Fusion Fuel Green PLC Q3 FY2022 Earnings Call

Hello, everyone. Welcome to Fusion Fuel Greens Third Quarter 2022 Investor Update. My name is Benjamin Schwarz. I'm Head of Investor Relations at Fusion Fuel. I would first like to remind everyone 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 is 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. So thank you again for joining us today. I'll just quickly run through our agenda for the next hour. So we'll kick things off with an overview of Fusion Fuel’s value proposition. Then the management team will share, yes, we'll share third quarter highlights, financial results, latest on our commercial strategy, pipeline, market expansion plans, and finally, a very exciting technology update. We will then revisit our 2022 milestones before ending the presentation portion of the webcast with some brief closing remarks from Fusion Fuel's Chairman. We'll then open up the floor for a facilitated Q&A. I'd like to remind everyone that as in our previous quarterly calls, questions can be entered in the chat box in the webcast platform at any point in the next 57 minutes. Alternatively, you can also submit your questions to the Investor Relations mailbox, which is [email protected]. So let's begin with an overview of Fusion Fuel. What makes us unique and how we are creating value? Fusion Fuel is in the business of developing and delivering cost-effective clean hydrogen solutions to accelerate the global energy transition. At its core, Fusion Fuel is an industrial technology company. We have developed and commercialized a proprietary miniaturized PEM electrolyzer that unlocks cost-competitive green hydrogen through unprecedented functionality, flexibility, and scalability. The modularity of our electrolyzer technology lends itself to a decentralized approach, and we've leaned into that as a source of unique differentiation. Where much of the market has gone down the path of ever-larger scale electrolyzers to drive down their levelized cost, we've gone in the other direction, small scale, mass produced. In doing so, we've been able to eliminate some of the cost and complexity of hydrogen production and distribution and deliver bespoke co-located solutions that few others can. So while others are talking about developing green hydrogen projects, we are doing it. Our unique approach and differentiated tech have enabled us to build a robust commercial pipeline of tech sales and development projects. We are producing green hydrogen today at our demonstration facility in Portugal with many more highly actionable projects in various stages of the development cycle, including what will be Spain's first solar to green hydrogen refueling station which we're developing for Exolum in Madrid. So with that primer, I'll now pass it over to Frederico Figueira de Chaves, Fusion Fuel’s CFO and Co-Head, for an update on the third quarter and subsequent events.

