FuelCell Energy, Inc.

Good day, and thank you for standing by. Welcome to the Fuel Cell Energy Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Tom Jelston, Senior Vice President of Finance and Investor Relations. Please go ahead.

Tom Jelston Thank you, Carol. Good morning, everyone, and thank you for joining us on today's call. As a reminder, this call is being recorded. This morning, Fuel Cell Energy released our financial results for the third quarter of fiscal year 2021, and the earnings press release is available on the investor relations section of our website at fuelcellenergy.com. Consistent with our practice, in addition to this call and our press release, we will post slides presentation on our website. This webcast is being recorded and will be available for replay on the company's website approximately two hours after we conclude the call. Before we begin our prepared comments, please direct your attention to the disclosure statement on slide two of the presentation and the disclaimers included in the press release related to forward-looking statements. The discussion today will contain forward-looking statements, including, without limitation, statements with respect to the company's anticipated financial results and statements regarding the company's plans and expectations regarding the continued development, commercialization, and financing of its fuel cell technology and business plans. These forward-looking statements are intended to qualify for safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today, other than statements of historical facts, are forward-looking statements and include statements regarding our anticipated financial and operating performance. Forward-looking statements made on this call represent management's current expectations, and based on information available at such times, statements are made. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from any results predicted, assumed, or implied by the forward-looking statements. We strongly encourage you to review the information in the reports we file with the SEC regarding these risks and uncertainties, in particular those that are described in the risk factor section of our annual report on Form 10-K, and cautionary statement language concerning forward-looking statements disclosure in our quarterly report on Form 10-Q. You should also review the section entitled Cautionary Statements Concerning Forward-Looking Statements in This Morning's Earnings Press Release. During this call, we will use non-GAAP financial measures when we talk about the company's performance and financial condition. In accordance with SEC regulations, you can find a reconciliation of the non-GAAP measures and the comparable GAAP measures in this morning's earnings release and the reconciliation document posted on the investor relations portion of our website. For our call today, I'm joined by Jason Few, Fuel Cell Energy's President and Chief Executive Officer, and Mike Bishop, Executive Vice President, Chief Financial Officer, and Treasurer. Following our prepared remarks, we will be available to take your questions and be joined by other members of the leadership team. I'll now like to hand the call over to Jason for opening remarks. Jason?

