Fusion Fuel Green PLC Q2 FY2023 Earnings Call

Hello, everyone, and welcome to Fusion Fuel Green's Second Quarter 2023 Investor Update. My name is Benjamin Schwarz, and I'm Head of Investor Relations at Fusion Fuel. So, we'll begin with the safe harbor statement. I'd 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, or 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 those 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. Thank you for joining us today. So, I'll quickly run through our agenda once again. I'll kick things off with an overview of Fusion Fuel at a glance. The management team will then present second quarter highlights, financial results, project, commercial updates, before wrapping up with a discussion of our milestones and priorities for the remainder of 2023. We will then open up the floor for facilitated Q&A with the remaining time. As in our previous quarterly calls, questions can either be entered in the chat box in the webcast platform at any point during the next hour, or you can submit your questions to me directly at the Investor Relations mailbox at [email protected]. Okay. So, as always, let's begin with a brief refresher on Fusion Fuel, our value proposition, and our positioning in the green hydrogen sector. So, our mission is to make the energy transition more accessible through the development and delivery of cost-effective clean hydrogen solutions. Our patented miniaturized PEM electrolyzer, the HEVO, is at the heart of everything we do in all of our products. Its simplified modular architecture is a true differentiator that unlocks multiple sources of advantage, including high throughput production, a scalable building block approach that positions us to create customized fit-for-purpose hydrogen solutions and cost-competitive distributed production of hydrogen, mitigating the need for hydrogen distribution infrastructure, a critical and costly bottleneck in the market today. We've built a robust pipeline of actionable near-term projects in our core market, Southern Europe, with significant grant funding tied to many of those foundational projects that strengthen the economics and derisk the investment case. We're also making promising inroads in new priority markets in Northern Europe and North America, geographies that have been unlocked too as a result of the introduction of our HEVO-Chain solution. We have a differentiated and synergistic business model that positions us across the value chain. In addition to selling our proprietary electrolyzer solution to third-party customers, we also originate and develop green hydrogen projects with diverse avenues for monetizing that value creation. And finally, we are poised for a significant growth ramp as the market matures with an extensive long-term project pipeline and a world-class production facility in Portugal, where we're targeting 0.5 gigawatts of electrolysis production per annum by the end of 2025. So, with that, I'll now pass it over to Gavin Jones, CFO of Fusion Fuel, to share some highlights from the second quarter of 2023.

