Fusion Fuel Green PLC (NASDAQ:HTOO) Q2 2022 Earnings Conference Call September 8, 2022 10:00 AM ET
Company Participants
Ben Schwarz – Head of Investor Relations
Frederico Chaves – Chief Financial Officer
Jeffrey Schwarz – Chairman
Zach Steele – Co President of Americas
Conference Call Participants
Operator
Ben Schwarz
Hello, everyone. Welcome to the Fusion Fuel Green’s Second Quarter 2022 Investor Update. My name is Ben Schwarz, and I’m Head of Investor Relations at Fusion Fuel.
I would first like to remind everyone that this call may contain forward-looking statements, including but not limited to, the company’s expectations or predictions of financial and business performance which are based on numerous assumptions about sales, margins, competitive factors, industry performance and other factors which cannot be predicted. Forward-looking statements are inherently subject to risks, uncertainties and assumptions and they are not guarantees of performance. I encourage you to read the disclaimer slide in the investor presentation for a discussion of the risks that may affect our business or may cause our assumptions to prove incorrect. The Company’s under no obligation and expressly disclaims any obligation to update, alter or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Okay. Thank you all for joining us today. As always, I will run through our agenda for the next hour, we will open with some remarks from Fusion Fuel’s Chairman, followed by an overview of our value proposition as well as some observations about valuations in the green hydrogen sector. And then the management team will share second quarter highlights, financial results, the latest on our technology, and an update on our commercial strategy and pipeline. As we always do, we’ll end with a recap of our 2022 milestones before opening up the floor for to facilitate Q&A. And as in previous calls, questions can be entered in the chat box in the webcast platform at any point during the next 58 minutes. Alternatively, you can also submit your questions to the investor relations mailbox at ir@fusion-fuel.eu. So without any further ado, I’ll pass it over to Jeffrey Schwarz, Fusion Fuel’s Chairman.
Jeffrey Schwarz
Thanks Ben. I’m Jeffrey Schwarz, Chairman of Fusion Fuel Green PLC and I want to add my welcome to our Q2 and six months investor presentation. The equity markets have not been kind to growth stories this year. The Federal Reserve’s efforts to rein in inflation by raising interest rates has had a disproportionate effect on the share prices of fast growing companies due to the discounting of our year cash flows, or so Wall Street analysts would have you believe. Then again, most of those strategists began the year predicting double digit equity market returns. So I’d take their advice with more than a few grains of salt. I know I say this almost every quarter. And I apologize if I sound like the proverbial broken record. But I’ve been in the investment business for more than 40 years. And the one investment strategy that has proven to work consistently over time is to uncover businesses that serve a growing market with a superior technology and a strong management team. That is what we identified with Fusion Fuel Green and recent events in particular, the energy crisis in Europe, and the passage of the Inflation Reduction Act of 2022 in the United States, have only served to magnify the opportunity.
A chief concern for producers or off takers of green hydrogen is a concept called the levelized cost of hydrogen, which is driven primarily by the interplay of two factors, the cost of electricity required for electrolysis and the CapEx for the electrolyzer and balanced [Inaudible]. Fusion solution offers advantages on both counts. Grid independence and scalability are what makes our solution unique, and especially ideal for the high value added mobility market, which is a key near-term target for Fusion. In the production of green hydrogen grid independence enables eliminating exposure to highly volatile prices for electricity and natural gas, a benefit and very much in focus during this time of historically high energy prices in Europe. The benefit of eliminating this form of uncertainty is quite straightforward. The fact that our HEVO-Solar generators can produce low cost green hydrogen, at even the very modest levels of production eliminates risk in a less obvious, but potentially more important way.
And I beg your indulgence for a moment as I use an analogy to explain. Imagine, if you will, two suppliers of equipment, which are used to produce widgets. Supplier A offers a machine that can produce 10,000 widgets per year, but at a high cost, or alternatively, a second machine that can produce 100,000 widgets per year at a lower cost but with a significant upfront capital investment. Supplier B has a machine that can produce 10,000 widgets per year at that same lower cost, but with just a fraction of the required CaPex. Also, let’s assume that the expectation is that the market for widgets will grow significantly over time. But next year when the equipment will be delivered, the market is projected to be 10,000 widgets, but which one would you recommend purchase? To me the answer is obvious supplier B. The ability to meet current demand, while retaining the potential to grow productive capacity, as the market grows, is the slam dunk winner. And that’s even more so if one believes the price of widget making equipment may will decline in the years ahead.
Well, I suspect it won’t come as a surprise to you. But in this analogy, manufacturers of centralized electrolyzers are supplier A and Fusion is supplier B. And this feature of being able to start with models production of green hydrogen, and grow as demand grows is especially important in a nascent market like mobility, with a very large existing stock of diesel fuel trucks, buses and heavy duty equipment. The demand for green hydrogen today is modest, however, is expected to grow over time as existing equipment reaches end of life and is replaced by equipment powered by hydrogen fuel cells. I’ll conclude by saying this, keep your eye on the prize. If you believe that the future of green hydrogen is bright, and believe our HEVO-Solar solution offers unique advantages, then there’s every reason to believe as I do, and mind you I have never sold a share of Fusion, that we will be successful in building a company that is valued highly in the marketplace.
