Ladies and gentlemen, thank you for standing by, and welcome to Fuel Energy’s Second Quarter 2020 Earnings Call. At this time, participant lines are on mute to prevent any background noise. At that time – after the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Tom Gelston, Senior Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, everyone, and thank you for joining us on the call today. As a reminder, this call is being recorded. This morning, FuelCell Energy released our financial results for the second quarter of fiscal year 2020, and the earnings 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 have posted a slide presentation on our website. This webcast is being recorded and will be available for replay on the company’s website approximately two hours after the conclusion of the call. Before we begin our prepared comments, please direct your attention to the disclosure statement on Slide 2 of the presentation and the disclaimers, including 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 its business plans. These forward-looking statements are intended to qualify for the 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 operational performance. Forward-looking statements made on this call represent management’s current expectations and are based on information available at the time such 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 and the reports we file with the SEC regarding these risks and uncertainties, in particular, those that are described in the Risk Factors section of our Annual Report on Form-10-K and cautionary statements concerning forward-looking statements disclosures in our Quarterly Report on Form 10-Q. You should also review the section entitled quarterly statement concerning forward-looking statements in this morning’s earnings press release. During this quarter call, we will use non-GAAP financial measures when talking about the company’s performance and financial condition. In accordance with SEC regulations, you can find a reconciliation of these non-GAAP measures to the comparable GAAP measures in this morning’s earnings press release, and the reconciliation document posted on our Investor Relations portion of our website. For our call today, I’m joined by Jason Few, FuelCell 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 team members of the leadership team. I will now hand the call over to Jason for opening remarks. Jason?

Thank you, Tom. Good morning, everyone, and thank you for joining us on the call today. These are unprecedented times. Before we get started on behalf of the FuelCell Energy team, I want to say that our thoughts and prayers are with those directly impacted by the ongoing global pandemic. And I want to thank the medical professionals, first responders and other essential workers who are bravely performing their jobs under improving, but yet very difficult circumstances. I will give an update on the impact of COVID-19 on our company later in my prepared remarks. In light of the recent public events, I want to reaffirm FuelCell Energy’s commitment to diversity and inclusion in every aspect of our business. Our commitment to enable the world to live a life empowered by clean energy requires a diverse and talented team. I also want to thank the entire FuelCell Energy team. During this time of global challenge and uncertainty, we remain focused and committed to continued execution of our Powerhouse strategy. And I’m proud of the team’s dedication and the results we have been able to achieve this quarter. Last, I want to thank the Board of Directors for its support of our global team and enabling us to retain our team members on payroll with benefits despite our manufacturing facility shutdown, thus, enabling us to hit the ground running upon our reopening. Coming out of our difficult fiscal 2019, we were poised to execute on our new Powerhouse business strategy. The unexpected onset of COVID-19 has slowed some of the progress we had hoped to make by delaying bids and product solicitations and challenging our sales efforts, as our customers around the world struggle to address the business challenges brought on by this virus. As businesses slowly reopen and markets rebound,…

Thank you, Jason. Let’s begin by reviewing the financial metrics for the quarter shown on Slide 7. Second quarter revenue increased by 105%, compared to the second quarter of fiscal 2019 to $18.9 million. The biggest contributor was revenue from service and license agreements, which increased by $4.4 million versus the prior year quarter to $7 million. The increase was driven by revenue recorded on module replacements under customer service agreements. Revenues from generation increased by $3 million to $4.6 million in the second quarter of fiscal 2020, primarily benefiting from additional revenue associated with the Bridgeport Fuel Cell Park project that we acquired in May of 2019. And the addition of the Tulare BioMAT project, which began commercial operation in December of 2019. We had 32.6 megawatts of operating power plants in our portfolio as of April 30, 2020, compared to 11.2 megawatts at the end of the second quarter of fiscal year 2019. Increasing the scale of our generation portfolio in order to derive long-term recurring cash flows is a strategic focus of the company. Advanced – revenue from Advanced Technology contracts increased by $2.3 million to $7.3 million in the quarter due to the addition of revenues from the company’s joint development agreement with ExxonMobil Research and Engineering Company, which was executed during the first quarter of fiscal 2020 and the timing of activity under other existing contracts. Gross profit was approximately $200,000 for the quarter, compared to a gross loss of $3.6 million in the second quarter of fiscal 2019. Results benefited from increased Advanced Technology work under our joint development agreement with ExxonMobil Research and Engineering Company, as well as lower manufacturing costs, resulting from our reduction in workforce in fiscal 2019, partially offset by approximately $1 million of manufacturing variances due to the shutdown…