Thanks, Ben. I appreciate that. And thank you everyone for joining once again. As mentioned last time, we have received approval for a EUR10 million grant from component 14 of Portugal's resilience and recovery plan for a project in Sines, and also commenced work on our Exolum tech sale project in Madrid during the third quarter. More recently, we have announced two tech sale contracts, totaling EUR7 million in Portugal and in Spain. In addition to the opening up of the Italian market with the Duferco Energia agreement. We continue to make progress on securing grants for the projects we're involved in. Now we'll dive into this a little further later on. Two significant notes from earlier today and last week are important for us. We've now disclosed our first project in the U.S. This is a project that has been in the works for several months now and with the passage of the Inflation Reduction Act, it has become one of the keys strategic pillars for the company. Zach will dive deeper into this major milestone in a little while. Last week, we also introduced the HEVO-Chain. This is the first centralized electrolyzer for the company and is the first that we know of in the market that is based on a series of miniaturized units working together as a strength. We're extremely excited by this product. It not only opens new markets to us, but we believe it will also be a true disruptor for the PEM electrolyzer market in the coming years. During the third quarter, we booked an operating loss of EUR5.5 million driven by EUR4.6 million of operating expenses. Increase in expenses from the second to the third quarter was largely driven by an increase in headcount pertaining to the go-live of Benavente, and then the related tax provisions required in the portal for the holiday subsidies paid to employees. In addition, we incurred EUR600,000 of one-off bookings related to Evora and Exolum expenses, alongside various larger activities related to marketing costs as well as various consulting and specialist engineering validation works, the results of which we've disclosed in previous quarters. Going forward, we're adjusting our administration expense guidance to around EUR4 million to EUR4.5 million a quarter for the fourth quarter and also for most of 2023. Our pretax profit loss for the quarter was again significantly impacted by the non-cash item of the fair value movement of the outstanding warrants. This had a EUR3.8 million positive impact, bringing our pretax loss for the quarter to EUR1.6 million. One item I would like to highlight is that we expect to book revenues and also part of the P&L impact of the Exolum project during the fourth quarter of this year. So that's something to look for in the next quarterly update. We've added this slide for additional transparency for our shareholders and analysts, covering some elements of our balance sheet into the financial section of our results, and we'll continue to provide this information going forward. As you can see, we have a total of EUR61 million of total assets and around EUR15.6 million of liabilities. Our property, plant and equipment is mainly composed of our Evora plants, HEVO-Sul, Sines project, and our Benavente facility. Regarding Benavente, several months ago, we initiated a process to do a sale-leaseback for the property. We can now inform you that this is a transaction that we expect to close in December, which will also generate substantial cash proceeds for the company. Important to note, we currently hold EUR12 million of inventory and around EUR3 million of advanced payments to suppliers. This is a result of measures taken late last year and at the beginning of 2022 to secure our supply chain. We've recently seen several cases where competitors were unable to deliver due to supply issues, and we have had the opportunity to step into projects in that phase. Over the coming months, we will be working to transition this inventory into revenues and have a positive impact on our cash balance. Our receivables also included EUR3.7 million, a growth of which we are awaiting payments on. In the third quarter, we continued to hold a substantial VAT receivable balance of EUR6.5 million. However, I'll highlight that we have submitted reimbursement requests for part of this balance. These requests have been approved, and those inflows will be reflected in the fourth quarter. During Q3, we continued to pay for some materials orders, not only for inventory, and for our Evora and Exolum projects, as well as investments into our international property and our EUR4.6 million of operational expenses. Our liquidity position is something that we as a team have been actively managing with the various tools that are available to us, including as mentioned, the reimbursement of all our VAT and the grants receivables, the sale-leaseback of Benavente, and as our projects progressed through additional revenues. We are a company in an aggressive growth trajectory, and the recent announcements and projects may require certain capital in the future. As we've noted before, we'll continue to consider all possible options for the company to ensure that we continue to execute our growth plan. Our outstanding shares and warrants balance is relatively unchanged at 13.4 million shares. As announced at our last earnings release, during Q3, we did tap into the ATM facility and sold around 300,000 shares at an average price of $7.35. During the fourth quarter, we also used the ATM facility to sell 400,000 shares at an average price of $4. Year-to-date, we have raised around EUR3.7 million through the ATM facility at an average price of $6.3 per share. With the sale-leaseback of Benavente, the receivables mentioned in the previous slide, and the other capital options being supported by the firm, in addition to the normalization of our product activity and revenues over time, we expect to have less use of the ATM facility going forward. As highlighted previously, we have a strong track record of securing grants for our project portfolio. We've applied for nearly EUR80 million of grants excluding our IPCEI submission. As of our last update, we had during the last update EUR19 million of grants approved and EUR3.5 million of grants for investments already requested. As of today, we can show that we have secured another EUR30 million of grants for one of our projects. We expect to be able to disclose information regarding this award in the coming days. So for now, I'll not go into the details of the project that it relates to, but please be on the lookout for the press release relating to that hopefully still this week. As announced last week, we are technology providers for four projects in Spain that were preselected for grants. We expect to get the final results of those submissions early in 2023. This grant portfolio and the related projects are a very significant asset for the company and establish very strong bases for our order book for the coming years. Now to dive a little deeper into those, I will pass it on to Zach to share more information with you regarding our commercial activities.