Thank you, Tom, and good morning, everyone. Thanks for joining us on our call today. We had a number of successes during the third quarter as we continued executing against our powerhouse business strategy. Before getting into the business highlights, I will give a brief company overview shown on slide three. Looking at our last full fiscal year ended on October 31, 2020, we delivered revenues of approximately $71 million, comprised of our three largest revenue categories, service and licenses, advanced technologies, and generation. all of which represent diversified sources of recurring revenue under multi-year contracts. In addition to those three revenue categories just mentioned, we are confident that we will regain meaningful incremental revenue from product sales in the future. In the near term, we see opportunities developing in international markets, including Asia, Europe, and in target customer segments domestically. We have been taking steps to rebuild our business development and go-to-market capabilities as an essential step in the strength and pillar of our powerhouse business strategy to ultimately support growth. We have also been adding experienced strategic talent as we continue to focus on market segments that deliver long-term growth opportunities, which we believe will position us to re-enter targeted global markets, expand client relationships, and build new ones by focusing on customer segments. Our company headcount is currently 380 team members and growing. We've had many global customers who are utilizing our multi-feature fuel cell platforms. Many of these systems integrate combined heat and power capabilities, creating high energy efficiency levels. Other installations enable microgrids, enhancing grid resiliency and reliability. Some of our applications utilize biofuels, resulting in carbon neutral to carbon negative power and eliminating on-site flaring. Now turning to slide four. As a company, we are committed to our purpose of enabling the world to live a life empowered by clean energy. The world will always need reliable power created in an environmentally responsible manner. We are periodically and increasingly reminded by fires, hurricanes, and other extreme weather that grid reliability remains a critical issue that can't be taken for granted. We are committed to providing solutions that deliver on our commitment to addressing climate change and deliver clean baseload power ultimately around the world. Today, according to the WHO, more than 1 billion people are without access to reliable power. With our broad product portfolio, Fuel Cell Energy is uniquely positioned to assist customers with decarbonization goals, leverage a wide range of feedstock, and to meet the challenge of ensuring energy reliability and infrastructure resiliency. Our customers can and should be able to achieve each of these objectives. We believe the goal of decarbonization does not require deindustrialization and that developing countries around the world should also participate in economic development alongside industrialized nations. Instead of non-onsite solutions that rely heavily on credits or offsets, our technology provides authentic and local solutions for clean energy and has the future promise to decarbonize industries less suited for electrification. we believe strongly in the ability for customers to make a direct impact in the communities in which they operate, directly reducing the need to rely on offsets that can originate thousands of miles away. And as we look to the future, We plan to deploy our unique and differentiated energy solutions to generate hydrogen through electrolysis and our fuels, store that hydrogen, and utilize that hydrogen to firm up intermittent renewables, repower transportation, power existing combustion generation assets with hydrogen, and provide clean hydrogen as a source of energy to the industrial sector. We do this in a manner which supports high standards of living and economic growth while protecting the environment and adapting to new resource challenges. This purpose continuously drives our strategic focus and the work we are passionate about doing. Next, I would like to turn your attention to some key messages for the quarter shown on slide five. I am very pleased to announce that during the quarter we began commercial operations at the 1.4 megawatt biogas project at the San Bernardino, California, wastewater treatment facility. On the 7.4 megawatt project at the U.S. Navy submarine base in Groton, Connecticut, we have achieved mechanical completion and executed the interconnect agreement. During the commissioning process, the final stage prior to commercial operation, a localized and contained elevated temperature was observed inside a component of one of the two installed plants, and as a result, the commissioning process was suspended. This has delayed the overall commissioning timeline for the platform as we repair the gasket seals and insulation. Our team has identified the root cause and is in the process of applying improvements and preventative upgrades, as well as implementing the necessary repairs to the plant. We expect to resume commissioning on this project in late September, but timing is dependent on non-fuel cell energy related activities on the Navy base. Our intent is to achieve commercial operations as expeditiously as possible. We are also continuing to make significant progress on other new projects in our backlog, totaling 24.5 megawatts. On-site civil construction activity has advanced on our 14.8 megawatt utility scale platform in Derby, Connecticut, and our 2.8 megawatt utility scale shared clean energy project is in early stage development. In addition, the construction of our 7.4 megawatt project in Yapank, Long Island, which is shown on the right-hand side of the slide, continues. Our 2.3 megawatt tri-gen hydrogen platform, which is being built at the Port of Long Beach in California, has advanced to early site civil construction. Upon its completion, This multi-feature platform will deliver carbon-neutral electricity, green hydrogen, and pure water, helping our customer, Toyota, avoid water consumption in a region experiencing extreme drought conditions and provide a central distributed hydrogen fueling infrastructure to enable the continued growth of hydrogen fuel cell electric vehicle transportation. We have further enhanced our balance sheet to achieve an overall lower cost of capital across our platform and subsidiaries. To strengthen our liquidity and financial flexibility, in June we commenced an at-the-market offering program with Jeffries and Barclays Capital to offer up to $500 million of our common stock. Through July 31, 2021, we sold approximately 44 million shares under the Open Market Sales Agreement, generating net proceeds to the company of approximately $369 million. We plan on using the net proceeds from this offering to accelerate the development and commercialization of our advanced technology products and for product financing, working capital support, and general corporate purposes. Additionally, we recently closed on two tax equity transactions. One is a tax equity sale leaseback financing transaction with Crestmark Equipment Finance for the 1.4 megawatt biofuels fuel cell project with the City of San Bernardino Municipal Water Department in California. This marks our second deal with Crestmark. The transaction total was $10.2 million through a 10-year sell-leaseback structure and demonstrates what we believe is a continued interest from the financial markets and fuel cell energy's differentiated technologies. And we closed on a tax equity partnership flip financing transaction with EastWest Bank for the 7.4 megawatt fuel cell project located on the U.S. Navy submarine base in Groton, Connecticut. EastWest Bank's tax equity commitment totals $15 million. The ability to utilize these financing solutions enables us to recycle capital for additional clean energy projects and commercialization initiatives. And the third key message today is our focus on strengthening our leadership and sustainability. We have increased our commitment to research and development focused on the commercialization of our solid oxide power generation, hydrogen storage, and hydrogen electrolysis platforms, as well as growing our commercial capabilities. Our DOE-supported programs continue to advance the design of our solid oxide stacks, stack modules, and balance of plant systems. We are also executing programs to develop reversible solid oxide systems for energy storage and very high efficiency solid oxide power generation systems. Through our technology portfolio, we are developing solutions intended to address major global issues as society looks for ways to address climate challenges while at the same time combating grid reliability issues. Fuel cell energy remains focused on developing and deploying our distributed generation, distributed hydrogen, electrolysis, hydrogen energy storage, and hydrogen power generation, and carbon capture product portfolio solutions for some of the largest global energy opportunities. Turning to slide six, fuel cell energy is positioned to deliver decarbonization solutions across the energy delivery value chain. We believe energy must be delivered in distributed networks where it is needed, which will decrease dependencies on less efficient and less environmentally friendly centralized resources, help to harden grid infrastructure around the world, and lower the dependence on costly long distance high voltage transmission. Our distributed platforms offer clean baseload alternatives to traditional generation sources, avoid more emissions on a 24 by 7 basis than wind and solar, and as we commercialize our hydrogen solutions, our platforms will offer the opportunity to extend the life of existing investments in traditional generation assets by repowering with hydrogen and or capturing carbon from those generating assets. At the local distribution level, we enhance grid resiliency by delivering microgrid applications, siting generation closer to where it is consumed, and providing onsite solutions for commercial applications ranging from power generation, hydrogen, thermal energy, and carbon as a product ingredient for utilization. The multi-feature capabilities of our product and proven ability to operate using a variety of fuel sources supports distributed base generation and growing demand for hydrogen, carbon capture, and energy storage. Fuel cell energy is ready to transition power delivery around the world. And now I will turn the call over to Mike to discuss our financial results in more detail. Mike?

