Good morning, everyone. Welcome to HydrogenPro quarter number three presentation. This is the first presentation we do after we get listed on the main stock list in Oslo. My name is Richard Espeseth, and I'm here together with my CFO, Martin, and we will run through the slides today. First, we do the highlights. What's new in the last quarter? Number one, the most exciting is the DG Fuels, where offtaker agreements are now signed, and for HydrogenPro, it will be a totally change of the company. This project, it's about 10 times bigger for us compared to the other big project we have in the U.S., and that's mostly because our scope of supply will also be bigger. We expect the final investment decision in 2023. Very exciting.
The second I think we like to be clear on, we have been chosen to the DG Fuels, and we have done the feasibility, we have done the pre-FEED. The total FEED is not complete. The final investment decision is not made. We will never take any job into our order backlog until we have the final investment decision. Just be very clear on this. The DG Fuels in itself, it's approximately $500 million for HydrogenPro. The second highlight, it's the validation of the world's largest electrolyzer. The electrolyzer is produced, transport is completed, installation is completed, and the commissioning now it's at the very last day. We have been putting electricity, that means power on the electrolyzer, and we have been producing gas. Everything so far is as expected.
The test will run until the year-end, we will have the final results and review them. We jump over to the new electrolyzer technology, and we have also here completed our first 1,000-hour run. The first results we see, it's a significant efficiency improvement, and I will come back to the details further on in the presentation. Our belief in North America, and particularly in USA, is very strong since the biggest activities and the biggest leads we have, it's in the U.S. We have now established a new office in Boston, and we will physically soon move in and start to employ people there. That is the latest news. I will hand everything over to Martin about the business update and some financials. Martin, please.
Thanks a lot, Richard. Thanks a lot. Now I will walk you through the business update for the third quarter this year. As Richard presented, the DG Fuels Louisiana project have now signed offtake agreements, covering more than 90% of the total capacity with the Delta Air Lines and with Air France-KLM. We are currently now validating our technology, the world's largest electrolyzer, expect them to be commissioned this week. Our Q3 financials, we generated NOK 14.6 million of revenues, which is 87% higher compared to the second quarter. We have a backlog at the end of Q3 of NOK 849 million, and the active sales pipeline stood at 17 gigawatts, which constitutes of 115 projects. It's my pleasure as the CFO that we are now on the main list on Oslo Stock Exchange. We had the first trading date on 3rd of October.
Our manufacturing facility in Tianjin in China has been further upgraded. Important to say, the last bullet here is that we will start to recognize revenues from the large order in the U.S. from the fourth quarter. That leads me into the financials. In the third quarter, we generated revenues of NOK 14.6 million. The majority of those revenues are linked to the world's largest electrolyzer, which now is being commissioned at Herøya. While the adjusted EBITDA ended at a -NOK 27.4 million during the quarter. It's important to say we are now scaling up the business to deliver on the awarded purchase orders in order to execute on those. We will then start to recognize revenues from the next quarter. We have now, as of November 1, 100 employees in the company.
In the third quarter, we had investments of NOK 20.2 million, which is also mainly related to the facility in China. The cash balance at the end of the third quarter stood at NOK 342.8 million. If you look in the middle of the graph on the lower part, you can see the changes in the cash balance during the quarter. Starting then from NOK 435.3 million at end of Q2, the adjusted EBITDA came in at -NOK 27.4. We invested NOK 20.2 million, and the remaining part of NOK 44.9 in cash reduction is then mainly related to prepayment of steel to some suppliers in China. That also gives us a hedge in terms of prices for the large order and of course, then more visibility on the margin. The backlog stood at NOK 849 million compared to NOK 794 million in Q2.
The major change in the backlog is weakening of the NOK versus the U.S. dollar, but we also were awarded NOK 3 million of order during the third quarter. Our manufacturing facility in China, we have now upgraded it in order to meet HydrogenPro's standards. We are now producing the order to Japan, which was awarded on the 19th of April this year. Now we are scaling up. We have increased activity level, and we are now producing at full-scale capacity in the fourth quarter. Out of the NOK 20.2 million investments in Q3, NOK 17 million is related to the upgrade of the facility in Tianjin. Revenue recognition. Our orders follows the percentage of completion principle in terms of revenue recognition and thereby also the costs related to the project.
As mentioned, the large order with a contract value above $50 million, we will start to recognize revenues on that project now in the fourth quarter. As we have full capacity in China, we will then further increase the revenue recognition in Q1 and Q2. By end of Q3, the plan is that 90% of the total delivery will be recognized in our P&L. In the Q2 presentation, we guided that we plan to invest NOK 45 million in the facility in China. In this quarter, we spent NOK 17 million, meaning that there is NOK 20 million to NOK 30 million left to spend to have that fully upgraded to meet the international standards. We are also then, of course, now building up systems and organization for the delivery. We are validating the world's largest electrolyzer on our facility at Herøya.