Thank you, Frederico, and it's great to see everyone. I hope everyone in the U.S. had a wonderful Thanksgiving weekend. Please turn to the next page. A major focus for Fusion Fuel as we enter next year is to transform the hydrogen market from concept to reality. The emerging market necessitates proper project permitting and attracting customers by offering favorable economics and confidence in our solutions. We aim for over EUR40 million in gross revenue for the upcoming year. We plan to achieve this through technology sales to third-party clients and selling most of our existing Fusion Fuel owned projects to financial investors. In 2023 and beyond, we have been working on reducing risk in our pipeline by concentrating on some key factors. First, does the project have secured land? Secondly, are there grants available? Third, is the permitting complete, and finally, is there a customer in place? These four seemingly simple factors enable us to assess opportunities likely to reach the final investment decision and help prioritize our resources effectively. Almost our entire pipeline for 2023 has secured grants and land. This positions our pipeline to begin permitting and increases the chances of reaching the final investment decision since grants can subsidize our projects, making them more appealing to third-party customers. We have either received or initiated permitting for over 50% of our 2023 pipeline, with the remainder set to start soon. The permitting process typically requires six to nine months to secure the necessary approvals to reach the final investment decision. Our team is focused on starting the permitting for the rest of our 2023 pipeline by the end of Q1 2023. Our pipeline for next year consists of about one-third established third-party customer sales, with the remainder being Fusion Fuel owned projects, all situated in the Iberian Peninsula that we intend to sell to third parties. Concentrating our 2023 pipeline in Portugal and Spain enhances our chances of success since most of our employees are based in the Iberian Peninsula. While our focus is on 2023, we're also planning to expand into other key markets. We are thrilled to announce our expansion into North America and Italy. Both markets offer strong incentives, particularly the Inflation Reduction Act in the United States. We have secured early-stage opportunities in California and Southern Italy, with a total capacity of over 75 megawatts for production scheduled in 2024 and 2025. Combined with our projects in Portugal, this represents over 138 megawatts of HEVO-Solar and HEVO-Chain units for 2024 and 2025. HEVO-Chain is a new product that Frederico will discuss further, set to begin production in 2024. To leverage the U.S. Inflation Reduction Act, we are evaluating whether we can supply units for U.S. projects from our facility in Benavente or if we need to expand production capacity in the U.S. This could significantly enhance our production capacity given our early successes and the substantial growth potential from entering both the United States and Canadian markets. We are confident that our product offerings and strategies will appeal to third-party customers and financial investors looking to grow in these promising markets. In summary, we have a solid plan to utilize our 2023 production capacity by concentrating on a region that we understand well, the Iberian Peninsula. We have already established key projects in two strategically important markets to ensure the company’s future growth. Technology sales for 2023, as I mentioned, are focused in the Iberian Peninsula. We are working on projects with a total capacity of over 18 megawatts, comprising 743 units, with an estimated potential revenue exceeding EUR45 million for Fusion Fuel, including EUR15 million in grants associated with these projects. We are concluding construction on our first technology sale in Madrid with Exolum. Our team is set up to efficiently execute these projects, collaborating closely with external partners. This capability allows us to either pursue a tech sale or a turnkey project, which encompasses engineering, procurement of the necessary equipment, facility construction, and operational management. This approach enables us to generate returns from tech sales as well as from the overall project, with potential ongoing revenue from operations if we manage the facility. Our tech sales in Portugal are with KEME, and both projects have secured grants and land, with the first KEME project already in the environmental permitting stage. We expect KEME one to reach the final investment decision in the first half of 2023, and we already have inventory ready for this project. The Spanish portfolio has been preselected for the PERTE program and is finalizing its grants. These projects are now undergoing a final assessment to receive formal grant approval, as noted in our table under awaiting grants. We are dedicated to supporting these projects and securing their grants so that permitting can commence in the first quarter of next year. Some projects do not require an off-take agreement since the company is either the end-user or already has a secured customer. Having a customer confirmed significantly reduces risks for these projects. The most advanced Spanish project is in its final stages of permitting, anticipating a final investment decision in the first half of 2023, and we have inventory available to proceed. Additionally, we have a backlog of projects for 2024, which includes more technology sales in Spain that are applying for further grant programs, alongside the deferral project in Italy and other ongoing negotiations across North America and Europe. Our development projects continue to progress, with two key themes discussed in our last investor call. First, we are creating a mobility backbone not just in Portugal but throughout the Iberian Peninsula. Second, we are focused on decarbonizing industrial applications to sell to customers across Iberia, with an initial emphasis on the Sines region of Portugal. We have secured grants and land for all projects targeted to reach final investment decisions in 2023, including two mobility projects and three industrial-oriented projects. Our goal is to enhance our presence in the Sines region through three phases, achieving a total capacity of 85 megawatts. The first phase has received its environmental permits and is finishing the feasibility stage, aiming for a final investment decision in the first half of 2023. Again, we have the inventory