Thank you, Jason. Let's begin by reviewing financial highlights for the quarter shown on slide 7. In the third quarter of fiscal year 2021, we delivered revenues of $26.8 million compared to $18.7 million in the third quarter of fiscal year 2020. Looking at revenue drivers by category, service agreements and license revenues increased 102% to $14.3 million. The increase is primarily due to the fact there were more module exchanges during the quarter. Module exchanges generated approximately $13.4 million of revenue in the current year quarter, compared to revenue of $6 million in the prior year quarter. Generation revenues increased 32% to $6.2 million for the quarter from $4.7 million, primarily due to higher operating output of the generation fleet portfolio as a result of investments in maintenance activities and an increase in our fleet size. Advanced technology contract revenues for the quarter decreased 9% to $6.2 million from $6.9 million. Advanced technology contract revenues recognized under the Joint Development Agreement, or JDA, with ExxonMobil Research and Engineering Company, or Emory, were approximately $100,000 higher than in the comparable prior year quarter, reflecting continued performance under the JDA. This increase, however, was offset by $800,000 less revenue recognized under government contracts compared to the prior year period. Gross profit for the third quarter of fiscal year 2021 totaled $1.1 million compared to a gross loss of $3.1 million in the comparable prior year quarter. Higher gross profit for the quarter was a result of higher service gross margin primarily due to more new module exchanges for projects with higher margins during the current year quarter, improved generation gross margin related to an increase in revenues and a decrease in depreciation expense, and lower manufacturing variances primarily as a result of increased production volumes. These were partially offset by lower advanced technology gross margin primarily related to the mix of government contracts in the quarter. Operating expenses for the third fiscal quarter of 2021 increased to $11.7 million from $7.6 million in the third quarter of fiscal 2020. Components of our operating expenses are Administrative and selling expenses totaled $8.7 million in the third fiscal quarter of 2021 and included legal expenses associated with the tax equity financings as well as additional share-based compensation of $500,000 due to non-cash grants made in August and November 2020 under our long-term incentive plans and increased compensation expenses as a result of an increase in staff compared to the prior year period. Research and development expenses totaled $3 million in the third fiscal quarter of 2021 and reflect increased spending in the company's hydrogen commercialization initiatives compared to the comparable prior year period. The loss from operations totaled $10.6 million in the third fiscal quarter of 2021 compared to $10.8 million in the comparable prior year period. Net loss improved to $12 million in the third fiscal quarter of 2021 compared to a net loss of $15.3 million in the comparable prior year quarter due in part to higher gross margin for the third fiscal quarter of 2021 compared to the comparable prior year period. Additional contributing factors included lower interest expense as a result of the early repayment of the Orion facility and the fact there was no charge for the change in fair value of the common stock warrant liability, partially offset by higher operating expenses for the period, and the fact there was no gain on extinguishment of finance obligation recorded in the quarter as there was in the comparable prior year period. The net loss attributable to common stockholders in the third quarter of 2021 was $0.04 compared to $0.07 in the third fiscal quarter of 2020. The lower net loss per common share was due to higher weighted average shares outstanding due to share issuances since July 31, 2020, and the lower net loss attributable to common stockholders. Adjusted EBITDA totaled negative 5.2 million in the third fiscal quarter of 2021 compared to adjusted EBITDA of negative 5.6 million in the third quarter of 2020. Please see the discussion of non-GAAP financial measures, including adjusted EBITDA, in the appendix of this deck and our earnings release. Next, please turn to slide 8 for additional details on our financial performance and backlog. The chart on the left-hand side of the slide graphically shows the numbers we just reviewed for the third quarters of fiscal years 20 and 21. Looking at the right-hand side of the slide, we finished the quarter with backlog of approximately $1.3 billion, reflecting the continued execution of backlog and adjustments to generation backlog, primarily resulting from the decrease in fuel pricing, which lowered estimated future revenue, offset by the inclusion of the project with United Illuminating in Derby, Connecticut, which was awarded in the second quarter of this fiscal year. Now, turning to slide nine, I will build upon Jason's comments on our enhanced liquidity. As he mentioned, our at-the-market sales of common stock resulted in net proceeds of approximately $369 million during the quarter. Subsequent to quarter end, we closed a tax equity sale leaseback financing transaction with Crestmark Equipment Finance, for the San Bernardino project and a tax equity partnership flip transaction with East West Bank Corp for the US Navy submarine based project in Groton, Connecticut. These financings will further enhance our liquidity position. All of these actions are consistent with our powerhouse business strategy to strengthen liquidity with the goal of enabling us to focus on executing our business plan, including building out the backlog of generation projects, commercializing advanced technology platforms, including our solid oxide platform, carbon capture and separation solutions, and expanding our go-to-market activities. As of July 31st, 2021, we had total cash and cash equivalents of approximately $494 million. This total includes approximately $468.6 million of unrestricted cash represented by the blue bar in the center of the slide and $25.5 million of restricted cash and cash equivalents represented by the green bar. On the right-hand side of the slide is a chart illustrating our total project assets, which make up our company-owned generation portfolio. We intend to continue to develop, construct, and grow project assets. Investments to date reflect capital spent on completed operating projects represented by the gray bars and capital spent on projects currently in development and construction represented by the light blue bars. At the end of the third quarter of fiscal year 2021, our gross project assets total approximately $238.3 million. As detailed on slide 19 in the appendix of this presentation, Our generation portfolio totaled 76.1 megawatts as of July 31st, 2021. This includes 34 megawatts of operating assets and 42.1 megawatts of projects in process. Projects in process begin commercial operation. They are expected to contribute higher revenue and adjusted EBITDA. Additionally, as these future projects come online, we expect to see additional long-term tax equity financing, such as the examples I previously discussed. In closing, we are pleased with the progress made this past quarter, and from a financial perspective, we believe we are well positioned to execute on our near, medium, and long-term business plans. I will now turn the call back over to Jason to discuss further. Thanks, Mike.

