Fusion Fuel Green - Q2 2023
August 30, 2023
Transcript
Benjamin Schwarz (Head of Investor Relations)
Hello everyone, and welcome to Fusion Fuel Green second quarter 2023 investor update. My name is Benjamin Schwarz, and I'm Head of Investor Relations at Fusion Fuel. We'll begin with a 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. Okay. Thank you for joining us today. So I'll quickly run through our agenda once again. So we'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 de-risk the investment case. We're also making promising inroads in new priority markets in Northern Europe and North America, geographies that have been unlocked, as a result... unlocked to us 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 solutions to third-party customers, we also originate and develop green hydrogen projects with diverse avenues for monetizing that value creation. 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 GW of electrolysis production by the end per annum by the end of 2025. So with that, I'll, I'll now pass it over to Gavin Jones, CFO of Fusion Fuel, to share some highlights from the second quarter of 2023.
Gavin Jones (CFO)
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 EUR 2.5 million contract to supply a 550 kW 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 sale 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 MW HEVO-Chain, non-containerized version in Southern Italy, and signed an agreement with Hydrogen Ventures to reach final investment decision on a EUR 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 EUR 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 the 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 EUR 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 EUR 1.4 million expense that was recorded in Q1, we saw a reduction to our personnel-related costs due to a lower headcount when compared to the first quarter. This was coupled with further reductions to 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 was 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 to 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 EUR 7.2 million that was recorded during the quarter. Other notable movements include a reduction in VAT, as EUR 3.2 million was settled during the quarter. An increase to trade payables as we booked the equipment for Benavente, as mentioned above, and an increase to deferred income as we issued further invoices to customers and received more inflows from our C5 grant award. Next slide, please. No ordinary shares were sold through the ATM during the second quarter. Over nine trading days in July, and on August 1st, 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 that 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 have 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 timeframe. 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 EUR 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 MW on the initial guidance. The investment in a second production line has been pushed to 2024 due to slower than expected client deliveries. We expect to issue 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.
Frederico Figueira de Chaves (CEO)
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 for 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 note that the HEVO-Solars and the HEVOs within them are producing at a higher rate than their data sheet. 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 negotiations of future sales contracts. We now have a brief slideshow 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 plant, the development of the control software and processes, 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 are 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 own projects on the way. 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 permits, connection lines, local permits, or even offtake agreements. These, in addition to the EUR 44 million of grants we have secured already for this portfolio and the EUR 50 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 waiting 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 SPVs, we will be able to secure significant revenue models for 2024 and 2025, as well as recognize some of the, some of the value of the stock already with those SPVs. The Sines 1 and Sines projects alone represent EUR 20 million each of potential revenues for Fusion Fuel.
Given that we're looking to not only deliver the electrolyzer, but similar to CSIC connection, 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, they 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 a solution to a technology integrator wouldn't allow us to do. With this in mind, our team was busy during June and July, preparing three new submissions, for our own projects for the latest round of Spanish and Portuguese programs, as well as being highly engaged in the submissions for four client projects. If successful, these projects represent nearly 70 MW of electrolyzer capacity and around EUR 65 million of potential revenues for Fusion Fuel. The importance of creating these potential projects has only grown 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 pursuing the European Hydrogen Bank option. 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 requires 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 lots of different introductions of new processes in the permitting process.
This meant that things like our Ebro projects, we 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 need to be on industrial sites and the permitting process is much longer. The HEVO-Chain solution was certainly our core offering today, with its industry-leading efficiency for a PEM system, is receiving significant traction for projects developed by third parties and our own. 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 a hydrogen project that go well beyond the supply of the electrolyzer alone. This is where our unique ability of 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 was 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 confirmed revenues for the firm, as well as release substantial cash flows, given that they will consume a significant amount of product currently in our inventory. We've received services on some of our competitors.