available to complete these projects. The second phase has begun environmental permitting and is targeted to reach final investment decision in the second half of 2023. We are continuing pre-feasibility studies on the remainder of our portfolio to be prepared for permitting in the coming months and aim for final investment decisions in the latter half of 2023. As mentioned in our last call, Portugal serves as a blueprint for the other markets we are focusing on. This blueprint is already being applied to generate a pipeline of over 175 megawatts of development projects in California, Portugal, and Spain for 2024 and 2025. The expansion into North America is notably transformative for Fusion Fuel. North America is gaining traction due to the Inflation Reduction Act, which facilitates hundreds of billions of dollars in subsidies for hydrogen and other renewable technologies, including manufacturing. This includes a $3 per kilogram production tax credit that can last up to a decade, as well as a 30% to potentially 40% investment tax credit on the capital costs of the solar components of projects, along with billions in subsidies for clean technology manufacturing and the development of hydrogen hubs which further accelerate growth in key hydrogen production and demand regions across the United States. Additionally, state-level subsidies like the low carbon fuel standard credit in California are geared towards supporting the mobility industry. Moreover, Canada has announced a 40% investment tax credit for the upfront capital costs associated with hydrogen production, making it a very appealing market for Fusion Fuel's HEVO-Chain product set to launch in 2024. This combination of legislative support and our expanded technology capabilities marks a strategic shift that propels our growth plans in North America for 2023. Securing our first project in North America, located in Southern California, was a strategic decision aimed at maximizing technology offerings and incentives to ensure a high probability of achieving a successful final investment decision. We are partnering with Electus Energy, a hydrogen project developer active in California. We are excited to collaborate with Electus due to their established commercial relationships and presence in the California market. Our first project aims for 75 megawatts of green hydrogen production capacity on 320 acres in Bakersfield, California, situated near Interstate 5. Bakersfield is strategically chosen due to the existing heavy industries and its proximity to distribution channels linked to Los Angeles. We have initiated pre-feasibility work with Black & Veatch as the lead contractor, and we will provide updates as we progress on this promising project. Our target is to achieve a final investment decision for this project in 2024 and begin commercial operations in 2025. We are actively expanding our team in North America to execute this opportunity, while also identifying and securing additional prospects in 2023. We believe the introduction of HEVO-Chain opens up significant market potential for us in the U.S. and Canada, particularly in regions such as the Northeast and Pacific Northwest U.S., as well as British Columbia and Ontario in Canada. These regions have existing or planned hydrogen incentives that make them ideal candidates for applying HEVO-Chain technology. The scale of the Bakersfield project alone justifies the establishment of a new manufacturing plant, especially for the HEVO component. As this project progresses toward its final investment decision, along with other opportunities in our pipeline, we will need U.S.-based manufacturing capacity to benefit from the Inflation Reduction Act, as a majority of our produced equipment must be made in the USA. We are in the preliminary stages of determining our requirements and are actively scouting potential locations for one or two manufacturing facilities in North America. This expansion would enhance our existing business plan for Benavente. We are enthusiastic about the challenge of growing in the crucial markets of the United States and Canada. We're also excited about our expansion into the Italian markets, which we see as a natural progression from our core strategic European markets, thanks to its excellent solar resources, established natural gas infrastructure, and plans to increase hydrogen production in the coming years. Italy boasts an existing natural gas grid stretching from Northern Africa to Southern Italy and has set ambitious targets for hydrogen usage in heavy industries and long-haul trucking by 2030. This aligns perfectly with Fusion's mobility and industrial decarbonization strategies that we have already implemented in the Iberian Peninsula. Our partnership with Duferco Energia is particularly exciting, as Duferco's core businesses include energy trading, steel manufacturing, and shipping. We have entered a joint agreement with Duferco to establish a presence in Italy and the MENA region for technology sales and project development. Fusion Fuel will leverage Duferco's established operations as we expand into Italy and potentially Algeria and Tunisia. Notably, Algeria and Tunisia have existing pipelines connecting Northern Africa to the Italian markets. We have initiated a project at Duferco’s Giammoro facility in Sicily, where we plan to install 50 HEVO-Solar units to support a multi-carbonate fuel cell system that Duferco intends to test. This project is expected to be installed in 2024, showcasing the potential of HEVO-Solar in this strategic country within a challenging market sector, paving the way for possible replication in other regions. Following our successful Iberian strategy, Fusion Fuel will apply the same blueprint in targeted mobility and industrial segments in Italy. We aim to install up to four hydrogen fueling stations for mobility in Southern Italy by the end of 2024. Additionally, we are focusing on Northern Italy—specifically areas like Bologna, Brescia, Verona, and Rodina—targeting the decarbonization of industries such as steel, glass, ceramics, and refineries. These areas present ideal opportunities for our new HEVO-Chain technology, which can scale with our customers in a decentralized or co-located manner, proving to be more efficient than competing products. We will work with Duferco to implement this technology at the Brescia steel mill as one of our initial projects in that vicinity. I will now turn it over to Frederico to discuss our exciting new developments regarding the HEVO-Chain technology.