Thank you, Mike. Next on Slide 10, I want to provide an update on the Powerhouse business strategy that we announced earlier this year. The first phase of our plan was to transform in order to build a solid financial foundation on which to grow the business. Over the past several months, beginning just prior to when I assumed the role of CEO in August of 2019, we undertook a number of restructuring initiatives to strengthen our financial footing in order to support future phases of our strategy. Prior to COVID-19, we were focused on strengthening our business by optimizing capital deployment and developing new business. In the example shared earlier by Mike, you can see that despite COVID-19 challenges, this remains an ongoing evolving process, with goals of improving our cost of capital over time and working hard toward ultimately achieving profitability. We will continue to focus on disciplined capital deployment and securing lower cost, long-term financing and tax equity financing for completed generation projects. Pursuing commercial excellence is a never ceasing focus as we seek to strengthen our customer relationships, establish new customer relationships, and build a world-class customer-centric reputation by keeping close to the markets we serve and respond to the needs of our customers. Our priority is to develop a deep strategic partnership with our existing customers, as we also develop such relationships with future customers. Operational excellence is at the heart of our success, as we strive to execute on projects, manufacturing, and customer service. We have implemented cost reductions over the past year that were evident in the results reported today. As we continue to make strides toward profitability, reducing costs while adhering to safety and product quality standards goes hand in hand with our pursuit of operational excellence. As we look to continue…

Okay. [Operator Instructions] Your first question will come from Jeff Osborne from Cowen and Company. Your line is open.

Hey, good morning, guys. Jason and Mike, I was wondering if you could touch on the Orion Facility. How much of the $200 million is withdrawn? And have you started the six-month clock on the $35 million?

Good morning, Jeff. It’s Mike. I’ll take that one. So we drew down $80 million under the Orion Facility in – on October 31 and then in November of 2019. Those proceeds were primarily used for construction of our projects and process, including the Groton project. Today, we announced that we entered into a secondary loan facility with Orion for $35 million that can be used for general corporate purposes, and we have not drawn down anything under that facility at this point.

Okay. And then on the generation side, you talked about some challenges there. Can you just touch on the nature of those and what you’re doing to mitigate them?

Sure. So during the quarter – so just to kind of reset here. Currently, we have eight plants operating in our generation portfolio. We brought on the Tulare plant at the beginning of – or the end of October, I’m sorry, the end of December of last year. During the quarter, we had several plants, which had maintenance items that we addressed and we’re doing an overall review of the portfolio and continue to make improvements in the portfolio and expect improving operations going forward.

Okay. Two other quick ones if I could. One is on the – you mentioned manufacturing costs because of COVID, I think, $1 million impacted you in the April quarter. Should we assume a similar amount for the current quarter?

So there was $1 million additional expense in the quarter related to COVID-19, related to the manufacturing shutdown of the Torrington facility. That’s really a function of unabsorbed overhead, given that we weren’t producing anything, as Jason said in his prepared remarks, we intend to bring the factory back up starting in at the end of June, June 22. That will be a slow ramp, so I would expect to see some impact in the quarter and the exact amount, TBD.

Okay. And then I might have missed it. But in the Q or the presentation, you didn’t have the COD dates for some of the projects as the table used to provide in the past. Can you just talk about the near-term lens between Groton and Yaphank and the timing of those as COVID has pushed those out by months, weeks, quarters? It was unclear just what the timing is?