With that, I’ll turn the call back over to Ben.
Ben Schwarz
Great, thanks very much. So with the benefit of that context, let’s begin with an overview of Fusion Fuel’s business case and value proposition. For those of you who are new to the name or need a refresher, Fusion Fuel is in the business of developing and delivering cost effective clean hydrogen solutions to accelerate the global energy transition. As I’ve said before, at its core Fusion Fuel is a technology company we have developed and commercialized a proprietary integrated solar to hydrogen generator that unlocks grid independent green hydrogen production at a market leading levelized cost.
Our decentralized approach is a truly unique source of differentiation in the market, where everyone else is going bigger to drive down costs. We’ve gone small scale and modular and doing so had been able to eliminate some of the cost and complexity of hydrogen production and distribution. While others are talking about developing green hydrogen projects, we’re doing it as we speak, our HEVO-Solar technology is producing green hydrogen at our demonstration facility in Portugal. And our unique approach and differentiated technology have enabled us to build a robust commercial pipeline of tech sale and development projects, led by our pilot project with Exolum in Madrid, which will be up and running by the end of the year.
Yet, despite all that, it’s not lost on us that we continue to be persistently and significantly undervalued relative to our peers in the green hydrogen sector, a group of names that undoubtedly has advantages from maturity, scale and balance sheet perspective. But as our Chairman rightly pointed out, in a market where most everyone has fundamentally the same offering, what customers care about more than anything is levelized cost of hydrogen that is and will continue to be the key differentiator. That also happens to be where we believe we have a clear competitive advantage. Not only we offer known long-term certainty of costs through our integrated solution, but we can do so at market leading levels agnostic of scale and without grants. We have a differentiated business model of selling both technology and green hydrogen and have a clear path to revenue generation and delivery at scale.
So another way of looking at this chart would be to say Fusion Fuel is the cheapest green hydrogen pure-play stock out there today by an order of magnitude. And hopefully the next 50 minutes or so together will lead you sharing a similar perspective. So I’ll now pass it over to Frederico who will provide an update on the quarter and subsequent events.
Frederico Chaves
Great. Thank you, Ben. And good afternoon and thank you everyone for joining us. As always, we’re excited to share with you the latest developments at Fusion Fuel, and particularly given the recent macro events and industry news that make it a very bright and exciting future for us.
So we’ll cover a few of these items during the presentation. So I will just touch upon some of the highlights now. From a technology and production side. We’ve not only fall in line with production of our HEVO electrolyzer, the new Benavente facility being the first the producing electrolyzers in mass scale in Iberia. We’ve also completed an assessment of our technology and manufacturing process with Black & Veatch. In addition, we have TUV SUD performing ongoing performance tracking of HEVO-Solar units, and it continues to perform 10% above our [Inaudible].
As part of our continued investment and commitment to our technology development, we filed two more patents, which we believe will continue to provide us with a technological edge in the markets.
On the project side, we continue to secure significant grounds for our project portfolio, in particular with the recent announcements of our C-14 and C-5 awards in Portugal. In July and August, we also raised around $2 million through our ATM offering. This is a facility we expect to continue to tap into opportunistically, we see great opportunities for us to pursue within our project portfolio that I mentioned. And at times, we may feel that we may tap into this toolbox, if we feel it’s appropriate.
In the past weeks, the days when we were more, most active and naturally around the Inflation Reduction Act in the US that for higher market volumes, and we opportunistically dipped into those. That said we continue to be in strategic partnership discussions of various types, which was is a longer term importance to the firm and hopefully we can share more details on that later.
Next slide please. In the second quarter, we recorded an operating loss of EUR 4.8 million, of which EUR 4 million related to operating expenses. Of these EUR 1.9 million are related to personnel costs and EUR 1.3 million are related to non-recurring professional administration costs as well as one off annual costs related to annual company and statutory audits, filings and related legal fees. We maintain our guidance of around EUR 3 million a quarter of operational costs until your end.
We booked EUR 150,000 euros of share-based expenses is a non-cash expenses and are related to restricted stock units and options related to Fusion Fuel personnel. As previously highlighted, this is a charge that will be recurring as it is amortized over the vesting period. We do intend to keep using securities with vesting causes as a means to attract talent, reward staff and ensure alignment with shareholders. Therefore, non-cash expense line related to these should be expected over the coming years.
Each quarter we need to recognize fair value movements on outstanding warrants. With the market movements in particular related to energy and gross sales, we have a positive impact of EUR 6.7 million. This is simply an accounting recognition and it is a non-cash item.