And moving to slide 11. As we've laid out in our comments today and over the past several quarters, we have been successful in increasing liquidity at an attractive cost of capital, which we intend to reinvest to achieve sustainable growth. We will continue to execute against our project backlog, and as projects are completed, this will expand our generation portfolio, which we expect will generate higher revenues and EBITDA. As I have already discussed, we are also making investments toward advancing our solid oxide platform and carbon capture solutions to commercial deployment. To facilitate growth across all of our platform technologies, we are working toward the goal of achieving an annualized manufacturing production rate of 45 megawatts at our Torrington facility by the end of the calendar year, up from 17 megawatts at the end of fiscal 2020. With our focus on manufacturing excellence, we have made strides in continued adoption of lean manufacturing principles and implementation of advanced automation technologies where feasible. This increased production rate has also been facilitated in part by our effort to bring in additional talent and expertise across several key areas of the business. In addition to manufacturing personnel, we have recruited for key capabilities and support functions, business development and engineering, while also improving our retention capabilities. Next, on slide 12, I'd like to give further details specifically regarding our investment in strategic talent, because advancing and elevating human capital management is critical for the next phase of our growth. In particular, I would like to highlight some additions to the leadership team. This summer, Betsy Schaefer assumed the role of Chief Marketing Officer, and she brings with her considerable Fortune 50 experience in corporate communications, marketing, and brand management. We believe that she will help us articulate our value proposition to customers and prospective customers alike, as well as educate national and local policymakers on the value of fuel cell technology and its essential role in the energy transition. We have also brought on board Andrea Jones, our Chief People's Officer. She will play an essential role in helping us recruit, develop, retain, adapt to a new work model, and enhance our human capital resources as we continue on our journey of growth and ensure we are well positioned to compete for talent. We are also continuing to add expertise across all areas of the company. to grow the commercial team to build our sales pipeline, add product engineering, manufacturing, and project management capabilities, and increase our base service capabilities as our product installed base continues to grow. Additionally, I am delighted to officially welcome our two most recent board members, Cynthia Hansen and Donna Sims-Wilson. which expands our board to seven directors, six of whom are independent. Cynthia and Donna are respected executives in business today and will add tremendous value to our company as we execute our strategy. Next on slide 13 is our powerhouse business strategy, which is based on three core pillars of transform, strengthen, and grow. I won't go through each of these today, but I think it is important that we remain centered around our overarching strategy to penetrate significant market opportunities where we believe our technology will win. We introduced the powerhouse business strategy in January of 2020 when I was relatively new to the position of CEO. This strategy was intended to serve as a guidepost for our turnaround as we repositioned Fuel So Energy to capitalize on the energy transition and I think it has served us well. We have built a durable financial foundation, and our added liquidity provides the flexibility to fund our growth plans and effectively compete in the marketplace. We are developing new technologies, growing our production capabilities and capacity, delivering on our backlog, and continuously striving to improve our operational excellence and deepen customer relationships. I am energized by the focus and resolve of the Fuel Cell Energy team as we continue to grow our company to attain our vision of a world empowered by clean energy. Looking at slide 14, we will continue to drive progress toward our long-term targets and goals for fiscal year 2022 that we established with the launch of the Powerhouse Business Strategy. Reaching these targets will require successfully executing against our 42.1 megawatt project backlog, achieving commercial operation for each of those projects, and driving new top line revenue and margin as we invest in commercializing and human capital. As I've explained throughout my comments today, we are pursuing commercializing our advanced technology around distributed generation, distributed hydrogen, long duration hydrogen energy storage, pure hydrogen power generation, electrolysis, and carbon capture sequestration and utilization. Finally, to conclude my remarks on slide 15, we have executed several strategic actions to strengthen our balance sheet, enhance liquidity, and reduce our cost of borrowing, which we believe have positioned the company to execute on our growth strategy. I am backed by an exceptional leadership team, and we continue to add to our talent pool across the company. We are focused on taking care of our customers, achieving our financial goals, and continually building upon our operational excellence while adhering to our core purpose. Our technologies have a key role to play in the global goals of decarbonizing the grid, developing the hydrogen economy, and supporting existing energy and industrial infrastructure investments with differentiated carbon capture solutions. We are two years into our powerhouse strategy to strengthen our business, maximize operational efficiency, and position us for long-term growth. Although we have hit a few bumps along the way, we remain on track and confident that we can achieve our plan. Finally, we intend to be a leader in sustainability and environmental stewardship through the technology we deliver and the full circular life of our platforms, and we'll provide an update on our efforts and evolving strategy during future calls. I will now turn the call over to Carol to begin Q&A.

Thank you so much, Jason. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jeff Osborne with Cowan.

Hey, good morning, guys. I just had two questions for you, Jason. One is I was wondering if you can quantify or qualify the product sales. You mentioned that you expected near-term momentum there, but can you just give us a sense of the quoting activity and some of the new partners that you might be working with, how they're positioned in terms of financing and some of the other challenges that, you know, lead to some of the long lead times in the types of products that they're developing or projects?

Good morning, Jeff. Thanks for joining the call. Yeah, let me try to give you a sense of that. We've spent a lot of time rebuilding our pipeline, you know, as part of our powerhouse business strategy. And with that, you know, we've talked a lot about the timeline of the sales cycle for the megawatt scale class projects that we actually pursue being, you know, roughly in the 18 to 24 month type window. We are, you know, in very good position, we think, in terms of that pipeline and the opportunities that we're working on across multiple customer segments, leveraging the multi-featured capabilities of our product, which is really what we're really focused on driving. So as we look to the coming forward quarters, we anticipate that we'll have a lot more to say about customer wins on actual business. As you know, One of the things that we changed shortly after my arrival was how we talk about projects in our backlog. And what we've moved to is only putting in our backlog actual signed contracts, or in the case of PPAs, fully executed PPAs. So as we move these things through our pipeline and get through contract negotiations and get to signed, committed contracts, we'll have a lot more to say about those projects.

That's great to hear. I look forward to it. Just one quick follow-up. Just given the increased headcount and the new executives that you have on board, coupled with the changes in fuel prices, I was wondering, Mike, if you can remind us or give us some guidance as to what we should think about the break-even levels are, assuming product revenue is zero at the current run rate. What megawatt portfolio do you need? Is that 50 megawatts, 60 megawatts? Any color you can have or add would be helpful.

Yeah, good morning, Jeff, and thanks for joining the call. So what we, at the beginning of the powerhouse business strategy, we did put out long-term targets that we were targeting by the end of fiscal 2022 to get the business to EBITDA positive, and really the tenets of being able to do that, executing on the strategy, building out the backlog of assets that we have, and we continue to make progress there, obviously, with San Bernardino coming online this quarter. So you'll continue to see revenue increase from our generation portfolio and obviously the EBITDA that comes along with that. So our expectation is that we're still on track to achieve EBITDA positive end of next year as we continue to execute on the business plan.