Thank you, Ben. Good afternoon or morning to all of you who have joined our second quarter investor update call. During the second quarter, we were awarded a €2.5 million contract to supply a 550-kilowatt solar to green hydrogen plant by a Spanish government agency called CSIC. CSIC, also known as the Spanish National Research Council, is a public research institution dedicated to promoting innovation, scientific research and technological development. This project will be based in Zaragoza, Spain. We also published our inaugural ESG report in addition to issuing further invoices to our technology customers. After the end of the second quarter, we finalized the acceptance tests at our Exolum hydrogen plant; signed a long-term green hydrogen offtake contract with a Spanish industrial group; continued to work on a strategic partnership with Duferco to cover the Italian market, starting with a 1-megawatt HEVO-Chain, non-containerized version in Southern Italy; and signed an agreement with Hydrogen Ventures to reach a final investment decision on a €20 million project in Portugal by the end of 2023. Frederico will cover these strategic partnerships with Duferco and Hydrogen Ventures in more detail later in the presentation. We will now move on to the financial results for the second quarter. Please note that all values discussed are in euros unless stated otherwise. We recognized no revenue during the second quarter. We invoiced customers a total of €1 million during the quarter, but client invoices or inflows do not always equate to revenue recognition as the related accounting standard sets out a number of criteria that must be met before identified performance obligations within these customer contracts have been satisfied. The items that we have invoiced have been deferred until such time that the performance obligations will be satisfied. For our Exolum project, the key milestone pertaining to revenue recognition is provisional acceptance. As this was achieved during the third quarter, the associated revenues will be booked. As we continue to transition from HEVO-Solar to HEVO-Chain, we identified a significant portion of our inventory that we do not expect to use on projects utilizing both the non-containerized and containerized version. The monetary value of these components was €7.2 million, and we recorded an impairment charge for the full amount during the second quarter. Any inflows received as we dispose and/or recycle these components are expected to be credited against the impairment charge in future periods. We continue to source buyers for these components, but until we have agreements in place, we consider it prudent to write off the full value of such materials. This impairment has been recorded as part of cost of sales. Our operating cost base decreased for the second consecutive quarter. Excluding the non-recurring €1.4 million expense that was recorded in Q1, we saw a reduction in our personnel-related costs due to a lower headcount when compared to the first quarter, coupled with further reductions in travel, administrative and consulting fees, but somewhat offset by increased legal and depreciation charges. Our quarterly charge relating to our equity incentive plan reduced by €500,000 during the second quarter. This reduction related to the forfeiture of a significant number of instruments, which was offset by new grants during the period. The forfeiture of options resulted in a credit of €1.3 million, which is split between equity for those expenses booked in 2022 and profit and loss for those booked during 2023. The pre-tax loss for the quarter amounted to €12.4 million, of which approximately €8.1 million related to non-cash items. Moving to the balance sheet, the increase in property, plant and equipment is driven by two items. The first relates to the booking of new equipment that was invoiced during the quarter for our Benavente production facility. This increased the value of this asset by €4.5 million. The second relates to the recognition of a new land lease for our continued development of our own project pipeline. The inventory balance shown is net of the impairment charge of €7.2 million that was recorded during the quarter. Other notable movements include a reduction in VAT as €3.2 million was settled during the quarter; an increase in trade as we booked the equipment for Benavente; and an increase in deferred income as we issued further invoices to customers and received more inflows from our C-5 grant award. No ordinary shares were sold through the ATM during the second quarter. Over nine trading days in July and on August 1, we raised $492,000 cumulatively by selling 222,000 ordinary shares at an average price of $2.35 per share. These sales were made on an opportunistic basis when the price of our ordinary shares and related volumes were at a level that we considered appropriate for us to be active in the market. The last sale we made was at $2.28 per share. Our stock has since fallen to as low as $1.69 without us being active with the ATM. I think this is the most appropriate moment to discuss our capital position. As we've discussed previously, it's of paramount importance that we raise capital to strengthen our balance sheet and to meaningfully extend our runway, which will enable us to generate revenues as we work towards cash flow self-sufficiency. Our main objective is to ensure we select the financing option that best protects shareholder interests while still meeting the needs of the company. As a small Cap company, the ATM has proven to be the most efficient method of strengthening our capital position as capital market transactions of late have tended to focus on larger Cap or privately owned companies. We are in discussions with both existing and prospective capital providers regarding financing solutions to meet the above objective. While we have no firm details to relate to you regarding these financing solutions, we expect to update the market further as our discussions progress. As part of our Q4 2022 investor update, we issued guidance for 2023 through 2025 for expected operating results. Our 2023 revenue guidance reflected amounts forecasted to be recognized on two of our own projects, both of which were expected to be completed during 2023. For the two projects in question, significant grant funding was awarded to each with the key criteria being that both projects were completed before the end of 2023. Given the licensing and permitting delays experienced to date, it will not be possible for these projects to be completed within the allocated time frame. As a result of the foregoing, we are providing revised guidance. In our revised guidance for 2023, we have excluded the related revenues and cost of goods sold for these two projects. It's important to note that we consider this to be a delay rather than a reduction. For the two projects in question, we had identified investors for both and have now shifted these investors to other projects in our portfolio that are in advanced stages. The shift from HEVO-Solar to HEVO-Chain will allow for a more streamlined licensing and permitting process. HEVO-Solar requires larger land plots in addition to requiring a more complex licensing process. Moving some of our own projects to HEVO-Chain should reduce some of the difficulties encountered during 2023 to date. We expect our technology sale revenues of €5 million to remain unchanged and are not revising this initial guidance. We expect our invoicing to customers to be ahead of plan, but our revenues will lag behind due to the nature of our technology sale agreements, where revenue recognition will be back-ended as opposed to over time, which is consistent throughout the industry. Slide 12 of this presentation aims to set out some of the key milestones in a typical technology contract. Our cost of goods sold has been updated to reflect lower revenues for 2023 and the impairment charges recorded during the second quarter. We have estimated a lower production capacity for 2023, a reduction of 10 megawatts on the initial guidance. The investment in the second production line has been pushed to 2024 due to slower-than-expected client deliveries. We expect to issue a revised guidance for 2024 as part of our Q3 investor update. I will now pass you over to our CEO, Frederico, who will guide you through the rest of the presentation.