Sure. So, we did not want to – given the uncertainty that’s out there, we did not want to be overly specific about exact dates of when the projects will come online. But as we said, we have 40.6 megawatts of projects that are currently in the – to be constructed backlog. The ones that are currently in construction right now are the Groton project, that’s very far along. We’ve included photos of that in the presentation. The San Bernardino project, as we announced this quarter, is now under construction, as well as the LIPA Yaphank project, 7.4 megawatt project, which is active in Long Island.

Got it. Thank you.

And your next question will come from Eric Stine from Craig-Hallum. Your line is open.

Good morning, everyone.

Good morning, Eric.

So – good morning. Just curious on the generation portfolio. Obviously, you’re making progress there. But any thoughts on potentially selling any of those projects, obviously, that would set back your plans there in terms of EBITDA but would also help the balance sheet in light of some of the challenges you’ve got at the present time?

Sure. Good morning, Eric. This is Mike. So the company has had a long-term strategic focus in building out our generation portfolio, so that we can benefit from the long-term recurring cash flows of that portfolio. We’ve made significant progress in having over 30 megawatts now on the balance sheet with higher revenue from last year and higher EBITDA from last year, and expect to continue to grow that portfolio. So that, that portfolio can provide the sustainable cash flows to ultimately get the company to EBITDA positive. That said, the company is always evaluating capital priorities. We are continuing down our current path of building out projects and keeping them on balance sheet. But as we evaluate projects, there could be opportunities in the future to sell what we’re currently building out or potentially what’s on the balance sheet. But no plans as we sit here today to do that. We’re fortunate to have a $200 million credit facility in place with Orion, we’re strategically aligned with them to build out this portfolio. And then we’ve also demonstrated that we can, once projects hit commercial operation, we can bring in efficient capital to recycle the construction financing and reinvest it back into the business.

And, Eric, I would just add to that, that as you look at what we are doing as part of our overall transformation plan and the opportunities that we’re pursuing, for example, in Europe, I think, you will see where part of our approach in that market will be fairly balanced between on balance sheet opportunities and selling projects. And as we develop new projects and our pipeline begins to convert, that same evaluation for each project will be part of that process.

Got it. Okay, that’s helpful. Maybe just turning to carbon capture. I know originally, way back when that – when the first agreement was inked there, you targeted a pilot project with Alabama Power, and I know that, that sense kind of been tabled. Just curious what – I mean, obviously, there are next steps planned. Maybe any details you can share as to what those next steps may be with Exxon?

Yes. So we continue to move forward with the JDA2 with Exxon. And the goal of that is to prove out the technical milestones that we’ve outlined in that program, and then to move from that phase to a demonstration project, which Exxon has publicly talked about as potentially being at one of their facilities in Rotterdam.

Okay. And I have seen – I’ve seen that, but not – I mean, any thoughts on timing, or is that something to – still to be determined?

Not prepared to talk about timing right now, Eric, but – because obviously that’s in cooperation with Exxon and aligning both of our plans around that.

Okay. That was worth a try. Maybe last one for me. Just I’d love an update when you’re talking about looking at international markets, I’d love an update anything you can share on POSCO and where things stand in kind of the negotiations with the agreement breach that they have made?

Yes. So, Eric, we – we’ve obviously made public through filings. Some of the things that are going on with POSCO at this time, we’re not prepared to make an additional statement. I will tell you, though, when we are, we will certainly issue an 8-K and inform the market of where we are with POSCO.

Okay. Thank you.

Thank you.

Your next question comes from Colin Rusch from Oppenheimer. Your line is open.

Thanks so much, guys. I’d love to get a little bit more detail on the sales pipeline. Obviously, you guys have put some effort into that. I would love to see what the early returns are in terms of entering some of the new geographies, some of the traction on the incremental product offerings that you guys are going to bring out? And then also, just the order magnitude on number of clients and how those clients are progressing through the sales funnel?