Got it. Is that at a certain megawatt level or just based on time? I didn't know how to think about the model.

It's really the megawatts to support building out the backlog and continuing to provide modules to the fleet. So the production rate that we are ramping to today is 45 megawatts by the end of the calendar year. And, you know, that will support the business plan in front of us as we go forward.

Got it.

That's all I had. Thank you. And certainly to the extent that there's additional opportunities, as Jason mentioned, we have capacity in the factory of up to 100 megawatts, so we could continue to ramp as additional opportunities evolve.

Great. Thank you.

Okay. Thanks.

Carol, are there any other questions?

Colin. Hey, guys. I didn't hear the queue. Thanks for having me on. You know, I was wondering about the investment in R&D and what you're doing to accelerate learning cycles. It's, I think, exciting to hear some of these new products coming to market, but I want to understand kind of structurally what you guys are doing. with that R&D effort to help move things along and get those products into the market as soon as possible.

Colin, thank you, and good morning, and thanks for joining the call. Maybe I'll start, and then I'll ask Tony, our Chief Technology Officer, to chime in a bit here. But, you know, part of what we're doing is really – focused on the talent that we're bringing in to help accelerate the commercialization process, in addition to the investing that we're doing outside of what traditionally in some of our, you know, like our solid oxide platform has been, you know, a lot of DOE. We continue to benefit from, but we're making more investments there to speed up the commercialization process. The other thing that we're doing is more rapid prototyping and testing, and Tony can talk about some of the work that we've already done around electrolysis and moving toward the work that we're doing around reversible solid oxide as well.

Yeah, Colin, this is Tony. So what we, as Jason indicated, we're basically utilizing – DOE funding, in the case of carbon capture, the Exxon funding, and our internal R&D funds to bring these new technologies to market. And the prototyping, for example, that Jason mentioned is we're operating a solid oxide electrolysis demonstration system right now in our Danbury labs. It's a completely integrated system producing hydrogen from power and water. It's hitting all of its performance objectives, and the plan is to run it for another few months and then convert it to what we call reversible. We'll add hydrogen storage. We'll add some equipment, and we'll take the hydrogen, store it in a tank, and send it back to the same stack demonstrating application. So these initial demonstrations basically trigger larger demonstrations. You may recall we have funding for a 250-kilowatt demonstration. at Idaho National Labs that we're building right now. So we're moving down the demonstration to prototype path to commercial production with a mix of external funding as well as our own internal funding.

Great. That's super helpful. And then just with the restructured balance sheet, congratulations on getting all of that done. I want to get a better sense of how that's changing your conversations with customers. I think Jeff was getting after it a little bit earlier, but, you know, with this level of equity relative to your debt position, you know, and a view towards being EBITDA positive, you know, have you been out talking with customers about that dynamic and how is that changing the conversations with folks, you know, in terms of being able to move things along towards full POs?

Yeah, no, Colin, that's a great question. Yeah, it obviously is a big help in the customer conversations. You know, one of the things that you know, true about the fuel cell business and certainly amongst the stationary fuel cell providers is the uniqueness of the various technologies. And so our position, you know, being in a much stronger balance sheet position is definitely helpful in terms of customers as they think about, you know, selecting our technology because core to that decision is is the long-term nature of the relationship that we establish with the customer. And that relationship is typically over 20 years on each purchase decision the customer makes. So being able to demonstrate viability, being able to demonstrate strong financial stability, and the ability to continue to invest in innovation, and obviously in the service and support model, is important for customers, and it's certainly aiding in our conversations.

Okay. Thanks so much, guys.

Thank you.

Next question is Lawrence Alexander from Jefferies.

Hi there. Thank you. I guess, first of all, can you give a sense of the broader pipeline or range of discussions that you're having? I mean, are the size of projects changing? Are the lead times for potential projects changing? Can you give a sense for just kind of the scope of activity that's not yet in your backlog?

Yes. So, Lawrence, thanks again for joining the call, and thank you for the question. As we look at the project conversations we're having, our opportunities, they really span a range of different areas. application opportunities for the company. We continue to have a number of conversations around biofuels, leveraging the unique capabilities of our platform. That uniqueness is the fact that we can actually leverage on-site biofuels without those biofuels needing to get into pipeline quality or be transported on a common carrier pipeline. We can use them right on site. That gives us a unique set of opportunities to continue to pursue more opportunities like the biofuel projects we talked about today. We're having conversations around data center applications and continue to have a lot of conversations around education and healthcare, and particularly those conversations generally tend to be focused around microgrids and the importance of really shoring up resiliency and reliability, just given all of the disruptions that are happening across the grid today. And then as we talked about the multi-feature capabilities of our product, the opportunities that we're pursuing around food and beverage to be able to do multiple things in those applications, ranging from providing power, delivering carbon as an ingredient for utilization, whether it be in a beverage or in food processing, for example, keeping meats cold through the processing stages, as an example, as well as providing thermal energy, whether that be integration into their absorption chilling and or replacing or adding to boiler capacity in those facilities, which is generally what you find in those kind of locations. And then across the utility landscape, we continue to pursue utility projects, and those are largely RFP-driven. And as you know, in the state of Connecticut, for example, there was recently legislation passed for 30 megawatts of power platforms for fuel cells in the state of Connecticut, with manufacturing fuel cells in the state having an advantage in terms of how those RFP responses get evaluated. And so we continue to pursue those type of opportunities. And from an international perspective, it's those same type of opportunities, but with a lot more focus as well in conversations around hydrogen and what's happening around hydrogen and and carbon capture, those are big focuses in our conversations there. We see that customers are making long-range plans for projects that may not actually be implemented until the 2023-type timeframe and forward, but they're interested in making product selections around technology today. We are actively engaged in those types of conversations.