Great. Thanks, Zach. So our innovation hub hasn't stopped at Fusion Fuel and obviously, Zach and the team and all the whole commercial areas have kept us well on our toes with all these opportunities. So I'm happy to be able to share with you some of the great things that the team has been working on today. So for those of you who have followed our story for some time, you know that this all began with our first generation of our miniaturized electrolyzer, the HEVO. This 2020 model required 664 HEVOs per HEVO unit. We then consolidated three HEVOs into one in 2021, and this is the model that's been installed in Evora. This year, we further consolidated our HEVOs so that we only require 144 for HEVO-Solar. This version, while still taking advantage of the cost benefits of the miniaturized system, can work with four bars of pressure and has an increased hydrogen output with a 50% cost reduction from the 2021 version. We're already in testing of the 2023 version of the HEVO. This not only sees further consolidation, but still maintains overall similar size, but is able to work with two membranes per unit, improving the performance further and also reducing unit cost by another 20%. This 2023 unit is not only highly competitive, it's also a game changer for Fusion Fuel. We've recently taken the step into a new market for us, the centralized PEM market. Using this 2023 HEVO, we've connected several units on an integrated string of miniaturized electrolyzers. With this, we've created a modular system that is easy to install and operate, and can work inside with limited available space. It’s able to work with any energy source, thereby broadening our addressable market substantially and no longer limiting us to markets with high solar radiation. This system takes advantage of the attractive cost benefits of using a miniaturized system, which we've covered before. This allows us to bring affordable hydrogen solutions even for small-scale uses. Because it is modular, it's also easily scalable, making us competitive already with our first generation for many different types of projects. All this together gives us the HEVO-Chain, a truly revolutionary product in the hydrogen markets. Now, I will show you a short video on the technology. Our HEVO-Chain solution is able to work with any energy source, making green hydrogen from any renewable energy. This is a start of a new world for Fusion Fuel, and a very exciting one. It is a solution that can be containerized and is usable for small to large scale use cases. It's all based on our HEVO miniaturized PEM solution, all working in tandem on a string. The system is easy to install, highly modular, and highly efficient. By using our HEVO, we can make the most of our cost-efficient design to bring a highly competitive product to the market. We believe this will truly disrupt a lot of the existing smaller mid-sized projects in the market today. What you're seeing here is the real-life version of the HEVO-Chain unit that I have right next to me to give you a sense for the size. It is made up of 16 HEVOs, all integrated and linked, but operating independently. The system is designed to be modular and scalable, and we can include them in a rack to be able to service larger projects. It boasts one of the highest efficiency rates for PEM systems today. Again, this is all based on what we learned in the creation of the HEVO-Solar. This new addition to our product portfolio puts us in a strong position to be competitive for a wide range of projects, focusing the HEVO-Solar on projects with large scale grants, land availability, and very high solar radiation, and the HEVO-Chain on markets with less constraints requiring a range of energy sources. In 2022, we developed the first HEVO-Chain hydrogen unit, allowing us to now begin planning projects using this technology. The first version uses existing water and power systems from the HEVO-Solar and HEVO-Night technologies. In 2023, subject to thorough testing, we plan to focus on making the water and power systems suitable for inclusion in the right container solutions. In 2024, we expect to start industrial production of the HEVO-Chain and begin commercial operations, offering both rack and containerized solutions. To do this, we will start planning projects and kicking off the required licensing and permitting processes for these projects already in 2023. I’d like to briefly update you also on our production status and our Benavente facility, where we continue to ramp up production of the HEVOs each month. We currently own EUR12 million of inventory, as I mentioned previously, together with another EUR3 million of prepaid orders to suppliers. This puts us in a very strong position to be able to deliver product to our projects, as Zach mentioned earlier, and in several cases, we can step in where competitors have not been able to deliver. This significantly derisks our 2023 production and project portfolio. In the first half of 2023, we expect to install and sell activities on both our solar concentration and module production lines in Benavente to complement the existing HEVO production line. We want to have Benavente with a 100 megawatt annual production capacity by year-end. In 2024, we expect to install and operate our HEVO-Chain production line and gradually increase production capacity so that by the end of 2025, we reach 500 megawatts of annual production capacity. As always, we'll close with bringing our main milestones, but to note, we continue to make strong progress across all fronts of our major milestones for the year, all while significantly ramping up our team and ensuring the company operates smoothly as one unit. While we would have liked to have seen faster developments in licensing and permitting processes for some of our projects and some of our markets, we've been positively surprised that the large movements governments around the world are making in the hydrogen market, building up significant momentum for the industry. For us, the IRA in the U.S., in particular, marks a strong game changer in the hydrogen market and we could not be more thrilled about the timing of our entry into this region with the Bakersfield project. The introduction of the HEVO-Chain is also another product that is likely to have profound positive impacts on the company, both in terms of the markets available to us, as well as solving solutions that in the past we simply had to pass up on. We're ramping up for 2022 in a very strong position for the upcoming year. So with that, I'll pass it to our Chairman for some closing remarks before moving on to Q&A. Thank you.