In the quarter, we also got EUR 0.5 million gain drawn by positive FX movements in our cash and short term positions. We also had EUR 170,000 chart related to our Fusion Fuel Spain joint venture and our share of those results.
We ended the quarter with EUR 10.6 million in our cash and cash equivalents instruments. As previously mentioned in the second half of 2021 and in the first half of 2022, we made strategic and long-term purchase orders to secure our supply chain. With those deliveries now having taken place significantly, we expect these expenditures to significantly abate in the second half of the year.
We closed the quarter with EUR 63 million of assets, of which EUR 32 million are related to PPE assets such as our Evora project, Azambuja project in Sines, Benavente facility and our intellectual property.
We also hold around EUR 21 million of inventory materials we have prepaid and receivables. Our receivables and certain [Inaudible] are driven by VAT to be recovered with which we have split out here and our grants awarded.
Following slide, Ben. At the end of the second quarter, we continue to have the same number of outstanding shares. We have an increase of around 7,000 restricted stock units versus the first quarter related to instruments issued to [Inaudible]. In Q3, we will have some modest increase in the outstanding shares due to the ATM facility and some shares that will vest for employees.
Move to slide. We’ve added this slide to provide transparency on the grounds we’re pursuing the ones — and the ones that have already been approved. This is an area that we are incredibly successful in pursuing. And we have amassed a great portfolio of projects with substantial support. The numbers here exclude our IPCEI submission as that project is so large that it will significantly distort the numbers, but rest assured, we are still pursuing it. And as a reminder, it is project that is in total investment size more than EUR 500 million.
As you can see, we have made submissions for just under EUR 80 million of grant financing. These are projects principally in Portugal, but also a few in Spain. EUR 19 million of grants have already been approved. And of these we have already submitted EUR 3.5 million to be released. This number will grow as we continue to implement these projects.
In the EUR 60 million of other grants applications, we have the C-5 senior projects in that. This is a grant we have been awarded but we have not yet received confirmation of the value. We will communicate this as soon as we can.
As we’ve noted before, we have a differentiated value proposition with both own technology and own projects being developed, creating substantial value. We have seen several projects with developers be abandoned even after being awarded grants. We are of the very few that are in actual development and implementation. This highlights the success on multi-pronged approach and is a strategy we will continue to pursue in Iberia and other markets.
Turn to slide. We continue to rapidly evolve our technology to keep us ahead of the curve. And on this slide you can see the continuous evolution about miniaturized electrolyzer and the HEVO. In fact, I have four of them in front of me as well for those who can see in the small screen. When it was first created, when the HEVO was first created a significant portion of our cost reduction came from simplifying the heavy design. We have maintained that simplification principle and not only further applied it to the HEVO but also to the HEVO-Solar overall. As you can see, we are reducing the number of HEVOs and HEVO-Solar which helps us drastically reduce the number of components of piping required, the maintenance costs of plant, and it also reduces the installation time and costs.
This more powerful HEVO and the cost reductions related to our product evolution continue to position us at the forefront of green hydrogen in terms of cost competitiveness. As mentioned before, we completed an independent assessment of our technology and manufacturing process with Black & Veatch. And in addition TUV SUD is performing an ongoing track record analysis about HEVO-Solar and it continues to beat our expectation in terms of hydrogen production performance.
In addition to our HEVO evolution, we’re also working on new and exciting technology advances, which we hope to be able to share with you in one of the upcoming updates.
With this I will pass out to Zach, who will give an update on our commercial efforts.
Ben Schwarz
Sorry, Zach, a little bit of internet difficulties.
Zach Steele
Hey, thanks Frederico and hello everyone. From a commercial standpoint, our mandate is simple to secure commitments for the full production of our Benavente facility in 2023 and beyond. Our goal is to confirm over 2,500 orders in 2023 and approximately 4,700 in 2024. We are concentrated on efforts in Portugal and are strategically expanding it to other markets such as Spain, Italy, Greece, the United States and Canada. Each project or geography goes through a detailed review to make sure it is a good fit for our technology, our strategy and most importantly, something we’re confident we can execute. To do this, we’ve implemented a multifaceted approach to deliver on our business plan, focusing on technology sales, and developing our own projects and mobility sector as well as strategic industrial hubs.
Our vision is to build a mobility backbone throughout Portugal and use this as a blueprint to build into other strategic markets in southern Europe and North America. In parallel, we’re also focused on been a major part of the solution in strategic and heavy industrial locations in Portugal, and other markets we expand into.
We have several third party sales in our pipeline, seven of which are in more advanced stages of development, and total over 507 HEVO-Solar units that represents over EUR 25 million in potential revenue in 2023. Our expectations for our current Fusion Fuel development projects to count for the balance of our production in 2023 and 2024.
Almost all of our projects have grants which make them more competitive to our customers from a pricing standpoint, and financially attractive to investors. We’ve secured over EUR 40 million in grants and plan to hear back shortly on additional programs as Frederico mentioned in C-5 in Portugal, and also the Porto program in Spain, which we’ve already been notified of awards.