Here, we've laid out the value chain of a green hydrogen plant, starting with the power supply, then the electrolyzer system, the engineering, the balance of plant procurement, the construction process, finally leading to green hydrogen being produced and delivered. For Ebro 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 on the delivery of the electrolyzer system and in many cases, the installation and commissioning. We will also look to provide engineering services and balance of plant dimensioning and procurement for selected projects, and mostly related 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 to partner with, we will look for partners with the relevant expertise. Partnerships are a key enabler of our strategy and have a multiplier effect on our limited team and size. In Italy, we are working together with the Duferco Energia, a company we have partnered on, partnered with on two project proposals for Italian grants before, to create a commercial partnership to promote the Fusion Fuel technology suite to the Italian market.
This is an example of the strategic relationships we are looking to form, where we bring our leading technology to a partner with substantial local operations and knowledge, and thereby accelerate our presence in the market beyond what would be possible alone. The partnership with Duferco kicks off with a 1 MW HEVO-Chain Series C electrolyzer system during 2024 to decarbonize a local refinery. This is the first project that will be taking the 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 demonstrator 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 working, 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, but these partnerships are important for us 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, gas blending, and mobility 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 negotiating and framing the first agreements 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, what is truly special about the HEVO-Chain offering and the HEVO itself. This 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 kWh/kg, and an efficiency at the system level of 51.8 kWh/kg.
This compares to most peers at around 57 kWh/kg, 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-- to be handled in components and dimensions as small as 20 kW. This allows for high scale modularity when 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, and we've gone into this detail in the past, we have an industry-leading precious metal utilization. This is the chart you see here on the right.
We are currently well below the targeted platinum group metals usage in both the EU Clean Hydrogen Roadmap and the US Department of Energy roadmap. Critically, we've completed more than 2,000 hours of new HEVOs, using an amount of platinum group metals only targeted to be reached around 2030, and about one quarter of the value used by some of our more established PEM competitors. This highlights how truly differentiating the HEVOs 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 the previous slides.
However, I'd like to note that HEVO-Chain is now on full commercial mode, and that for the first time, we've included the capture of oxygen from the electrolysis process for a client for a system delivery at the end of the year. The process of producing one kilo of green hydrogen releases eight 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 a use for oxygen in their industrial process, and therefore were 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 now on how we are executing against these.
As noted, we have started an all-effort push on tech sales with our HEVO-Chain offering. This has resulted in more sale offers going out in the last few months than in the previous two years. Importantly, this includes the first proposals for projects in Northern Europe and in the U.S., both key markets for the green hydrogen industry. It's clear to us and to everyone that strengthening our capital position balance sheet is a priority for the HTOO team. There are very little details, as Gavin noted, that we can provide at this time. We are 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 on where we are in project sales and tech sales, which has 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 can deliver offers for projects up to five and 10 MW already. It's important to note that the largest ever electrolyzer in operation today is 20 MW only. So the path to go 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 a process that won't stop, but 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-MW 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 in the coming weeks. I'll now ask Gavin and Ben to join me as we open the session for some Q&A. Thank you.
Benjamin Schwarz (Head of Investor Relations)
Great. Thanks, Frederico. I've gotten some questions in via 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 on the webcast platform. Okay, so we'll begin with some questions from from Chris Tsung at Webber Research. There's a handful of questions on the H2 Pioneros project announcement that confirms EUR 3.3 million in grant funding. How do you plan to fund the remaining EUR 2.5 million of capital investment for that project?
Frederico Figueira de Chaves (CEO)
Great, thank you, Gavin. So to note, this project is one, similar to, our Portugal projects. These are own projects that we are looking for infrastructure investors, for we are actually the owners and the funder, funding partner for these projects. We're already in advanced discussions with a renewable investor, for that project. To note, that project is what we call To, Toledo 1, in the slide of the PERTE and C14, project grant overview, and we're in discussions with that same investor for Toledo 1 and Toledo 2. But the project has also been changed to, to HEVO-Chain. So it is a, a HEVO-Chain offering as well. Most critically, to get this project sold, the critical item was 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.