Thanks, Frederico. This investor presentation has been packed full of important developments from Fusion Fuel. Therefore, I'm sure we're going to have lots of questions, so I'll not take up much of your time. Quarter after quarter in my remarks, I've emphasized what has been my formula for success as an investor, which is finding companies with a strong management team, a differentiable and superior technology, and serving a growing market. As I read Wall Street research discussing Europe's impending economic winter of discontent, the uncertain timing of any relaxation of China's COVID zero policy, and the likelihood that the Federal Reserve will need to bring on a recession in order to break the back of inflation in the U.S., I'm greatly comforted knowing that Fusion Fuel operates in a market that is and for the foreseeable future will be the beneficiary of huge tailwinds. The financial incentives for green hydrogen, which will exist for years to come in both Europe and North America, give me the confidence to say that despite the highly uncertain global macroeconomic environment which most businesses are facing, the market opportunity for Fusion Fuel has never been brighter. With that, I'll turn it back to you for a Q&A, Ben.

Great. Thanks so much. A lot of questions came through, so appreciate your engagement. We'll begin with a couple of questions from Chris Tong at Webber Research. So with respect to the breakdown of revenue between the HEVO-Solar and HEVO-Chain looking out into the latter half of the decade, can you provide any guidance as to which product would likely be Fusion Fuel’s main source of revenue by 2025 or by 2030?

Sure. Absolutely. From our side, we see that in the short term, HEVO-Solar will be taking the bulk of that, given that that's the production facility available. In the future, as we ramp up, most likely HEVO-Chain will likely overtake HEVO-Solar. The target addressable market is much larger for the HEVO-Chain opportunity. Again, it's not limited by solar radiation nor by land requirements. We believe both offerings are incredibly competitive in their markets and in their niches. It's just that the available market for the HEVO-Chain is just that much larger.

Yep. Just a follow-on question. Is there any plans to introduce other products across the hydrogen production chain?

So from our side, we're currently obviously playing still on the advantages of the HEVO with a miniaturized electrolyzer. We will continue to look at solutions that could operate with that as its base. It's no accident. One is called HEVO-Solar, the other one is called HEVO-Chain. HEVO is the base of both. We don't foresee it in the short term any product that is not HEVO centric, although there may be variations of solutions that could combine the HEVO. But primarily, we see the HEVO-Solar and HEVO-Chain as our two major projects, at least for the midterm.

Certainly, Frederico. The potential to add an oxygen capture system would be an incremental revenue.

Switching gears to commercial for the H2 Pioneros Program in Spain, that was announced the other week, is it all or nothing for the four projects for which Fusion Fuel is involved as a technology supplier, or can one project be selected while the other three are not?

It's the latter. So every project stands on its own. If one project moves forward and receives the grant, while the other three do not, we would still move forward with that one project as a third-party technology sale.

Thanks, Zach. There's a subsequent question about breaking up a number of HEVO-Solar for each project. I suspect we will disclose that information.

That's correct.

Will Bakersfield likely be a mix of HEVO-Chain and HEVO-Solar?

So we've engaged Black & Veatch to do the initial conceptual study and pre-feasibility work. We are going to evaluate both options: do we do HEVO-Solar projects or do we do a centralized HEVO-Chain with traditional solar, or a combination thereof? So we'll update you on the progress of that as we get closer.

Thanks. There was a question about milestones in order to take FID on that project, but I suspect that you answered that - at Black & Veatch is kind of answers that as well.

Maybe I'll just touch on that for a second. So as we've noted in previous calls, we put in concept, pre-FEED, FEED, and then FID final investment decision. We’re in the concept stage of this project. In the coming months, we hope to make a decision to move into pre-feasibility, upon which we would start to initiate permitting on the project. But we hope to provide an update on that in our next quarterly call.