And I appreciate, like, a lot of the activity is on the microgrid side. But when you think about the larger applications, has the size of the largest projects in your potential scope changed compared to what you were considering a couple of years ago? I mean, we've seen some fairly large projects, I'm thinking, in Europe and Asia already be announced. And so I'm just curious as to if you're participating in those very large ones.

Yeah, so as you know, our platform is a very scalable platform, and today I believe this still holds true, that we have the largest fuel cell platform in the world, and we also have the largest installed fuel cell platform in the United States as well. And we are working, for an example, and building out our 14.8 megawatt project in Derby, as we talked about, If the projects you're more referring to are all around electrolysis and those type of opportunities, our platform there on solid oxide, the way we're architecting that and plan for commercialization is around being able to deliver gigawatt scale capacity. And so the way I would answer that question is we're not shying away from those opportunities at the larger scale, even though we haven't announced any awards, obviously, in that regard.

Great. And then two last quick ones. Just the solid oxide, when that starts to ramp, will that require additional investment? And if you did scale your production from the 40, 45 megawatts up to the 100 megawatts, if you flexed out the capacity that you're building, what would be the incremental margins on the extra volume?

Lawrence, I apologize, but I'm going to ask you, if you don't mind, to repeat your question only because there was some static on the phone and I didn't catch the first part of your question.

Sure. So on the solid oxide, is there any additional investment needed to scale up once you get through the demonstration phases?

Yes. In terms of our need to build out manufacturing capacity for solid oxide, there will be investment required because it is a different technology, right? We're going from our carbonate fuel cell technology. We're adding our solid oxide fuel cell technology. The stack architecture is totally different. I mean, so for example, Our stack in our carbonate platform, it's 400 cells stacked, and that module is about 10 feet tall. The full cell stack height on our solid oxide is about 17 inches. So completely different cell architecture, and the manufacturing process is different. That being said, there are leverage points across manufacturing with certain things like tape casting and other processes that are leverageable across both technologies, and we certainly will do that. But incremental investment is required to be able to scale capacity for our solid oxide manufacturing.

And Lawrence, this is Mike, and thank you for joining the call. On your second question regarding profitability around the carbonate fuel cells and as we leverage the factory here, you know, at these current run rates, we have... We still have manufacturing variances coming through because we're below our standard, and current quarter that was around $1.7 million. That cost has come down compared to the prior year, which was in the $2.6 million range. And as we continue to ramp, you know, those manufacturing variances will continue to decline, which would expect to lead to higher profitability as the factory ramps.

Thank you. Your next question comes from the line of Praneeth Satish with Wells Fargo.

Thanks. Good morning. I wanted to ask about the Groton submarine-based project. I guess what happens if the Navy declines the extension? Are there any workarounds or alternatives that you could pursue to keep the project going?

Praneeth, good morning, and thank you for joining the call and your question. The Navy would need to grant an extension on the project, which we fully expect that the Navy will continue to support the project as they have up to this point. And again, as we indicated, the project was in commissioning. We identified you know, a high heat condition, and we're making the repairs to that platform. And so we hope to be back in commissioning, as we talked about, you know, later here this month in September. And then we would fully suspect to be able to work through the contractual arrangements we have, which is kind of a threefold contractual arrangement between us, CMAC, the Navy, and Groton Utilities to continue to move the project forward.

Got it. And then can you just give us a sense of the module exchanges that are expected to occur over the balance of the year? Should we expect a continued positive year-over-year impact from this? And if so, are there any specific dynamics that's driving the uptick in exchanges this year?

Good morning. This is Mike. I'll take the answer to that question. So from an accounting and revenue recognition perspective, the way module exchanges are accounted for essentially, and these are under our long-term service agreements, revenue recognition is deferred under the long-term service agreements for the portion related to module exchanges, which typically happen every five or seven years, depending on on the life of the module. So when you look at our results for service, it is variable. There's some quarters that have very little module exchanges, and like this quarter, we had a higher level. And it's really dependent on the life cycle of the plant in the field and when modules are due for replacement. We have not put out specific guidance around our service revenue, but would expect it to be variable as we've reported in the past.

Got it. Okay. Thank you.

Yep.

Your next question comes from the line of Noel Parks with Tui Brothers.

Hey, good morning.

Good morning, Noel.

Just have a couple of things. I wonder if you could talk about with the tax equity financings with the Groton project and San Bernardino. Can you talk a bit about the mechanics of those financing? I'm curious about what the lead time was involved in the application process and or this negotiation process and whether there are any prepayment restrictions on those arrangements.

Sure. Good morning, Noel, and thank you for joining the call. So just, I guess, to give a little bit of an overview of what we do when the company creates a generation project assets. These are typically assets where we go out and we competitively bid for a power purchase agreement, either with a utility customer, and those are our larger generation assets, or a behind-the-meter customer like For instance, the San Bernardino project where we're selling power directly to the municipality. So that's kind of the first step. And then the company, through our financing operations, will go out and solicit competitive bids. to either finance the project or sell the project and evaluate those bids. And as we've talked about, the company's preference for our current backlog, our current portfolio, is to build a chunk of assets on balance sheets so that we can – benefit from the recurring cash flows. So for these two projects, we went through that process during the build-out of these assets, and we're comfortable with the financing terms that were offered by these two counterparties. As Jason mentioned, this is our second transaction with Crestmark, our first transaction with EastWest Bank. The East-West Bank transaction was a partnership flip transaction. That's our first – that first type of tax equity transaction. That transaction lends itself also to potentially bringing in back leverage debt as well, and those are – you know, things that the company will look at doing in the future. So I'd say there has been good interest in financing our projects and doing that on a repeatable basis, and we're looking forward to, you know, having further discussions for the assets that remain in our portfolio under development and construction.