Benjamin Schwarz (Head of Investor Relations)
Yes, that's right. I think it does. As a follow-up to that, we had announced that there were four projects preselected for grant funding as part of the first H2 Pioneros call. Are the remaining three projects still in contention? And if not, how should we think about the viability of those projects?
Frederico Figueira de Chaves (CEO)
Sure. Thanks, Gavin. So of the four, one was awarded and two, we let go, and one has been resubmitted to the new project. So that is Toledo 2, the actual one that we have resubmitted, at present.
Benjamin Schwarz (Head of Investor Relations)
Great, thanks. What is the pathway to monetize the approved grants, or the secured grants, given that only EUR 6.8 million or so has been invoiced to date? Also, the approved grants decreased quarter-over-quarter from EUR 70 million to roughly EUR 60 million. Can you provide some clarity as to what happened there?
Frederico Figueira de Chaves (CEO)
Sure, certainly. So, I'll tackle those in reverse order. The grants net reduction of the EUR 10 million are related to, as Gavin mentioned, the two projects that we could not complete due to licensing delays. So even though we had been-- we were not the only ones to suffer this problem. There were in these government programs, there were 40 hydrogen projects approved. Not a single one was implemented, given the delays on the government's side. So we were not unique, but effectively, that matches exactly the decrease in grant value, was us formally acknowledging that we will not be pursuing the projects. In reality, the grant will only expire at the end of the year, but we are already reflecting that in the numbers. Sorry, Ben, that was a set... Sorry.
Yes, the recognizing of the revenues. So effectively, the grants serve to support the CapEx expense of the projects. So as we transfer and sell the projects to investors, they will be the ones who will benefit the most from the grant. So there is a certain amount of the grant funding that we are taking receipt as the current holders of the SPV. This allows us to sell some of our products to that SPV. By the time the grants, we do hope to see a decrease in that grant number in our own books as we transfer these SPVs to third-party investors. And so with the moving of the grants to third parties who will truly benefit from them, we will also see the contract sales related.
Benjamin Schwarz (Head of Investor Relations)
Great. Thanks, Frederico. Final question from Chris. On the revised guidance, can you provide some clarity as to how expected revenue decreases by EUR 20 million, but net income only decreases by EUR 9 million?
Gavin Jones (CFO)
Sure. I can take that one, Ben. So in terms of that revised guidance, again, 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.
As you record revenue, 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 wordy response to that, but hopefully I've got the message across.
Benjamin Schwarz (Head of Investor Relations)
Thanks, Gavin. A couple of questions from Erwan Kerouredan at RBC. What are the next steps regarding your product simplification strategy and the perceived phase out of the HEVO-Solar? Should we expect further impairments as part of that transition?
Frederico Figueira de Chaves (CEO)
So I'll answer the next steps, and Gavin, maybe you take the impairment piece. So for us, as we mentioned, we are already moving well along on the HEVO-Chain solution. We've been moving our projects towards the HEVO-Chain offering, so taking advantage of the simplified licensing process that offers us. At this stage, there's no real sort of further requirement for us to do a product simplification strategy. It's more just focusing our efforts on getting the projects transferred, which take most of that to the HEVO-Chain solution. Gavin, over to you on the impairment.
Gavin Jones (CFO)
Yeah, perfect. So we don't expect any further impairments, but again, we can't be 100% definitive on that. What we have done is taking a pretty rigorous review of everything that we have in inventory. And we feel the number that we booked in this quarter, you know, correctly reflects the items that we won't use going forward. We know for sure that we won't use going forward. As I mentioned, we're looking to sell those or recycle or scrap them, so hopefully there will be inflows in the future. But in terms of other items in our inventory that we have, as Frederico mentioned, HEVO-Solar is not dead. We still have projects ongoing, so we will utilize the materials that we have.