As I mentioned, we’ve sought to narrow our commercial focus to two strategic platforms, mobility and industrial decarbonization. We continue to focus on developing a mobility backbone in Portugal by providing turnkey solutions to the market. We have a number of mobility projects in Portugal in various stages of the development cycle and are looking to build out — build on that template into other markets. Focusing on strategic industrial locations is the other key platform. And we believe Portugal is poised to play a critical role in addressing the energy crisis, which continues to plague all of Europe. And that starts with Sines in Portugal, we are committed to being a leader in decarbonizing Sines industrial zone, while also ensuring we are positioned to capitalize on the hydrogen export opportunity. We recognize that a development focused approach is capital intensive. And as a result, we are working on multiple solutions to secure equity capital from infrastructure funds, and exploring project financing alternatives.
Next page. Fusion Fuel’s competitive advantages are decentralized and scalable approach to green hydrogen production. Large centralized projects require substantial investment not just in the electrolyzer itself, but also surrounding infrastructure such as pipelines, trucks and other balance of plant equipment. This also takes significant time and creates additional complexities for large scale, centralized projects to secure permitting and financing to develop that additional infrastructure. We’re seeing the cost of last mile Logistics and Distribution of hydrogen to be as much as $2 per kilogram it causes like most of the time goes unnoticed when you talk about levelized cost of hydrogen. Our approach is to co locate our system on site next to the end user and use our HEVO-Solar solution even at small sizes as it’s competitive. This allows customers to not have to make very capital and time intensive bets on a centralized system, and instead start small and grow with the market demand over time. This option doesn’t exist in the market today and is needed in a nascent market like green hydrogen. As pioneers in green hydrogen, Fusion Fuel notice the problem in the market with our customers and our providing a solution to let our customers grow with us and ease into the hydrogen ecosystem while offering the lowest possible levelized cost of hydrogen in the market, especially when you include avoided distribution costs.
As previously noted, we focus — we’re focused on two core markets, mobility and decarbonizing specific industrial hubs. First on mobility, we’ve learned many important lessons from our first project with Exolum, the largest refined products distribution company in Europe. The key takeaway from our experience thus far on Exolum is that we must not just offer our technology, but we must offer a solutions to our customers, which can include supporting development, permitting, grant applications, construction and operations of the overall facility. This experience has led us to offer customers several solutions in mobility such as just selling technology as a solution, building the facility and selling them hydrogen, or building the entire hydrogen value chain offering hydrogen as a service. This provides our customers multiple options to transition to the hydrogen ecosystem. By either offerings not only include hydrogen production, but also includes the refueling station and the vehicles. We are establishing network of companies to offer a suite of services including trucks, forklifts and buses to our customers.
We are seeing substantial interest not just in Portugal, but throughout the Iberian Peninsula, Italy and Greece and are beginning to see interest in North America, particularly in light of the passing of the Inflation Reduction Act.
Portugal, as I noted, is a strategic market for Fusion Fuel, and in order to make hydrogen a reality in 2023, we are focused to develop our own pipeline of projects to build out the hydrogen refueling infrastructure in Portugal. We’re focused on building out a mobility backbone centered around major distribution hubs along the coast in Azambuja and Sines as well as an Elvas and Evora. These are key areas of focus and we plan to build off these locations to put green hydrogen production and refueling stations every 150 kilometers to connect Porto to the Algarve and Lisbon to Spain. We also have selectively been looking at working with municipalities throughout Portugal to offer solutions to them as well. In buses and also looking at different aspects. The Sines region also is core to Fusion Fuel as I noted, and it’s not just Fusion Fuel it’s also Portugal’s, it’s also important for Portugal and Fusion Fuel’s ambition for the domestic hydrogen market. Sines is currently has one LNG terminal as well as having a Galp Refinery that consumes 60,000 tons per year of hydrogen, plant green ammonia export facilities and other industrial customers.
Sines is currently planning to build a hydrogen pipeline that will supply hydrogen to customers in Sines, and potentially export to other markets. Today, we have secured $40 million grants for projects in Sines are awaiting award of additional grants to help us achieve our target of 10,000 tons per year of green hydrogen production in the region.
In summary, this represents over 3,700 HEVO-Solar units, which will be produced in 2023 and 2024. That’s over 50% of our 2023 and 2024 production, and these projects will come online in 2024 and 2025. Our company continues to evaluate, negotiate and develop opportunities in Spain, Italy, Greece and North America to get the remaining orders of the balance of our 2023 and 2024 production.