Colin, good morning. How are you? This is Jason. I’ll make a few comments and then I’ll turn it over to Ben Toby to give you more of a sense of customers and what he has seen in the market. As a – what we’ve done in terms of our go-to-market strategy is really think about how do we think about partnerships as we look at international markets, and how we structure channel and/or distribution relationships, so that’s been a big effort and focus for us. Secondly, we’ve really thought about how we position our product against a set of applications where we think we have really strong competitive differentiation. That’s obviously around applications ranging from the use of biofuels, distributed generation, distributed hydrogen, how we address opportunities where thermal energy is an important part of the customer solution. And then also, as we think about – if you think about the European market, where we have sub megawatt products, than how that – our platforms become part of the overall fabric of the customers’ operation, like we’ve demonstrated with the Radisson Blu Hotel, where we’re integrated into the facility. We provide all of the electricity, all of the thermal energy needed for hot water and heating for the hotel. But I’ll ask Ben to maybe give you a sense of how customers are responding to us now versus maybe how customers were responding to us 12 months ago.

Sure. Be happy to. Good morning, Colin. Ben Toby speaking. I think that the customer response is increasingly enthusiastic to our products. We are known as a solutions provider that delivers the highest possible efficiency when it comes to converting fuel into useful electricity and heat. We’re known as a provider of renewable energy via biogas. And we’re also known as somebody who has been in the market delivering solutions to these traditional applications for a long time. What is increasing now is an awareness of the uniqueness of our applications around renewable electricity delivery and particularly around hydrogen and carbon capture. We’re getting a lot more awareness and I would say traction in those opportunities, where we’re speaking to folks around how to convert sort of advanced applications into today’s opportunities. And so, I think, it’s – each market segment, each geography has unique attributes that are strengths that we can go for. And those are the ones that we’re trying to uncover. But I’m very optimistic about the sales pipeline as it’s continuing to unfold, and we’ll see good results going forward.

Great. I’ll have some follow-ups afterwards. Just turning into some of the refine of assets. I would love to understand kind of how the finance market is trending for you guys? Obviously, there’s a long history with the assets. But your ability to recycle capital, would love to understand how the relationships are developing with lenders in terms of repeatability of some of these deals and comfort level with the assets to just simplify some of the events sometimes as you go forward?

Sure, Colin, it’s Mike. I’ll take that one and good morning. So I start off by saying, we continue to have a very strong relationship with Orion. You can see in the quarter that we recycled the capital from the Crestmark financing into the San Bernardino projects and we’re able to pull down financing for that and entered into an additional $35 million financing facility with them. At the project level, continue to have strong dialogue with existing and potential new lenders. And obviously, the next project up is the Groton Sub-Base Project in dialogue with folks on that. Activity level is quite high. And we continue to anticipate that as projects hit COD, we will be able to bring in efficient cost of capital using a combination of tax equity and long-term debt.

Okay.

I think, Colin, just to add to that. I mean, one of the important things is, I think, if you look at the customers for which we’re executing these projects with the very strong customers where there’s a lot of comfort from long-term lenders with the credit quality of the customers that we’re doing business with.

Perfect. Thanks, guys.

And our final question for today will come from Pavel Molchanov from Raymond James. Your line is open.

Thank you for taking the question. When you talk about more than a $1 billion of backlog in the generation portfolio. Can you split that apart between natural gas or other conventional project versus biogas and landfill gas on the other side?

Yes, I think, Mike, I don’t know if you’ve got. We can certainly talk about which projects are biofuel projects and which projects are natural gas projects and then try to give you some way to think about it.