And our production and R&D team have also done a pretty good job at reviewing the materials to be used for HEVO-Chain, both containerized and non-containerized. We've been able to utilize many, many components within the inventory that if that process wasn't done, then they would have had to be impaired. We will continue. We will be on this journey for the next couple of months until HEVO-Chain becomes, you know, a bit more recognized in the market, and then we're actually installing the product. So hopefully not, is the answer, based on the review that we've done so far.
Benjamin Schwarz (Head of Investor Relations)
Thanks, Gavin. Frederico, 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?
Frederico Figueira de Chaves (CEO)
Thanks, Ben. No, absolutely not. So the US market, and I'll note the North American market, to throw Canada in there as well, is certainly a priority for us. As I noted during my speech, we've been making offers for both Northern European markets as well as North American markets. The IRA is a phenomenal opportunity for anyone in the green hydrogen space. Any project that includes our technology can benefit from the $3 tax credit per kilo of hydrogen produced. So it's certainly a focus. In fact, this is one of the partnership discussions that we are engaged in, so we look forward to be able to share more with you all related to our efforts in North America.
But just to note that it is certainly a priority for us. How we plan to cover that market, going forward beyond just the sort of answering for inbound technology requests and ongoing work on projects that were already in flight. I, I believe it'll become clearer as we're able to announce details around our partnerships. So I, I will be vague, but hope to be able to communicate more in the coming weeks.
Benjamin Schwarz (Head of Investor Relations)
Great. We'll pivot now to some questions from Jeffrey Grampp at AGP. What are the remaining steps required to reach FID on the projects with Hydrogen Ventures?
Frederico Figueira de Chaves (CEO)
Sure. So for the project with Hydrogen Ventures, the one that we are discussing with them, this is a project that we've been already, we have the licensing of the power grid, we have the power line, we have the hydrogen production land. So at the moment, the-- this is more around the contractual discussions, with Hydrogen Ventures, then doing their review and due diligence on the project or the project materials, the grants, contracts, and so on. So, in terms of FID, these are now the coming months. It's really on investor review of the project more than any particular, milestone.
Benjamin Schwarz (Head of Investor Relations)
Great. The 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?
Frederico Figueira de Chaves (CEO)
Sure, of course. So, effectively, when you do a HEVO service, this is one of the advantages of the HEVO-Chain. When you do a HEVO-Solar project, every single project needs to be completely tailored. The amount of hydrogen produced by HEVO-Solar depends on the local irradiation of that site. The topography of the land can change the requirements, and so on. So every single proposal needed substantial custom work and custom offering, nearly doing a full project review just to put out an offer. With the HEVO-Chain, we're able to have standard offers. So we have, effectively, a much more standard building blocks that can be applied anywhere, given that it only requires a certain amount of land to place the unit.
This has allowed us to have, you know, pretty much from standard designs to standard offer letters, layout, 3D layouts, sorry, and so on. This. The ability to be able to deliver nearly 40+ offers, you know, in a couple of months, would simply not have been possible with the HEVO-Solar offering. So that standardization is what we're referring to.
Benjamin Schwarz (Head of Investor Relations)
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?
Frederico Figueira de Chaves (CEO)
Sure. So, again, on permitting issues in Portugal and Spain are related to the type of land, and the rules and requirements that each hydrogen project has to go through. So for example, last year, Portugal passed a regulation that was called the Simplex that allowed hydrogen projects to be sped through a number of regulatory and licensing requirements, and it was sort of a licensing-lite approach. As of this year, that position was reversed, and that accelerated process is impossible. So actually, projects that were pursuing that Simplex system, they've been informed that they need to revert back to the old lengthier regulatory process. So that sort of change of goalposts from the regulators make it very hard for the various projects.
It particularly hits the HEVO-Solar because the type in the, should I say, the original regulatory requirements that they have now reverted back to, the amount of licensing required, or should I say, the required licensing hurdles significantly increases with the footprint size of the project. So when you're doing a one-hectare project, it's very different when you're doing a 10-hectare project, and so on. So effectively, the required licensing process for a HEVO-Solar project of any sort of relatively decent size meant that it already... it would immediately hit all the highest hurdles. Again, this was a development in the regulatory process that caught us by surprise because the previous one was only implemented last year.