Thank you, Gavin, and thank you all for joining us today. I would like to start by sharing with you the latest developments from the work that's been ongoing throughout this year from Exolum. The project, the first of its kind in Iberia, going from solar energy to green hydrogen straight to a refueling station, all co-located, has completed its acceptance testing phase, and the project has been delivered to the client. In addition, we're proud to know that the HEVO-Solar and the HEVOs within them are producing at a higher rate than their anticipated performance. In this early stage market, Fusion Fuel has proved itself as having a leading engineering team, able to not only design but also deliver a full solution to the client, having taken on the oversight of the design, construction, installation, and commissioning of the plant. Currently, Fusion Fuel has the only green hydrogen plants currently live in Iberia, and we're working to deliver the third to CSIC. This is an experience level that has proven to have substantial value as we enter the negotiation of future sales contracts. We now have a brief slide show of the Exolum project, which, as I mentioned, we oversaw every step, bringing together several partners throughout. The project included civil construction, installation of the HEVO-Solar, the installation of the balance of plants, the development of control software and processes, and the commissioning of the entire plant. The team worked incredibly hard these months to bring a truly pioneering plant to life. This experience and knowledge is a strong competitive advantage that Fusion Fuel has in the Southern European market. As we've mentioned several times, we've secured substantial strategic sites and started the development of key green hydrogen projects primarily in Portugal and Spain, but also in the U.S. and Morocco. Focusing on Portugal and the five key owned projects underway, we continue to move forward with these projects, adding significant value to them as we continue to secure the elements required for their go-live, be it power agreements, connection lines, local permits or even offtake agreements. These, in addition to the €44 million of grants we have secured already for this portfolio and the €15 million already requested for the Aveiro project, create an enormous portfolio value for the company. This is in addition to the IPCEI project submission, where we are still awaiting to hear a decision on whether it's approved or not. We continue to receive questions and clarification points, which we are answering, but we do not know yet what the timeline for a final decision is. We are currently negotiating the sale of three of the projects listed here to infrastructure investors. With the successful negotiation of these projects and the transfers of those special purpose vehicles, we will be able to secure significant revenue orders for '24 and 2025, as well as recognize some of the value of the stock already with those SPVs. The Sines I and Azambuja projects alone represent €20 million each of potential revenues for Fusion Fuel given that we're looking to not only deliver the electrolyzer but, similar to CSIC and Exolum, we are looking to develop the entire hydrogen plant, including balance of plant, something that we are able to do as one of the only players to have done so in the last years in this market. Our expectation is to be able to close the negotiations on these projects by year-end. Projects take a long time to take shape, unfortunately, a lot longer than we expected, but also longer than was ever considered in the various national hydrogen strategies. However, the recent negotiations with several large counterparts on the various projects in our existing portfolio highlight the value these have for the company. Firstly, to create the backbone for technology sales in future years and, secondly, they enable us to engage with hydrogen offtakers and potential investors in a way that simply supplying the solutions with technology integrator wouldn't allow us to do. With this in mind, our team was busy during June and July in preparing three new solutions for our own projects for the latest rounds in Spanish and Portuguese programs as well as being highly engaged in the submissions for four client projects. If successful, these projects represent nearly 70 megawatts of electrolyzer capacity and around €65 million of potential revenues for Fusion Fuel. The importance of creating these potential projects is only growing since the announcement of the European Hydrogen Bank earlier this year. As a recap, any project that seeks to benefit from the European Hydrogen Bank cannot receive other forms of support or grants. Therefore, if the projects listed here are not successful in securing the grants we are seeking, the work to create these opportunities will not be in vain. We will still be looking to make them a reality by assuming the European Hydrogen Bank auction. In June of this year, coinciding with the progression of our HEVO-Chain offering, the team began pursuing a more focused effort to secure third-party sales for electrolyzer deliveries. The HEVO-Solar proved to be a difficult product for clients as it required substantial land and a unique and ever-changing licensing landscape. To give an example, just in Portugal, the regulatory requirements for a hydrogen project have substantially changed and have had a lot of different introductions of new processes in the permitting process. This meant that things like our Aveiro projects would no longer be able to build them as they are today. This is how fast the pace is changing. We will still implement the HEVO-Solar in certain projects; Exolum and CSIC are examples of those, but it increasingly becomes harder as these things will be on industrial sites and the permitting process is much longer. The HEVO-Chain solution was our core offering today with its industry-leading efficiency for PEM system is receiving significant traction from projects developed by third parties. We've been transferring the technology used in our own projects to the HEVO-Chain solution gradually, and this is proving substantially easier to advance with the licensing and permitting processes. Since this transition to the HEVO-Chain, our sales team has already submitted around 40 offers for this new solution. These submissions are often complex, requiring full design specifications for hydrogen projects that go well beyond the supply of the electrolyzer alone. This is where our unique ability to design full project scope with our experience in getting these projects implemented is proving to be a competitive advantage. We have seen recent industry news of troubles inside hydrogen projects, and we believe that experience in executing, designing projects, and being responsible for projects that are live is a significant differentiator in the years to come. The sales to third parties have several stages, and we expect to be hearing final technology decisions on several of the offers in the coming months now that the European summer break is coming to a close. A highlight for us in this process has been the offering of our technology for the first project in Northern Europe, which was not possible before the HEVO-Chain solution, and something which we noted in the last update as a strategic priority for us. The reality is that although Southern Europe has enormous potential for green hydrogen, the northern countries in the continent are moving faster in establishing a series of projects in this space, and therefore, it's something we certainly want to participate in. As noted in the previous slide, the sale of our own projects to infrastructure investors is something that we are actively engaged in and look to conclude before year-end, which will generate significant revenues for the firm as well as release substantial cash flows given that they will consume significant amounts of product currently in our inventory. We've received several questions on our business model as it differs from some of our competitors. Here, we've laid out the value chain of a green hydrogen plant, starting with the power supply and the electrolyzer