To continue to fill out our planning capacity for 2023 and beyond, we’re not just focused on development projects, but also looking to provide solutions to our third party customers. We have combined 500 — over 500 HEVO-Solar units of tech sales in advanced stages that are either signed, awaiting the award of a grant or in negotiations to be signed. The ones we are waiting to sign or receive grants are marked as confidential. As of now, our pipeline of tech sale projects is focused in Portugal, Spain and Italy. We’re actively evaluating opportunities in other markets as well. We’re not just selling technology to our customers, but in many cases, we’re also providing a turnkey solution as I noted before. One point I’d like to highlight is that the grant requests that are being made are exclusively using our technology, which gives us the ability to secure these projects as they are awarded. Our approach allows us to not only make margin on our technology sale, but also the opportunity for additional revenue streams with the overall construction of the facility and revenue during operations while offering the best possible solution for that specific customer.
Lastly, one of our core markets we’re expanding into is North America. In the USA, Inflation Reduction Act is a massive win for fighting climate change and accelerating the clean energy economy specifically in green hydrogen. This is a true game changer for us and the rest of the hydrogen value chain, the focus specifically on Fusion Fuel, we qualify for the $3 per kilogram production tax credit, or the 30% investment tax credit. The production tax credit can also be taken as cash payments via direct payments from the IRS. Fusion’s technology is rapidly reducing its levelized cost of hydrogen to under $3 per kilogram before subsidies in 2023 and likely well below that are regions with superior solar radiance, such as California, Southern California or southwest USA. This combined with our decentralized approach allows us to be able to offer lower prices and grade hydrogen or diesel costs today after monetizing the production tax credits. Our team is working hard to build a large presence in North America, we’re beginning to build out our team to give us the bench strength to aggressively enter this very important market. We are enacting negotiations to secure projects and partnerships throughout North America. I cannot stress how big of an opportunity this is for the hydrogen market. And for Fusion Fuel, especially due to our unique value proposition we can offer with our decentralized approach. We look forward to sharing work significant updates on this point over the coming months.
I’ll pass it back to you Frederico.
Frederico Chaves
Great. Thanks Zach. And it promises to be very exciting future updates given all the US development and also technology development. So I hope you also join us in our next month. Before moving to our Q&A. I’ll briefly recap on our core milestones for this year to help understand where the progress we’ve made, we’ve highlighted which items are completed, which ones are in progress and which ones have not yet started as of Q2.
On production, we went live with a HEVO of production at Benavente, to remind everyone that is about 120 megawatts of electrolyzer production capacity for next year. We will, how much we produce depends on when the project is live, standard licensing, we will try to give them the rapid evolution of the units in front of me, and we will try to always be producing for the projects as we need to put them into the ground.
The rest of the production lines in Benavente are expected to go live in Q1 and Q2 of next year. On a commercial scale, we’ve also secured sorry, we’ve also secured the grant for the Benavente facility. So on the production side that is very well on the progress side as it already first half of the year. On the commercial side, Zach has already covered the great progress both in securing the orders projects, while securing the related grants, and the very exciting developments happening in the US.
On technology, the same, we continue to evolve and maintain our leadership position. In the second half of the year, we started designing the oxygen capture setups, and we intend to prototype this in 2023. So therefore, we’ll be able to capture not only and sell or position ourselves on the green hydrogen production process but also green oxygen production. As seen before, we hope to share some of the new innovations we’ve been cooking in one of our upcoming updates.
Project development and implementation is well underway for several projects. As we’ve noted several times, we’re actually making green hydrogen a reality. Safety is a central piece of our culture, and a point that we’ve been instilling across all of the areas of the organization. And this will continue throughout our time [Inaudible].
Overall, the momentum we see within the firm and in the whole hydrogen market has been incredible. I was excited with the opportunity we have in front of us. Now I pass over to Ben to moderate some Q&A. Thank you.
Ben Schwarz
Thanks Frederico. Looks like we’ve got quite a few questions coming through. Getting some feedback on my end. I’ll work through the questions, the email as well.
Question-and-Answer Session
Operator
[Operator Instructions]
Ben Schwarz
So let’s us kick this off with some questions from Chris Young at Weber Research on the C-5 grant, if you could talk a little bit about the approval process and what determines the final approval amount? I guess that’s probably a question for Federico.
Frederico Chaves
So on the C-5, C-5 is a component of grants that is in mobilizing agendas. So these are many companies involved in these programs as around 90 or so companies that are involved in the discussions with governments. So the government, so only when all of those are finalized, we have confirmation on our final value. So we hope that is within September we hope to be communicating but I’d say the timeline is not within our control. We have already been confirmed across that we will receive an award, the question now is the value.
Ben Schwarz
A couple of questions on grant funding here. So for Benavente, what other milestones need to be met before you can invoice the remaining EUR 3.5 million? How do tax credits work? Is dollar for dollar, or euro for euro rather that reduces taxable income or is it taxes against profits?
Frederico Chaves
So I’ll also in this reverse order. So it is tax again profits of company and we have until 2032 to make use of those. And on the, what’s required to take the others it’s a proportion of spent. So in line with our spending for Benavente, we are able to ask for reimbursements and cost cutting. So as part of the production lines that I mentioned before, so Q1 and Q2 start to be delivered, we expect to also be submitting the reimbursement requests for all [Inaudible].