But effectively changed the, changed the game for the HEVO-Solar in these markets. It's not to say that that applies to Morocco or other markets. For some, like Portugal and Spain, these were one of the, the changes. So effectively, what we have done is we have separated the, hydrogen production from the power production, in terms of physical separation, and we transfer the electrons to the electrolyzer. This proves still to be a very cost-effective manner because the HEVO-Chain is actually performing very well, exceptionally well, with a very low, or should I say, very high efficiency, low kilowatt hour requirement for HEVO.
Benjamin Schwarz (Head of Investor Relations)
Thanks, Frederico. Can you provide an update on the Gedisol project, which was announced last year?
Frederico Figueira de Chaves (CEO)
Sure. The Gedisol project and the HEVO-Solar project, to be specific, those are the two projects that were impacted by the delays of the licensing, as Gavin mentioned. These were the projects that we were expecting to deliver this year. There have been, we had to change the investors for those projects to other projects in our portfolio.
Benjamin Schwarz (Head of Investor Relations)
Thanks. When should investors expect some clarity on the company's capital position?
Gavin Jones (CFO)
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 break even. We continue to look at all the solutions available to us to protect shareholder value. You know, 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 with caution on these items. So hopefully provide an update relatively soon. Frederico, anything to add to that?
Frederico Figueira de Chaves (CEO)
No, that's right.
Benjamin Schwarz (Head of Investor Relations)
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?
Frederico Figueira de Chaves (CEO)
Ben, so on the first point, I'll just refer people back to slides we've shared previously, where we noticed our levelized cost of hydrogen for our HEVO solution. We already at that point in time recognized that levelized cost of hydrogen applied to both the HEVO-Solar and the HEVO-Chain. Therefore, even in the slide at that point in time, we simply said HEVO solution. So we have made that public before. We believe it is industry-leading, and I will note 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 if it's solar only or solar and wind.
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.
Benjamin Schwarz (Head of Investor Relations)
Yes, just touching on customer willingness to pay a premium for green hydrogen.
Frederico Figueira de Chaves (CEO)
So, absolutely. As we've noted, we've been able to close 300 purchase agreements. This is something that is rare in the market, and we are effectively seeing that happen more and more. We'll note that the Guarantee of Origin market is starting to truly take shape in Europe, and we've seen the first sort of, so to say, demand and prices of that come out into the market. Those make green hydrogen projects extremely attractive. So we certainly are seeing that appetite for a certain amount of volume of green hydrogen at a premium.
Benjamin Schwarz (Head of Investor Relations)
Great. Question here on how the proposed Three Pillars Regulations being considered in the U.S. would impact Fusion Fuel and aspirations or desire to utilize a $3 PTC, if at all. I'll just chime in here as I sit here in the U.S., invite Frederico and Gavin to add. So for those who aren't aware, the three proposed pillars are temporal matching, so matching energy consumption with clean energy production on an hourly basis, additionality, it's only using installed, recently installed, I should say, renewable production, and then deliverability, which is using renewables production that is co-located with the hydrogen facility. Interestingly, those first two pillars are consistent with the Delegated Acts that were adopted earlier this year by the E.U.
So it doesn't represent a meaningful hurdle for us, as we're already ensuring compliance with our project design and definition in our European portfolio. And then with respect to deliverability, our modular technology is designed for co-location, both with end users as well as with renewables production. So we don't anticipate meaningful changes to our approach to projects in the U.S. going forward. Anything to add? Otherwise, I'll move on to the next one.
Frederico Figueira de Chaves (CEO)
Yes, go on.
Benjamin Schwarz (Head of Investor Relations)
Great. Question here on the status of the uncertain submission. Has feedback been received? And how does the transition from HEVO-Solar to HEVO-Chain impact that project, if at all?