system, the engineering, the balance of plant procurement, the construction process, finally leading to green hydrogen being produced and delivered. For Aveiro and Exolum, as well as for CSIC, Fusion Fuel is responsible for the entire value chain, developing a full and rare experience within our team to be able to deliver this. Going forward, our primary focus will be on the delivery of the electrolyzer system and, in many cases, their installation and commissioning. We will also look to provide engineering services and balance of plant dimensioning and procurement for selected projects and mostly limited to projects in Iberia. These are services that require a thorough understanding of the local regulatory requirements, something we have here, but instead of developing for other markets, we will look for partners with the relative expertise. Partnerships are a key enabler in our strategy and have a multiplier effect on a limited team and size. In Italy, we are working together with Duferco Energia, a company we have partnered with on two project proposals for Italian plants before to create a commercial partnership to promote the Fusion Fuel technology suites to the Italian market. This is an example of the strategic relationships we are looking to form. While we bring our leading technology to a partner with substantial local operations and knowledge, we accelerate our presence in the market beyond what would be possible alone. The partnership with Duferco kicks-off with a 1-megawatt HEVO-Chain Series C electrolyzer system during 2024 to decarbonize the local refinery. This is the first project that we'll be taking a containerized version of the HEVO-Chain solution, something we're very excited to deliver. There are further partnership discussions ongoing, covering new markets such as North America and India, with demonstrated projects for Fusion Fuel included. We can't go into them now, but we'll share developments on these exciting discussions as soon as we can. We're also working with a large renewable specialist entity for potential funding on some of Fusion Fuel's projects in Europe beyond Portugal. These are projects that have already begun to take shape, but they still require investments for their completion. The green hydrogen world is still in its early stage, and these partnerships are important to help us accelerate our growth while ensuring we keep our costs as low as possible. We have been able to secure some of the first green hydrogen purchase agreements in Southern Europe. Green hydrogen offtake is still in its early stage and is a critical part of making any green hydrogen project viable. Our experience in negotiating contracts for industrial use cases puts us ahead of the curve when establishing ourselves in these markets. In addition to these three hydrogen purchase agreements, we've also secured several MoUs for the supply of green hydrogen for projects in our portfolio. The experience we established in the negotiation and framing the first agreement form a critical foundation to finalize these larger contracts, ensuring that the projects in our portfolio have an attractive unlevered IRR for their investors. Before reaching the last slide of the presentation, I'd like to spend a few moments to dig into what is truly special about the HEVO-Chain offering and the HEVO itself. It is a really important evolution in the PEM market, so bear with me for a moment. Firstly, we have a market-leading PEM stack efficiency of 47.8 kilowatt hour per kilo and an efficiency at the system level of 51.8 kilowatt hours per kilo. This compares to most peers, which are around 57-kilowatt hours per kilo, roughly a 10% efficiency advantage. Our system is one of the most modular and scalable of any electrolyzer solution in the market, able to handle components and dimensions as small as 20 kilowatts. This allows for high-scale modularity in building hydrogen plants, but also minimizes the disruption during maintenance processes and during any system issues, reducing the risk of requiring an entire plant to shut down as has been seen in other systems. One point to highlight, where we've gone through into this detail in the past, we have an industry-leading precious metal utilization. We are currently well below the targeted platinum group metals usage in both the EU Clean Hydrogen Roadmap and the U.S. Department of Energy Roadmap. Critically, we've completed more than 2,000 hours of new HEVOs using a lot of platinum group metals only targeted to reach around 2030 and about one-quarter of the value used by some of our more established PEM competitors. This highlights how truly differentiating the HEVO technology is and the advantages it has in the market. I'll touch upon this slide briefly but wanted to keep it in, as we always look to highlight where we stand versus what we set out to do at the start of the year. Most of the points have been covered in previous slides; however, I'd like to note that HEVO-Chain is now in full commercial mode. And for the first time, we've included the capture of oxygen for the electrolysis process for a client for a system delivery at the end of the year. The process of producing 1 kilo of green hydrogen releases 8 times that amount of oxygen, better yet, green oxygen, as no carbon emissions were released through its creation. In this first case, the client has used oxygen in their industrial process, and therefore, we're able to add on to the system oxygen capture capabilities. We expect this to be included in more and more client proposals going forward. Last quarter, we highlighted our strategic priorities, and we want to provide an update on how we are executing against this. As noted, we have started an all-effort push on tech sales with our HEVO-Chain offering. This has resulted in more sales offers going out in the last few months than the previous two years. Importantly, this includes the first proposals of projects in North Europe and in the U.S., both key markets for the green hydrogen industry. And it's clear to us and to everyone that strengthening our capital position and balance sheet is a priority for the executive team. The very limited detail, as Gavin noted, that we can provide at this time is that we're in advanced discussions with capital providers to strengthen our capital position. We do expect to make significant progress in the business in the coming months, given what I've mentioned before and where we are in project sales and tech sales, which should also put us in a position to take further steps to strengthen our capital without having such a distressed valuation. As noted, the HEVO-Chain offering is well advanced and commercially ready, and we've been delivering offers for projects up to 5 and 10 megawatts already. It's important to note that the largest PEM electrolyzer in operation today is 20 megawatts only. So the path to going large in this industry is still something that everyone is pursuing. For us, delivering on smaller projects and scaling up gradually is how we intend to reach the delivery of larger projects in the future. As the company grows and the industry evolves, we've also identified the need to review the structure and size of certain areas and, importantly, that we ensure that our resources are allocated in the most appropriate manner for our strategic goals. This is the process that won't stop, and in the coming months, will lead us to have some refocusing of our efforts and cost reductions where possible. The plan is that we can self-fund pursuing some of the new opportunities that we have identified. Lastly, regarding strategic partnerships, as highlighted earlier, we're thrilled to be working with Duferco Energia, bringing not only our first 1-megawatt containerized order but also, importantly, a plan for commercial coverage of the Italian market. We're pursuing other partnerships to help us grow and bring a multiplier effect to our business and are in very advanced discussions in both Europe and beyond. We can't say more now, but hope to be able to announce some of the items we're working on over the coming weeks. I'll now ask Gavin and Ben to join me as we open the session for some Q&A. Thank you.

