		)	—			—			—		—			(35,495		)
Balance, October 31, 2012	185,856,123	$	18	$	751,256		$	(736,831	)	$	66		$	(53	)	$	53	$	(381	)	$	14,128
Balance, October 31, 2015																								25,964,710		$	3	$	934,488		$	(838,673	)	$	(509	)	$	(78	)	$	78		$	(555	)	$	94,754



	2015		2014
Advanced Technology (including U.S. Government ⁽¹⁾):
Amount billed	$	433	$	2,517
Unbilled recoverable costs	3,077		2,886
	3,510		5,403
Commercial customers:
Amount billed	19,331		8,871
Unbilled recoverable costs	37,949		50,101
	57,280		58,972
	$	60,790	$	64,375



	Amortized cost		Gross unrealized gains		Gross unrealized (losses)		Fair value
U.S. government obligations
At October 31, 2012	$	—	$	—	$	—	$	—
At October 31, 2011	$	12,016	$	14	$	—	$	12,030



	2015		2014
Raw materials	$	29,103	$	25,460
Work-in-process ⁽¹⁾	36,651		30,435
Inventories	$	65,754	$	55,895



	2012		2011
U.S. Government:
Amount billed	$	20	$	52
Unbilled recoverable costs	890		1,012
	910		1,064
Commercial customers:
Amount billed	$	18,786	$	10,330
Unbilled recoverable costs	6,288		10,556
	25,074		20,886
	$	25,984	$	21,950


	2012				2011			Estimated Useful Life	2015				2014			Estimated Useful Life
Land		$	524		$	524		—		$	524		$	524		—
Building and improvements		7,587			7,579			10-26 years		9,263			9,117			10-26 years
Machinery, equipment and software		68,265			66,552			3-8 years		83,578			75,084			3-8 years
Furniture and fixtures		2,786			2,755			10 years		3,137			2,955			10 years
Power plants for use under PPAs		10,866			13,538			3-10 years		—			996			3-10 years
Construction in progress		7,970			5,762					9,948			10,534			—
		97,998			96,710					106,450			99,210
Less: Accumulated depreciation		(74,740		)	(72,785		)
Accumulated depreciation										(77,448		)	(73,385		)
Property, plant and equipment, net		$	23,258		$	23,925				$	29,002		$	25,825


(1)	Advance payments to vendors relate to inventory purchases.


(2)	~~Interest receivable relates~~Primarily represents the current portion of direct deferred finance costs relating to ~~amounts due on investments in U.S. Treasury securities.~~securing a $40.0 million loan agreement (see Note 10) and will be amortized over the five-year life of the facility.

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Accelerated filer þ

Non-accelerated filer o

Smaller reporting company o

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