Great. Thanks for the clarification. And I wanted to ask about, on the hydrogen front, your distributed hydrogen projects. Could you just talk a bit about, you know, sort of where those projects are housed in your organization and how they're managed, since those are definitely going to have a long horizon component to them, even relative to terms of your larger generation contracts. So if you could talk to them about how those are proceeding, that would be great.

Yeah, so the way that we do development inside the company, you can think about it this way. We have an advanced technology organization in which we drive our innovation there. That innovation then is turned into product given our validation of market need and fit for that product. And the product is developed through that part of our organization. When we achieve commercialization, that product now is on the shelf, if you will, and available to our sales team or business development organization to offer that product to customers for sale. When that product is commercial, then we have an engineering part of our organization that we call our operational engineering organization, and the product then really falls into that group in terms of how we maintain the product and service it on an ongoing basis between them and our customer service organization. So as we develop products, we then hand them off, if you will, to our commercial organization to then be able to offer those products to customers and to work directly with customers on the sale of the products. Did that answer your question?

It's helpful. I guess I was thinking a little bit more about it's kind of hard to divorce hydrogen from the larger infrastructure issues going forward. So I guess I was thinking about how that piece and your decisions around possibility of investment in, say, transportation infrastructure might be evaluated in the organization.

Yeah, so what we do, I mean, we do a lot of, you know, market research and through engagement with customers, we look at where should we prioritize our resources from a sales focus standpoint? Where should we prioritize and direct our development efforts in terms of capabilities? And as we talked about, you know, our platforms have multiple features, and so we even – prioritize which features we flex on first, if you will, given how we see the market unfolding and where we think we have an opportunity to win in the marketplace, how we differentiate. And so if you just think about hydrogen more broadly, Like you, we're excited about what's happening in the evolving hydrogen economy, the amount of interest and dollars being committed by, you know, governments across Europe, Asia, and certainly what we're seeing maybe unfold through the infrastructure package and legislation that's being contemplated here domestically in the U.S. So our platforms, the thing that, you know, excites us about our platform capabilities is the fact that we have three different technologies around how we can deliver hydrogen. So if you look at what we're doing with Toyota, that's an example of our tri-gen platform. And that platform allows us to provide power, clean water, and hydrogen from a single platform. And we can do that by using renewable natural gas. So we're delivering green hydrogen and carbon neutral to carbon negative power. And or, as we advance forward in the future, we have the ability to do things around carbon capture, for example, to deliver blue hydrogen. Secondly, we're working to commercialize our technology around REP. That's leveraging our current molten carbonate technology. And you can really think about that as a hydrogen generation platform. Because in that instance, we're operating the platform in reverse mode. We're not doing the co-production of power. and we're generating hydrogen, which is core and fundamental to our product anyway. That's what we do. We create an electrical chemical reaction. We make hydrogen, and we turn that into power. In this case, we'd be making hydrogen, and we'd be handing that hydrogen off to any number of applications. And because of the distributed nature of our platforms, we can co-locate or site that platform, just as we're doing in the Toyota case, exactly where that hydrogen is needed, thus removing the need to think about what's happening on infrastructure investments and pipelines, for example, or how you're going to move that hydrogen in a clean way, which today is one of the challenges because of the way hydrogen gets transported today largely by truck, right, so we can be exactly where that hydrogen is needed. And then the work that we're doing to commercialize our solid oxide platform. In that instance, right, we have the ability to do electrolysis, and we can do that by using only renewable energy like wind and solar, or we can use grid-related energy or even take advantage of nuclear energy. as a way to do electrolysis and to create hydrogen. And we have a highly efficient platform with our solid oxide capabilities to do that. And with the use of, as we've talked about, incremental waste heat, we could actually deliver 100% efficiency in the conversion of the electricity into hydrogen. That hydrogen can be stored. Or that hydro could be handed off, again, for an application where it might be used as a fuel, let's say, in an industry segment that's not typically well-suited for electrification but needs high heat as a way to manufacture its products, i.e., steel, as an example, and that's an industry that's working to decarbonize itself. our technology could certainly play a role in that as we get to commercialization, or that hydrogen can be stored and serve as the intermittent firm capacity, if you will, for intermittent technologies like wind and solar. And because we can store that hydrogen in traditional means, for example, in salt caverns, the way you store natural gas today, or in pipelines or in pressurized tanks, you virtually have endless capacity. So if you say, look, we want to build a platform that creates an ability for us to store enough hydrogen as the energy source, so in this case, hydrogen becomes the energy source, and you want that for days, weeks, months, as opposed to four hours, for example, as in the case of batteries, you have the ability to do that. So we think about those three platforms and our ability to address market needs, which come into play around what's the cost of electricity, what's the fuel availability, no fuel, what's water availability, no water. So we have a lot of optionality in terms of how we approach the hydrogen market as we get to full commercialization across all three platforms.

Great. Thanks so much.

Thank you. Your next question comes from the line of with Poker and Palmer.

Hey, thank you. Thank you for taking my question, and good morning. Good morning. Maybe if you mentioned about Connecticut 30 megawatts, so maybe starting over there, Can you help us understand or put in context how should we think about near-term orders or projects from Connecticut versus what we have seen over the last two years?

Yeah, so for that specific order that the governor signed into law requires the utilities to purchase 30 megawatts of fuel cell power generation in the state. And that's divvied up on a pro-rata basis between our two utilities here in the state. So roughly 24 megawatts for one, six megawatts for the other. There's a timeline for that process for which those RFPs are supposed to be run and winners selected on those RFP responses. And for fuel cells manufactured in the state, like ours are, receive extra consideration in the ultimate decision that gets made by the utility in terms of the fuel cell platform that they will elect to choose. That bill and that process is one in which we'll be driven by a very open utility RFP process for which we will participate in that process, and we're really excited about that. And that creates opportunities for us to win. Now, we've got to go bid, we've got to compete, and we've got to win, and we're certainly going to work on doing that in Connecticut on those opportunities.