Great. Thanks, Frederico. I've gotten some questions in the email as well as in the chat box. A quick reminder, if you do have additional questions, you can send them to the Investor Relations mailbox at [email protected] or enter them into the chat box in the webcast platform. Okay. So, we'll begin some questions from Chris Tsung at Webber Research. There's a handful of questions on the H2 Pioneers project announcing that confirms €3.3 million in grant funding. How do you plan to fund the remaining €2.5 million of capital investment for that project?

Great. Thank you, Ben. So to note, this project is one similar to our Portugal projects. These are own projects that we are looking for infrastructure investors to actually become the owners and the funding partners for these projects. We're already in advanced discussions with a renewable investor for that project. To note, that project is we call Toledo I in the slide of Perte and C-14 project front overview. We're in discussions with that same investor for Toledo I and Toledo II. The project has also been changed to HEVO-Chain. So, it is a HEVO-Chain offering as well. Most critically, together, these projects hold critical importance with the hydrogen purchase agreement, something we have announced and secured already for that project. So now we are in the next stage discussions with the investor. I hope that answers the question.

Yes, that's right. I think it does. As a follow-up to that, we announced that there are four projects preselected for grant funding as part of the first H2 Pioneers call. Are the remaining three projects still in contention? And if not, how should we think about the viability of those projects?

Sure. Thanks, Ben. So of the four, one was awarded, and two we let go, and one has been resubmitted to the new purchase. So that is Toledo II is the actual one that we have resubmitted at present.

What is the pathway to monetize the approved or secured grants, considering only €6.8 million has been invoiced so far? Additionally, the approved grants dropped from €70 million to around €60 million from one quarter to the next. Can you clarify what caused this change?

Sure. I'll address this in reverse order. The reduction of €10 million in grants is tied to the two projects we couldn't finish due to licensing delays. While we are not the only ones affected by this issue, as evidenced by the 40 approved hydrogen projects that have yet to be implemented due to governmental delays, it is not an uncommon situation. This decrease in grant value essentially reflects our acknowledgment that we will not pursue the project. The grant will officially expire at the end of the year, but we are already accounting for it in our numbers. The revenue recognition ties to the grants intended to support the capital expenditure of the project. As we look to sell these projects to investors, they will benefit the most from the grant. A portion of the grant funding is being received by us as the current holders of the special purpose vehicle, which allows us to market some of our products to that SPV. However, we anticipate a reduction in that grant number on our books as we transfer the SPVs to third-party investors. With the relocation of the grants to third parties, we will indeed benefit from them, and we will also see related contract sales.