Ben Schwarz
I’ll skip to a different question then circle back to a couple more from Weber Research related to Benavente. If demand increases significantly at what speed would be possible to ramp up production.
Frederico Chaves
So I’ll say this as well. So this is at the moment with the first production lines already designed and ready it would likely take around a year to be able to develop the second and third production lines of copy paste of the existing ones. However, and as I [Inaudible] before, we are working on some new solutions where we believe the ramp up, our ability to scale could be faster and also cheaper. So hopefully if not next quarter potentially one after that we will be sharing that with you all.
Ben Schwarz
Thanks Frederico. Let’s get Zach involved a little bit here. Slide 19 of the presentation refers to an EPC turnkey project. Can you talk about what that means, are those potential own projects or those –are those technology sale projects?
Zach Steele
Thanks Ben. So they are technology sales, we mean EPC turnkey as I noted in my, one of the slides, we’re offering support and grants, grant applications, development, permitting, and also includes building the entire project. So all balanced plants equipment, not just HEVO-Solar’s technology.
Ben Schwarz
Thanks. On that same slide for the tech sales, it looks like the cost per HEVO-Solar varies from the implied cost rather varies from 31 for the two Portugal projects to 44k for the one Italy. Can you help us understand how the pricing works and how the projects may differ from one another?
Zach Steele
Thanks. So on some projects, we have additional equipment such as compression, storage, and other balance of plant equipment that drives up the cost of the overall system that’s embedded in that cost that is noted, which is why it’s higher on a per unit basis.
Ben Schwarz
Great. Question here for our Chairman. So we received a question alluding to Nikola as a potential partner or customer in the US market. So while we can’t touch on any individual companies or counterparts, perhaps you can share your perspective on the strategic partnership process and how you and the executive team are thinking about it.
Jeffrey Schwarz
Yes, so as we’ve said, on numerous occasions, we’re a small company today with approaching a very large opportunity. And we understand that our growth trajectory, can steep in materially with partners who have either financial or operational scale. So we’ve been in conversations with potential strategic partners, whether they’re technology providers, we’ve mentioned conversations with Toshiba, which are ongoing, with companies that might be interested in our HEVO-Solar solution, and deploying it in their businesses, or partners who are interested in our project pipeline and might be interested in co-investing with us or purchasing projects for infrastructure funds. So all of those are conversations that are ongoing in a process that is a formal process. If you will step into their shoes for a moment, you could imagine that they would probably want independent third party validation of our technology of our production process, confirmation of the efficiency of the electrolyzers. And that’s something that we understood, we went out and have obtained that confirmation through the Black & Veatch and TUV SUD process. And we had been able to now deliver that to potential strategic partners who we’ve been in conversation with, once again, putting yourself in their shoes, the shoes of a interested financial party, you could imagine that the size of the grants that we might receive for projects have a major impact on what the economics or those projects are like.
And C-5 in that regard, C -5 is an important one. It’s the single largest of the grants that we have received so far. But we are in as Frederico described in these final stages of negotiation. I would think that without offering any information that would compromise our ongoing conversations, it would seem reasonable that these various strands of a strategic partnership evaluation process are coming together. We have not wanted to have any one party too far out in front of others in order to be able to present our board with multiple options to choose from. And all I would kind of conclude with is that this is a process that we would hope to be able to provide significantly additional disclosure on before yearend. And just to maybe touch on what might be an adjacent question, which would be how do we finance both the ongoing operation and these potential projects and what I would call out to folks is we have a balance sheet that has no debt, significant assets, a factory in Benavente that is debt free. We have claims against or receivables from government entities, whether those be VAT receivables, whether those are grants receivable, so we have significant assets that would be attractive for debt financing. We also have the potential for raising capital at the project level through from financial partners, we have the potential to raise equity at the holding company level, those I view all of those as live options for us and the board will determine which and most likely what a mix of all of those would look like to finance both our ongoing operations as Frederico referred to roughly a EUR 3 million per quarter operating expenses and then significant investment for project development. So we’re as a company we’re very comfortable with our financial position and the options available to us.
Ben Schwarz
Thanks. So let’s stick with, we’ve got a couple of questions here on the ATM facility. And so we’ll stick on that capital strategy theme. Talked about the company being undervalued relative to its peers. Isn’t it counterintuitive to use the ATM and further dilute shareholders at this point, would it be better to either get a big partner on board or concentrate on the textile portfolio with a faster return on limited equity instead of potentially using the ATM to finance the company’s production? Thoughts on that.