Yes. So good morning, Pavel. It’s Mike and thanks for joining. So if you look at our generation backlog, we have about $1.1 billion of generation backlog. Predominantly, natural gas, given that these are utility scale projects, if you look at the projects, Bridgeport project, 15-megawatt project, that’s a long-term PPA with Eversource, that’s a natural gas, the Groton Sub Base Projects, 7.4 megawatts, natural gas and, of course, the the life of project. But when you just follow-on to some advanced projects, when you look at are behind the meter projects, the Tulare BioMAT project is a great example, that’s using renewable biofuels from the wastewater treatment facility. And then, of course, our Toyota hydrogen project, that’s a BioMAT project as well. S I’d say, from a dollar perspective, more weighted towards NG, but certainly a significant piece here also on the biogas side as well.

Thanks. That’s helpful. In that context, let me ask about kind of the European dimension of the story. Historically, Europe has been a pretty small part of your revenue mix. But now, we’re seeing more and more headlines about the European Green deal, net zero target by 2050, kind of an all of the above story. I’m curious if – with that as the backdrop if you’re seeing more potential traction from European customers in any of those facets of the business?

Yes, Pavel, this is Jason Yes, we are. And I think if you look across kind of a pan European market, there are certainly certain markets where there is strong interest in terms of our biofuel capability, and particularly the proprietary gas cleanup capability that we have, given the fact that we don’t need to get biofuels to a pipeline quality gas to be able to use that in our platform. So very strong interest there. Secondly, as you are likely alluding to is the interest around hydrogen in European markets. So there’s a lot of interest in terms of our capabilities on our tri-gen platform to just – for distributed hydrogen to be part of how they’re thinking about hydrogen infrastructure. And then certainly, as we continue to work on the commercialization of our solid oxide technology around electrolysis and hydrogen energy storage, that’s certainly a big part of how they’re thinking about planning for their energy grid of the future. So I would say today and it all has been the comment as well, that the understanding that customers are starting to get about, I talked about the four global energy opportunities that we’re focused on: distributed generation, distributed hydrogen, carbon capture, and electrolysis and long duration energy storage via hydrogen and then hydrogen power generation. The greater awareness that we build around the fact that we’ve got technology today, that’s commercial across two of those. We’re well advanced in what we’re doing around carbon capture. And then we’ve demonstrated the ability that we have on our solid oxide platform. That realization is driving strong interest from customers on – about our company in Europe. And I think Ben is seeing that in the conversations we’re having with customers.

Absolutely, Pavel, Ben Toby speaking. I would say, not only do we continue to deploy our direct sale model to originate new business in Europe ourselves and turn it up really good opportunities in Europe, but we’re also cultivating increasingly a very active channel strategy. They’re having really good conversations with smart folks who are well positioned to take advantage of some of the applications that Jason was talking about. I would just make one additional point. And one of the themes that we’re doing is, there’s a lot of ambitious goals out there on the table. In the immediate near-term, you got to find a way to pay for them. So we’re delivering projects that are cash flow positive from day one that going – that removes carbon, because we’re lower than the CO2 footprint on the grids now. But as you go forward, you can retrofit and adapt with that same capital asset to increase your carbon footprint going forward. So that’s also attractive to the folks that we’re talking to over there. But you make a great point in is, I’m seeing Europe in the leadership position that they hadn’t previously, at least in my view, hadn’t occupied, but they definitely are increasingly doing so.

I appreciate the color, guys. Thank you.

Thank you.

I now turn the call back over to Jason Few for his remarks.

Thank you. I would like to close today by again extending a heartfelt thanks from all of us at FuelCell Energy to the healthcare professionals and other essential workers around the world who have been on the frontlines during the pandemic. I also want to say that I’m proud of all of the FuelCell Energy team has been able to accomplish, especially over the past quarter, despite the COVID challenges we have faced. I’m very excited about the future and our work to deliver on our purpose to enable the world to live a life empowered by clean energy. Thank you, everyone, for participating on our earnings call today and for your interest in FuelCell Energy. If you have any follow-up questions, please don’t hesitate to contact us. Thank you.

Thank you, everyone. This will conclude today’s conference call. You may now disconnect.