Thanks, Zach. Can you touch on the JV with Electus Energy? Is it a 50-50 JV?

We are planning a 50-50 joint venture for the project and currently have an arrangement to fund its development costs. We are in active discussions with our financial investors to partner on these projects. As we approach the final investment decision, we will secure financing for our position. As mentioned earlier, we intend to sell the technology and our units will be structured like a third-party technology sale with an equity upside. Electus has arranged its own financing for their position.

Then I just want to emphasize how attractive the economics we expect this Bakersfield project to be, and so we think that the ability to get this financed will not be particularly challenging. The IRA and the California low carbon fuel standards really make this a very, very attractive project.

Thanks. Last question here from Webber Research. Touching on the partnership with Duferco, is the agreement final for the 50 HEVO-Solar pilot project in Sicily, or is that not yet a committed order?

We're working jointly with them to develop the engineering work to submit for an upcoming grant program in Italy. The plan is that once we submit the grant, we will have entered into a third-party technology sale agreement with them. Right now, it's under a memorandum of understanding or letter of intent. But we plan to convert that into a binding agreement in the coming months.

Great. Thanks. A couple of questions here from Erwan Kerouredan from Royal Bank of Canada. With respect to the broader pipeline and timing of revenue recognition, should we be using commercial operation date as guidance for the revenue recognition timeline, or will we be recognizing revenue prior to that date?

That's a great question. We will put the presentation on our website after the call and update it to reflect a final investment decision date instead of the commercial operation date. Our plan moving forward is to avoid carrying all the working capital for every project. We intend to receive installment payments as projects reach their final investment decision. Our goal is to keep our working capital inventory close to net zero, so we will provide that update.

Just to note also on the accounting procedure and how we operate also with Exolum. When it's a tech sale, we'll start recognizing the revenue as we deliver the units. So by the date that's there on the COD, we should have recognized pretty much all of the revenues, or if not the vast majority of the revenues. But as I pointed out, the revenue recognition probably starts at FID onwards.

Thanks, Frederico. One more for Zach here. Was the IRA in the U.S. a major driver for the partnership with Electus and the project in Bakersfield, or had commercial discussions started prior to the announcement of that legislation?

We started talking with Electus back in the spring of 2022. It was before the IRA was passed. But, obviously, when the IRA passed, that solidified and crystallized the $3 production tax credit. Our system right now is roughly HEVO-Solar component. HEVO-Solar is roughly 50% solar. So we also qualify for a solar investment tax credit upfront. As Jeffrey noted, the low carbon fuel standard credits range anywhere between $3 to $5 a kilogram. Just the economics when you add that production tax credit is still attractive, accelerated discussions with Electus to have acre projects where we can really develop the business in North America.

Thanks, Zach. Sticking with you, here a couple of questions from Torkjel Jordbakke from Fearnley Securities. Can you provide a breakdown of the EUR40 million revenue estimate for 2023?

We have not secured the financial investors for the Fusion Fuel owned projects yet, and we are finalizing those arrangements. We achieved a 90% close rate on our third-party tech sales. I suggest using the third-party sales pipeline as a reference, and in the next quarterly update, we hope to discuss financial investor participation in our projects and provide an updated projection with more details.

Thanks, Zach. A question here for Frederico. Just a quick one. How much has been invested in the Benavente facility thus far? I believe it's roughly EUR13 million, but I'll let Frederico chime in on that.

It's around EUR10.1 million so far. It's actually mentioned on the first footer of Slide 9 for anyone who wants to refer to it. We do expect to probably invest another EUR15 million or so during 2023 into that facility. That EUR10.1 million also includes the real estate investments, as I mentioned; we will be doing the sale leaseback which we expect to close in December, surpassing that EUR10.1 million will be converted to cash proceeds for the company during Q4, is our expectation.

Thanks, Frederico. Sticking with you, and pivoting to capital strategy and capital planning. What’s the most likely or optimal path and timeline to raising capital?

The ideal way would be to convert a significant portion of our receivables into cash inflows. We're currently addressing items such as VAT, grants, and tech sales to Benavente and Exolum. Additionally, we have a substantial inventory that we want to convert into cash, which would greatly improve our capital position. Looking ahead, we also have the sale leaseback option. Our goal is to have the market recognize our current position so we can potentially raise capital through various means, whether it be debt, equity, or others, to support our growth plans for 2023 and beyond.