Great. Thanks, Frederico. Final question for Chris. Regarding the revised guidance, can you clarify how revenue is expected to decrease by €20 million while net income only drops by €9 million?

Sure. I can take that one, Ben. So, in terms of that revised guidance, again, it is important just to note the split between technology sales and our own project development sales. So, the cost of sales related to the two projects that I mentioned has fully fallen away. And for those who have been following us, you might remember that as reported in our most recently filed 20-F and our Q1 investor update, we recorded significant onerous contract provisions for our technology sales in December 2022, which effectively under accounting standards requires you to book your best estimate of the loss for those contracts when you first realize that those contracts will be loss-making. So, we recorded a provision in December, and how that kind of works its way out is you record revenue, and you will record the corresponding cost of sales. But as those losses have already been recorded in the income statement, the amount that will be recorded once revenue has been recognized will actually be significantly lower than if a contract loss provision hadn't been booked in the first instance. So, sorry, a bit of a worthy response to that, but hopefully, I've got the message across.

Thanks, Gavin. A couple of questions from Erwan Kerouredan at RBC. What are the next steps regarding your product simplification strategy and the perceived phaseout of HEVO-Solar? Should we expect further impairments as part of that transition?

I'll address the next steps, and Gavin will cover the impairment aspect. We are progressing well with the HEVO-Chain solution, and we are directing our projects towards this offering. We have taken advantage of the simplified licensing process it provides. At this point, we do not see the need for further product simplification strategies. Our main focus is on transferring projects, which will primarily involve the HEVO-Chain solution. Now, Gavin, I’ll hand it over to you regarding the impairment.

Yes, we don't expect any further impairments, although we can't be completely certain about that. We have conducted a thorough review of our inventory and believe that the numbers recorded this quarter accurately represent the items we won't use moving forward. We're aiming to sell, recycle, or scrap those items, which may lead to future inflows. Regarding our inventory, as Frederico mentioned, HEVO-Solar is still viable, and we have ongoing projects. We will make use of the materials we currently have. Our production and R&D teams have effectively evaluated the materials for HEVO-Chain, both containerized and non-containerized, and we have been able to utilize several components from our inventory. Without this review, those items would have needed to be impaired. We will continue this process for the next few months until HEVO-Chain gains more market recognition and we start installing the product. So, based on our current review, we anticipate no impairments.

Thanks, Gavin. Very good. Can you touch on the U.S. strategy? Has the U.S. market been deprioritized in the near term in favor of Northern and Southern Europe?

Thanks, Ben. No, absolutely not. The U.S. market, including Canada, is definitely a priority for us. As I mentioned during my speech, we have been making offers for both Northern European and North American markets. The Inflation Reduction Act presents a tremendous opportunity for everyone in the hydrogen sector. Any project that utilizes our technology can take advantage of the $3 tax credit for each kilogram of hydrogen produced. This is certainly a focus for us. In fact, this is one of the partnership discussions we are currently engaged in. We look forward to sharing more with you all regarding our initiatives in North America. Just know that it is indeed a priority for us. Our strategy to address that market moving forward, beyond responding to inbound technology requests and ongoing active projects, will become clearer as we announce details about our partnerships. I will be somewhat vague for now, but I hope to communicate more in the coming weeks.

Great. We'll pivot now to some questions from Jeffrey Grant with AGP. What are the remaining steps required to reach FID on the projects with Hydrogen Ventures?

Sure. The project we are discussing with Hydrogen Ventures is one where we already have the necessary licensing for the power grid, access to power, and land for hydrogen production. Currently, we are focused on contractual discussions with Hydrogen Ventures, as they conduct their review and due diligence on the project, which includes all project materials and grant contracts. In terms of reaching a final investment decision, this will be happening in the coming months, as the focus is primarily on the investor's review of the project rather than any specific milestone.

Great. Second question concerns the reference made in the second quarter materials for more standardization and rigor in sales efforts. Can you expand on what you mean by that? And what benefit that standardization will have?

Sure. When implementing HEVO, one of its advantages is HEVO-Chain. Each HEVO-Solar project requires extensive customization based on factors like local radiation and land topography, leading to a thorough review for each proposal. However, with HEVO-Chain, we can offer standardized proposals, utilizing more uniform building blocks applicable across various sites, assuming sufficient land is available for the units. This approach enables us to use standardized designs, offer letters, layouts, and 3D models. As a result, we can deliver substantial offers quickly, which was not feasible with the HEVO-Solar model. This standardization is what we are highlighting.