And in terms of timeline, should we be thinking that by the end of the year?

No, I think you should think about the timeline that's laid out. This is really more of a 22 activity when you'll see the utilities making decisions or, you know, final decisions around that.

Got it. Maybe switching to international markets of We have obviously been in process of going back in Korea, going back in Europe. Can you update us as to latest thoughts over there? How are the conversations progressing? How should we be thinking about timeline over there?

Yeah. So maybe I'll start first with Europe. That's a market that's obviously very exciting to us, not only with our traditional technologies, but just how aggressive pan-European countries are looking at the opportunities around hydrogen as a significant way for them to transition their energy infrastructure, and then the interest that exists there around carbon capture as well. We have... a number of opportunities in our pipeline that we are pursuing across various countries in Europe. And again, as we talked about, you know, we typically expect given the size of opportunities that we bid on, generally opportunities that are even when they're, you know, behind the meter, you know, and often cases we're also grid connected or as we work through our platforms, those are typically 18 to 24 month sales cycles. And so we anticipate that given the amount of time that we've been in the market now and as we've added resources and continue to add business development resources, we will start to see opportunities move from our pipeline into sign committed contracts, and as I said earlier, that's when we will, you know, state that we have firmly won those projects and we'll move them into backlog. With respect to Korea, again, if you think about the same timeline, you know, we as a company really reentered the Korean market in the July timeframe of 2020. and have been actively engaging with customers in that market. And so, again, you know, kind of same view around the ability to convert pipeline opportunities and to sign committed contracts would be around the same timing as we think about those opportunities. But, again, you know, also very excited about what's happening not only in Korea, but Asia more broadly around hydrogen and energy transition as well.

And maybe if I can squeeze one last time. So if we think about competitive dynamics are increasing in Korea today, one of your competitor announced manufacturing operations in Germany. Can you just help us frame if we think about applications Are these the same applications you and your other competitors are going in? May that be in terms of utilities? May that be in terms of data center? Or are there different applications, different end markets that you guys are targeting versus your peers?

Yeah, so as we think about our platform, and the word platform is important, right, because we think about the multi-feature capabilities of our product and how we leverage that. to differentiate against the competition. And for us, the competition, we think about it being more broadly than just other fuel cell providers, right, in terms of different generation decisions that a customer could make. If I think about a market like Korea, there are some clear areas where we are advantaged. For example, in Korea, the ability to deliver steam is an important attribute of opportunities in that market. If we narrow the discussion to just stationary fuel cell providers, right, we clearly differentiate ourselves in our ability to deliver steam versus our competitors. As we look at more energy transition type opportunities, and if we just took hydrogen as an example around that, The fact that we have three different platforms we think gives us an advantage given the breadth of our portfolio and the ability for us to apply the appropriate technology to the market dynamic. And so what do I mean by that? In a market where energy prices might be a factor, right, in terms of being able to drive revenues from the sale of electricity, a platform like our Trigen platform may be the best fit because you can drive generation revenue and you can deliver hydrogen. And the more you can drive from generation revenues, the less you need to, you know, achieve from a pricing standpoint for hydrogen, as an example. Conversely, if, you know, fuel prices are low and energy prices are low, the customer is looking to capture hydrogen, something like our product, like the REP platform that we're working to commercialize is a great opportunity for us to compete quite differently than maybe our competitive set. And then our ability to do carbon capture alongside of that to deliver blue hydrogen, for example, if we were using natural gas, we think it puts us in an advantageous position And then our efficiency on electrolysis, we think, will differentiate us in the market, both in terms of conversion of electricity and water into hydrogen, but then the reversibility of our platform to utilize the exact same stack that converted that electricity into hydrogen would be the platform that would produce power. We think that round-trip efficiency is also going to play a to the advantage column for us. And so, you know, we think we're well positioned there. And in terms of our presence from a manufacturing standpoint or capabilities, you know, we also have the capability from a manufacturing standpoint in Germany. So we feel good about, you know, how we're positioned to address global markets.

That's very helpful. Thank you for taking my questions.

Thank you. Our next questions come from the line of Eric Stein with Craig Hallam.

Good morning, everyone. Hey. Good morning. Good morning. I'll just sneak in a few here at the end. Just curious in advanced technology on the milestone payment side, I know you get, I think you've averaged probably one a year, and that's tied to the development work underway with ExxonMobil. Just curious if Is that anything you can provide in terms of timing and then maybe, you know, what that next milestone, what that maybe represents or what that means in terms of the process you're working through there?

Morning, Eric. This is Mike. So on the ExxonMobil contract, there are two technical milestones in the contract of $5 million each. Once the company achieves the technical milestone, we will get paid and that will be revenue. We have not put out any guidance around the timing of when we expect to achieve those milestones.

Okay. Got it. Then maybe just to confirm something on the fiscal 22 targets, when you talk about positive EBITDA, positive free cash flow, et cetera, are you talking about that that's a year-end run rate, or are those levels that you anticipate meeting for the entirety of the year?

Yeah, so year-end run rate, expect to get there by the end of 22 based on continuing execution of the business plan, which does include building out project assets and continued activity in advanced technologies and across the business. Okay, thank you. All right, thanks, Eric. Thank you, Eric.

That concludes today's Q&A portion of today's call. I will now turn the call back over to Jason Few for closing remarks.

Carol, thank you. And thank you all again for joining us today. We'll continue to execute on our powerhouse business strategy, working to deliver profitable growth and optimizing returns. The Fuel So Energy team is excited about our work to deliver on our purpose to enable the world to live a life empowered by clean energy, and we are committed to delivering long-term shareholder value. Thank you for joining and I hope everyone stays safe and healthy and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.