I want to take a moment to emphasize our focus on the cost of capital. For instance, the Benavente sale leaseback represents a very appealing equivalent to the cost of debt. I apologize for any feedback issues. When Zach discusses the potential financial investors for our Fusion-developed projects, we recognize that our current cost of capital is higher compared to traditional infrastructure investors. This creates an attractive financing opportunity for our Fusion projects. Eventually, as we establish a track record, we anticipate that project financing will become feasible. I want our shareholders to know that we are committed to finding the best ways to fund the company's growth for Fusion shareholders. We believe there are various options available to us, and we plan to utilize a combination of different funding sources.

Great. Thanks. Frederico, could you provide a quick data point on the current production capacity for the company this year and your expectations for 2023?

For 2023, we anticipate our production will likely be between EUR40 to EUR50 megawatts for the full year. We will only produce what our projects can accommodate, avoiding production solely for stock, as we currently have a significant inventory. At this moment, our production is below our potential capacity due to licensing and permitting issues, so we are intentionally holding back some production capacity. Next year, once the Benavente lines are fully operational, the theoretical production capacity will remain between EUR40 to EUR50 megawatts, but the actual amount produced will depend on future projects. We have a strong project pipeline and ample inventory to meet those needs, which puts us in a good position to deliver. However, it is important to remember the impact on our capital; inventory is costly, and we aim to produce what is necessary.

Thanks. I have a couple of questions regarding the EUR30 million estimate related to other grant applications. Does this pertain to component five?

So I will answer that, mysteriously. Unfortunately, we cannot disclose what that is related to, as I noted in the slides, that is secured until the respective entities allow us to actually disclose the further details of what project it relates to. We will then communicate that to the public. We expect to be able to do that this week. That is our target to still do that within this week.

Thanks. Regarding the potential size of the IPCEI grant that was not included in the table, I understand we haven't addressed this in a while, but it's still a consideration. If you have any updates on that, please share.

The total IPCEI project was over EUR0.5 billion with the grants. If I remember correctly, it was in the region of EUR150 million, so it has been restored. We can significantly distort all the numbers. We are in the third tier of the IPCEI submissions, and we should be the next one to be communicated. Unfortunately, we are not in control of that timeline, and due to the uncertainty and potential volatility of that one single line item, we removed it from the list. This does not mean we are not pursuing it. I want to clarify that this is still a project we are actively working on. We just want to avoid creating expectations around a single line item that may result in a binary outcome.

Frederico, I just want to clarify; when you mention third tier, do you mean that there are different levels depending on the purpose of the funding?

That's a very good question. We've not put that on the last two presentations, not because we're not actively pursuing them or they're not still opportunities in the MENA region. But until we secure the necessary components that I noted in the presentation around land subsidies, initiating permitting, those kinds of things we didn't want to disclose it because the number, the sizes can skew everything else we're working on. But they have all the caveats aside, we are still working on opportunities in Morocco, and some potential opportunities we're looking at in Egypt. As I noted, we have some potential opportunities with existing partners in Tunisia and Algeria.

There's a question here about those pipelines, a trans-Mediterranean pipeline from Tunisia to Italy. Are those pipelines natural gas? Are they hydrogen? Do you have any understanding of what percentage of hydrogen those pipelines can transport?

Natural gas. My understanding is we're looking at under 5% to be blended as hydrogen. Capacity will be TBD, but because we've been focused more on the Italian aspect of it, there's significant land available in those countries, and as they kind of advance, we get land. We know more about the projects, and we can have more definition, we'll share it.

Thanks, Zach. Our last minute here, estimated revenue for 2022, Frederico?

So our estimated revenue will be likely under EUR2 million. We will be booking the Exolum revenue. The Exolum project is a EUR2 million project. We'll be booking a portion of that. Note that as we go into 2023, what we want to do is with many of our projects, which currently are born as HPAs, we want to pass them to a financial investor. I’d be a financial partner. As Zach mentioned before in his section, so we can recognize all of those as revenues. We expect in the future to be able to book revenues for both the slides that sanctioned on tech sales and development projects. But for Q4, the only revenues likely booking will be related to the partial component of Exolum.

Perfect. Thank you, Frederico. That will do it for our third quarter webcast. Thanks to everyone who joined for your engagement. If you have any additional questions or if we did not get around to answering your questions, please feel free to reach out to me and the IR team at [email protected]. We look forward to seeing you all again in our next update.

Thank you, everyone. Have a good day.