Thanks. Moving now to some questions from the audience. What's the status of the HEVO-Solar given the permitting challenges referenced during the quarter? And can you provide some additional commentary on those permitting issues in Portugal and Spain?

There are permitting issues in Portugal and Spain related to the type of land and the rules that each hydrogen project must follow. For instance, last year, Portugal introduced a regulation called Simplex, which allowed hydro projects to navigate a number of regulatory and licensing requirements with a more simplified approach. However, this year, that position has changed, and the accelerated process has been reversed, meaning that projects previously benefiting from the Simplex system are now required to return to the longer regulatory process. This shift by regulators complicates matters for various projects, especially for HEVO-Solar. The original regulatory requirements have reverted, significantly increasing the licensing hurdles and expanding the project footprint size. For example, scaling from a one-hectare project to a ten-hectare project introduces major differences. The revised licensing requirements for any reasonably sized HEVO-Solar project immediately elevate it to the highest hurdles. This unexpected shift in the regulatory landscape has altered the situation for HEVO-Solar in these markets, although it may not apply to Morocco or other areas. In response, we have physically separated hydrogen production from power production and transferred the electronics to the electrolyzer, which continues to be a cost-effective approach. The HEVO-Chain is performing exceptionally well, demonstrating high efficiency with low energy requirements per kilogram.

Thanks, Frederico. Can you provide an update on the Gedisol project which was announced last year?

Sure. The Gedisol project and the HEVO-Solar project specifically faced delays due to licensing issues, as Gavin mentioned. These were the projects we expected to complete this year, but we had to shift the investors for these projects to others in our portfolio.

Thanks. When should investors expect some clarity on the company's capital position?

So, I think as Frederico mentioned, we are in discussions with various counterparts regarding various different financing solutions. So, it's not appropriate for me to go through in detail right now, but hopefully soon. But again, what I will build on my previous comments is that our goal has always been for us to bridge our finances to cash flow breakeven. We continue to look at all the solutions available to us to protect shareholder value. We don't want to fully fund the business plan on day one, especially given our depressed share price because any significant financing ends up being a dilutive recapitalization of the company, so we must move cautiously on these items. So hopefully, I'll provide an update relatively soon. Frederico, anything to add to that?

No, that's right.

Thanks, Gavin. Are you in a position to disclose Fusion Fuel's levelized cost of hydrogen from the HEVO-Chain solution? And then from a commercial standpoint, are you seeing customer willingness to pay a premium for green hydrogen?

Thanks, Ben. So, on the first point, I'd refer people back to slides we have shared previously where we noted our levelized cost of hydrogen for our HEVO solution. We already, at that point in time, recognize that levelized cost of hydrogen apply to both the HEVO-Solar and the HEVO-Chain. And therefore, even in the slide at that point in time, it simply said, HEVO solution. So we have made that public before. We believe it is industry-leading. And on the final levelized cost of hydrogen for any project very much depends on the cost of energy for a project and the load factor. So, it's solar-only or solar and wind. And again, we are seeing phenomenal results for projects we're modeling with solar and wind with the HEVO-Chain. So I would refer back to that. Ben, sorry, there was a second part to the question.

Yes. Just touching on customer willingness to pay a premium for green hydrogen?

We have successfully closed three hydrogen purchase agreements, which is quite rare in the market, and we are beginning to see this occur more frequently. The guarantee of origin market is really starting to take shape in Europe, and we are witnessing the initial demand and pricing emerging. This development makes green hydrogen projects very appealing. We are definitely observing a strong interest for a specific volume of green hydrogen at a premium.

Great question regarding how the proposed three pillars regulations being discussed in the U.S. would affect Fusion Fuel and our interest in utilizing the $3 PTC. As I speak from the U.S., I encourage Frederico and Gavin to contribute as well. For those unfamiliar, the three proposed pillars are: temporal matching, which involves aligning energy consumption with clean energy production on an hourly basis; additionality, which refers to using only recently installed renewable energy production; and deliverability, which means using renewable production that is located nearby the hydrogen facility. Notably, the first two pillars align with the delegated acts adopted earlier this year by the EU. Therefore, this does not pose a significant challenge for us, as we have already structured our project design and definitions in compliance with our European portfolio. Regarding deliverability, our modular technology is built for co-location, both with end users and renewable production. Consequently, we do not expect significant changes in our approach to projects in the U.S. moving forward. Does anyone have anything to add? If not, I will proceed to the next question.

Please, Ben.