Frederico Figueira de Chaves (CEO)
Yeah, as I say, we've been working and we've been informing the... I'm now speaking generally, not specifically for the FCA, but all programs that we've been doing the transition from HEVO-Solar and to HEVO-Chain in a coordinated manner to ensure that this doesn't cause problems to the different fundings and awards that have been granted. The FCA project, as I mentioned in my notes earlier, we continue to await a final decision. We have been receiving questions pretty much continuously on the project throughout the last months. And we eagerly await the decision. There's no expectation on timing, sorry. We do not have nor received indication as to when the timing will be.
Benjamin Schwarz (Head of Investor Relations)
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?
Gavin Jones (CFO)
Yeah. So we have embarked on a rigorous review of our cost base, like from cost of materials to general operating costs. All costs are being considered, and I think it's of paramount important 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.
Benjamin Schwarz (Head of Investor Relations)
Thanks, Gavin. What is the status of, Frederico, you alluded to this earlier, but what's 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?
Frederico Figueira de Chaves (CEO)
Yeah, as I mentioned, the U.S. recognizes a definitely core market for us. We've mentioned in the past that we have 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 the 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 Americas. We have already also been looking at or starting the process of licensing our HEVO-Chain solution to also be have all the required licenses for sale in the U.S.
Certainly very much in our strategic priority list.
Benjamin Schwarz (Head of Investor Relations)
Thanks. With respect to the new information on BGR in India, what are the drivers of that project, or kind of Indian aspirations, given the notable difference in the subsidy and kind of grant environment between India and Europe and North America?
Frederico Figueira de Chaves (CEO)
Yeah. So, to note, India does have, India does have substantial, hydrogen, project support and also hydrogen technology support, making it an attractive market, for the future. This is why, when we talk about an essential part, the partnership with BGR Energy, it goes beyond just the demonstrator part. Demonstrator part would need to be seen in context of a broader, effort for the, the Indian market. Given that these, those discussions and, and what the activities being done there are on BGR side and not on our side, not going to go into the, 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.
Benjamin Schwarz (Head of Investor Relations)
Thanks, Gavin. A question here from Tokyo, uncertain. Can you just help me just contextualize a bit more the EUR 20 million reduction in revenue guidance for 2023? Is that due to grants not being recognized as revenue, due to delayed commissioning, or perhaps just elaborate a little bit more on that.
Gavin Jones (CFO)
Sure. Thanks, Ben. So the twenty 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. So the revenue that would have been recognized on both 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. Okay, so not related to grants, other than the fact that because the grants required the projects to be completed in 2023, it basically meant 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 projects couldn't be completed for us to recognize the revenue, as opposed to grants not being recognized.
Frederico Figueira de Chaves (CEO)
And, Gavin, I would just also note there that the one of the projects that was impacted was the HEVO-Solar project, and the investor counterparty for that was Hydrogen Ventures. It is by no coincidence that we have simply now moved Hydrogen Ventures to the Azambuja project. So effectively, the concept, the use case, everything remains the same. It is simply a change of site in the discussions. So this, this is why we are well advanced, and we believe that those contracts can be closed by year-end. This is an evolution of the efforts we were already making with them, with a change of location rather than a whole new discussion.
Benjamin Schwarz (Head of Investor Relations)
Thanks, Frederico. Last question before we close here, 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.
Frederico Figueira de Chaves (CEO)
Just to note that for us, we are looking at a broad spectrum of partnerships. As we noted before, we have a 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 is understandable. But yes, we have various types of partnerships being engaged in.
Benjamin Schwarz (Head of Investor Relations)
Thanks, Frederico. 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'll look forward to seeing you all again in our next update.
Gavin Jones (CFO)
Thank you all.
Frederico Figueira de Chaves (CEO)
Thank you.
Gavin Jones (CFO)
Bye-bye.