Frederico Chaves
So I’ll jump on that one, so naturally to what Jeff alluded, and also Zach has mentioned in our product portfolio, we have a massive runway ahead of us. And we need to think strategically about how we will cover that. We have several options available to us. The ATM, as I mentioned before, is something that we will look to tap into opportunistically and when we see volumes of interest, and also it’s a facility that allows us to find the right partnership opportunity and not be forced into something in a rush. So we do not want to slow down the activities. The ramp up in the industry has massive, we see here an opportunity to take an outsize market share given our maturity. And we want to push for that. And so this is just another tool in our box. And as I mentioned before, the IRA announcements in the US provided market movements that we could actually opportunistically tap into.
Jeffrey Schwarz
Then I just wanted to add one or two other thoughts. The first is that as Frederico mentioned, we have built up an inventory of both key components and finished goods that will enable us to move quickly on projects that where grants have been received and where they need to begin construction by a deadline or else those grants are lost. So there are indeed projects that we are looking at that have been brought to us because the clock is ticking. And the developers haven’t been able to complete to get the equipment necessary to complete the projects in time. We want it to be in a position and we are now in a position to move quickly on projects like that. But as Frederico said, having now built up that our inventory, our spent on inputs will decline materially in the back half. So I, an answer to that question about isn’t it better to focus on tech sales. I think that going forward, we are now positioned to not need to be building to be investing in working capital, something that we did proactively choose to do in the first part of the year. And secondarily, I will acknowledge that the timing of the receipt of some of the grant funding has been a little bit slower than we had anticipated.
This is all very new for the governments that are involved in trying to encourage development of the green hydrogen industry. And it has taken them a little longer than I think they would have expected. And then we expect it both on the grant approval process, but also, once grants have been approved on funding. And we think that lag is something that should be, the government should be catching up on that. But we are also, as I mentioned, exploring options for getting debt financing against some of those grants and receivables. So that too should reduce our need for short term funding which an ATM can be another opportunistic source of.
Ben Schwarz
Great, let’s, one last question on financing, maybe for Zach here. In last quarter’s call we described there being a choice between partnering to obtain capital versus using our own on fusion field projects, which much of our pipeline being company on development projects, and no announcement yet on partners. Are you now leaning towards using your own capital for these projects?
Zach Steele
Thanks, Ben. Yes, that’s a great question. We should provide some clarity too. So I noted on the first slide that I was speaking to that, we recognize this as Jeffrey and Frederico just stated, we recognize it’s a capital intensive set of projects. And we are actively in discussions and looking at alternatives with infrastructure funds and other equity sources to fund our development pipeline. So those structures will allow us to use third party capital to fund the majority of the capital costs, which will reduce the stress on our balance sheet going forward.
Ben Schwarz
Thanks Zach. Let’s turn it over to our cost advantage. It’s a question around scale. One would expect that even in modular technologies, such as our own we have a lower levelized cost for a larger scale project and a very small one. That’s certainly the case for solar farms, despite the modularity of solar panels, when we describe our ability to produce small sub one megawatt projects at low cost, would you estimate that there is no increased levelized cost of hydrogen even at this small size?
Jeffrey Schwarz
The question Ben is, are there any additional costs?
Ben Schwarz
Yes, or the flip side is or I guess, can you talk about the economies of scale that we do or do not benefit from as we develop larger projects on our portfolio?
Zach Steele
Sure, I’ll take that one, Frederico. We like other our peers would benefit from balance of plant equipment on compression or storage or purification, that as you kind of scale into an opportunity. But we’re, as far as the technology on our electrolyzer, we’d be able to prove even with smalls in Evora at 15 units, that we think that we can compete at the prices that we stated in our presentation.
Ben Schwarz
Related to that, I guess, and I recognize that this will depend on the specific application or use case at what price per kilogram is a Fusion Fuel’s technology and Fusion Fuel Green hydrogen profitable.
Zach Steele
Yes, it’s a great question. So that’s also a very loaded question, right? It depends on the market. So let’s unpack that a little bit. So let’s look at Europe, right? We’re, as we know, we’re really focused in Portugal. If you look at the gas blending one at four bar, we can inject directly into the gas grid, right so that reduces the amount of balance of plant equipment that we would need. That market today if you look at natural gas 10 year strip, plus, carbon tax avoidance is north of $4.75 per kilogram. So we noted that our levelized cost is becoming around $3. So there’s definitely had margin there to make selling into just spot pricing on the gas grid as example. Mobility, which is a key market for us, is as high as close to $8 to $10 a kilogram, at the dispenser level, however, that requires us to put compression to get to 350 to 700 bar requires storage, but we’re still able to be profitable and be below what the current market pricing is being offered today.
And then looking US and other markets, we’re seeing in select markets, not including even the – not including the IRA incentives what we’re seeing in California and other markets, that we can compete heads up on mobility by just providing our technology and being under the current market pricing.
Ben Schwarz
It’s great segue to this next question, given the cost advantage, both in the EU even without grants given that the energy market in the US with grants, why does it seem to take so long for the market to materialize particularly in the EU, one would think that with the current obvious cost advantage that would translate to firm orders in fairly short order.