Great. A question here on the status of the IPCEI submission. Has feedback been received? And how does the transition from the HEVO-Solar to HEVO-Chain impact that project, if at all?

We have been transitioning from HEVO-Solar to HEVO-Chain in a coordinated way to avoid any issues with the various funding and awards that have been granted. Regarding the IPCEI project, we are still waiting for a final decision. Over the past few months, we have received ongoing questions about the projects, and we are eagerly anticipating the decision. Unfortunately, we do not have any indications about the timing of when to expect that decision.

Great. Thanks. Perhaps a question for Gavin. How are you thinking about reducing fixed costs, given the commercial challenges and revised revenue guidance discussed during the call?

Yes. We have embarked on a rigorous review of our cost base, from costs of materials to general operating costs. All costs are being considered. And I think it's of paramount importance for us to ensure that our cost base matches as much the reduction in the inflows, so that we can continue to be an efficient entity and meet our milestones as quickly as possible.

Thanks, Gavin. What is the status of Frederico? You mentioned this earlier, but what is the status of the U.S. strategy given the departures of the previous co-Presidents of Fusion Fuel USA? And do you plan to hire new leadership at any point?

As mentioned, the U.S. recognizes definitely a core market for us. We've mentioned in the past that we've had several projects that we are pursuing there. We are actively engaged in partnership discussions for the U.S. market, which I hope will bring some clarity to that question. I will just leave everyone with a note that, yes, the U.S. market is a priority for us. And yes, we do intend to have coverage and work together with local partners to make the most of the opportunity set there in the America. We have also been looking at starting the process of licensing our HEVO-Chain solution to also have all the required licenses for sale in the U.S. So, it's certainly very much in our strategic priority list.

Thanks. With respect to the new information on BGR in India, what are the drivers of that project or Indian aspirations given the notable difference in the subsidy and grant environment between India and Europe and North America?

So, to note, India does have substantial hydrogen project support and also hydrogen technology support, making it an attractive market for future. This is why we already talked about the partnership with BGR Energy. It goes beyond just the demonstrated plant. It needs to be seen in context of a broader effort for the Indian market. Given those discussions and what the activities being done there are on BGR side and not on our side. I'm not going to go into the specifics of those projects, but just to note that it is in the context of a broader effort and attractiveness that we see in the Indian market.

Thanks, Gavin, a question here from Torkjel Jordbakke at Fearnley Securities. Can you just help just contextualize a bit more of the €20 million reduction in revenue guidance for 2023? Is that due to grants not being recognized as revenue or due to delayed commissioning? Or perhaps just elaborate a little bit more on that?

Sure. Thanks, Ben. So the €20 million reduction is purely because of the two projects, so the HEVO-Solar and the Gedisol projects that will no longer go ahead in 2023. And so the revenue that would have been recognized on those contracts would have related to the electrolyzers, the HEVOs that we would have sold to those projects once investors had basically taken control of the special purpose vehicles who will develop the project. So, not related to grants other than the fact that because the grants required the projects to be completed in 2023. I think because the project couldn't be completed in 2023, the grants were no longer relevant. They couldn't be drawn down. So, it was more a timing issue that the project couldn't be completed for us to recognize the revenue as opposed to grants not being recognized.

Gavin, I would also like to mention that one of the projects affected was the HEVO-Solar project, with Hydrogen Ventures as the investor counterpart. By chance, we have now moved Hydrogen Ventures to the Azambuja project. The concept and use case remain unchanged; it is merely a shift in the discussions to a different site. This is why we have made significant progress, and we believe that the contracts can be finalized by year-end. This represents an evolution of our ongoing efforts with them, merely relocating rather than starting a completely new conversation.

Thanks, Frederico. Last question before we close here. It relates to strategic partnerships more broadly, but there was a question around whether the company is considering a partnership or collaboration with companies like J.C. Bamford given their stated desire to be a leader in hydrogen-powered heavy-duty equipment?

Just for us, we're looking at a broad spectrum of partnerships. As we noted before, we have the partnership with Toshiba in the R&D development and maintaining our leading position in that platinum group metals. We discussed with the Duferco Energia today a partnership on commercial coverage for the Italian market. I mentioned before a European partnership to fund and develop some of the projects in our portfolio. So, we are looking at a number of them and specific users like industrial users or heavy users of hydrogen are included in that. I'm not going to speak about specific names and so on as it’s understandable. But yes, we have various types of partnership being engaged in.

Thanks, Frederico. So that will do it for our second quarter webcast. Thanks to everyone who joined. If you have additional questions or if you'd like to speak with myself or with management, please feel free to reach out to me and the IR team at [email protected], and we look forward to seeing you all again at our next update.

Thank you, all.

Thank you.