Zach Steele
I think industry wide as I noted, everybody is meaning really heavy into doing large, large scale centralized projects, that requires additional land, additional permitting, and additional complexities, right. So binary risks, our approach and what we’re doing we’re able to kind of reduce the balance of planned risks. And I think really, for us, we’re seeing a lot of momentum recently, as we’ve just got our story out there more and are really pushing this really show people they can come to Evora, giving them a Black & Veatch study, showing them the two study and really be able to explain that we’re, our technology has reaching a certain level of commercialization that can be competitive, even without ramps, and we are starting to see, as I noted, other opportunities in Italy, Spain, Portugal, in North America.
Frederico Chaves
Zach, I’d like to just add that this is a nascent industry in a way, and there’s been significant progress made more recently in changing the legislation around licensing and so on. And I’ll just recall how long it took us to get all the licenses and so on for Evora. And then as the clause of Evora process, there was a change in legislation around licensing. So this is going to happen with several markets. And this is one of the reasons why things have taken just longer also in Europe, the legislative regulatory environment is catching up with the market developments.
Jeffrey Schwarz
I just like to offer one more practical element, which is there’s a huge amount of funding available. If you are considering installing a green hydrogen plant, and your choice is pulling the trigger today And knowing that there is, you get the project is economically viable. But also knowing that if you pull the trigger today and go ahead with that project, it is highly unlikely that the government is going to provide the grant. The grant is an incentive for companies to move ahead. And so people are understandably hanging back in the hopes of being able to win grants and then move ahead with projects. And I think that as these grants start to break loose, you will see projects move more quickly. But quite frankly, I understand why the clients that we are talking to are wanting to wait on the finalization of grants before committing to projects.
Ben Schwarz
Thanks. Frederico, you mentioned the process of, the permitting process for Evora, if you could just touch on providing a quick update on where things stand with Evora.
Frederico Chaves
So with Evora, we will have all the permits and license for production hydrogen and license to connect to the grid. We are, fall out fuel cell is ready to be connected. We are waiting for just the Portuguese regulator company to do the actual physical connection to the grid, we actually expect to start. As we expect that to be shortly, we will start producing into the storage tanks potentially as early as next week, if not the week after. And with that, as soon as we’re connecting, connected to the grid, we will start producing electricity to sell into the grid. So we are in the clear, we literally now need just the physical plug into the electrical grid here in Portugal. And a little bit before that, we will start producing to fill up the storage tanks.
Ben Schwarz
Thanks Frederico. Question, a couple questions here about the German market and I guess, perhaps more broadly, Northern European or northern latitudes and longitudes. Is the — isn’t the benefit of the avoidance of transportation cost limited to sunny countries or regions. So for countries like Germany or Northern Europe, we would only have the benefits of cheaper production. I think this is more about clarifying the markets, the choices we are making, that the markets in which we’re going to play.
Zach Steele
That’s correct, Ben. And we are focused on markets with strong solar radiance, to be able to offer the best advantage to our own projects, as well as for our customers. So that’s why, as I noted, we’re focused on Portugal, Spain, Italy, Greece, and then specific areas within the United States and Canada, that up its whole radiance.
Ben Schwarz
Yes, thanks. I would just, if I may, I would add that what we would say is that our technology not only produces more green hydrogen in areas with greater solar radiance, but it produces that green hydrogen more cheaply. So in these early days, the supply constrained days, we you know, it’s a, there are discrete choices to be made about where and when I suppose to allocate that the scarce heap of solar units. So we want to be allocating those to the regions where we get the most, we can extract the most value from those deployments.
Couple quick questions here, before we run out of time. How many employees do we have at this time?
Frederico Chaves
We have 140, obviously, significantly driven by our production facility in Benavente relatively large sort of both profit of that is the Benavente natural facility or so little bit around the time is our R&D and EPCTs and a third is the rest of commercial and administrative teams.
Ben Schwarz
And then sticking with Benavente, you mentioned on the milestone slide we mentioned that Benavente full go live is still in progress. Can you touch on the process of building out that facility and what that cadence will look like over the next, in the near term?
Frederico Chaves
So we have the, our electrolyzer production is the one that’s come by the next two lines to arrive, or the production of the solar concentrator module. And the solar concentrator, a small unit with the, for those who followed us before with a little sort of prism on top. These are two units that the current partner manufacturing facility can produce already. So we can service the projects that need those in the ground likely so already from the current production facility. And that’s why they are less urgent in terms of the go live. So critical go live has been HEVO expect the line for the small solar concentrator unit, the very small piece of the prism in Q1 and Q2, the module line, and then we’ll have the full lines live with the production output 120 megawatts of full sort of production capacity in Benavente.
Ben Schwarz
Okay, thanks Frederico. So it’s the top of the hour. That will do it for our second quarter webcast. Thanks to everyone who’s joined. If you have additional questions, or if we didn’t get around to answering your question, feel free to reach out to me and the IR team at ir@fusionfuel.eu and we look forward to seeing you all again at our next update.
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