In addition to that, we are establishing an office in the U.S. We are also planning to establish an office in Germany. That said, capital discipline is of vital importance for us, and we have now made the major steps in terms of delivery for the large orders the next few quarters. This is an important slide. This shows how we have grown this company, transformed this company during the last two years. We were listed on the Euronext Growth in October 2020, where we were a distributor. Today we are a technology owner. We have owned the IP rights, and we are an original equipment manufacturer. Two years ago, we didn't have any manufacturing capacity. Today, we have 300 MW of manufacturing capacity. The backlog stood at NOK 15 million, while it's at NOK 849 million as of end of Q3.
Thank you, Martin. Thank you. 10 times. That is a pretty good acceleration of the company. I also like to look back a little bit in the history. Electrolyzers are not new. Michael Faraday published his law of electrolyzers in 1834, and the very first electrolyzers was what they call the monopolar system. Later on in the 1920s, to our knowhow, it was the first bipolar systems were built. Later, it was developed a second generation, high pressure, because the first version was atmospheric units. The second generation is the high-pressure alkaline systems. They was developed in the 1960s, so a pretty long time ago. Now, I like to be just clear on this. The second generation, it's a good electrolyzer. The second-generation electrolyzer, that is what we will deliver for the large project to Mitsubishi Power in USA.
We are working now on the third generation. The biggest step from the second to the third generation, it is the total need of power inside the electrolyzer to produce gas will be drastically reduced. Just so we have the terms, first, second, third generation. When we look at an electrolyzer plant, we need a lot of electricity. On the left-hand side now you can see there is a circuit breaker, there is a current transformer, there is a rectifier. This is what makes the DC power goes into the electrolyzer. The DC power is the one splitting the water into hydrogen and oxygen. In the electrolyzer, we have gases and liquids coming out, and they go into a gas separator unit. We can put in a buffer tank if needed because some customers, they also need a gas purification unit.
We are working now on the 3rd generation, the biggest step from the 2nd to the 3rd generation, it is the total need of power inside the electrolyzer to produce gas will be drastically reduced. Just so we have the terms, 1st, 2nd, 3rd generation. When we look at an electrolyzer plant, we need a lot of electricity. On the left-hand side now you can see there is a circuit breaker, there is a current transformer, there is a rectifier. This is what makes the DC power goes into the electrolyzer, the DC power is the one splitting the water into hydrogen and oxygen. Then in the electrolyzer, we have gases and liquids coming out, they go into a gas separator unit. Then we can put in a buffer tank if needed because some customers, they also need a gas purification unit.
All these things which is inside the red dashed line, this is what we are supplying, and that's what we are producing in our own factory. Everything on the left with power supply, this is something we buy from others. Now, since this chapter is about technology, what do we do inside HydrogenPro to improve the technology, to improve the efficiency? We are working on three things. We are working on the electrolyzer itself, and what we are doing there, we are optimizing the anodes and the cathodes. That's one job. The second thing we are working on is the gas separator unit. The more streamlined and efficient we can have it, the better it is. One of the things we can do when we have the new electrodes, the losses will be less.
It means the heating will be less, and it means also we will require less cooling water supply. Then on the gas purification system, there are many producer of gas purification systems today, and some of them have 110 units in and 97 or 8 units out. Some others, again, are able to put in 100 and get out 100. That's what we are working on. This is, for us, it's important to improve not only the efficiency of the electrolyzer itself, but to improve the efficiency of the whole plant because the final bill, the owner of the plant will get, he need to also pay for all electricity we use for cooling water, for running pumps, and for other also things, not only for the DC power that we got into the electrolyzer.
What we are doing now, we are making a standard train with 2 electrolyzers, 1 gas separator, and 1 purifier. The purifier should be 2,200 units, but we like to design it for 30 bars. Because today's situation is we have 15 bars, but we are working on the next generation already now to increase the pressure. That means we should have a complete train for 2,200 cubic meter, and in the future, be prepared for 30 bars. Then on the second line, we are working also on something else. There is a formula given there which says V, that means how much gas you get out. It's equal to a constant, multiply by the number of cells and multiply by the number of kiloamps DC we run into the system. At the very end, it also multiply a Z.
The new electrolyzer body is working on eliminating this shunt current. This shunt current, that is what gives this letter Z, because when you put a DC into an electrolyzer, the DC power that goes to the cathode produce gas. There is a small amount of electricity that sneaks around and don't produce gas. This is what we are working on, and the target is to have Z equals 1. That means the shunt current will totally be gone. We have already built smaller units like this size in our lab, and we have started testing. After 3 different designs, we have achieved Z to equals 1. It will still take two to three years before the product is on the market. We need to do a lot more testing, we are on the right track.
The last little point is the cooling system. When you combine the higher efficiency with less losses, you need less cooling water, which again allows us to increase the temperature on the cooling water supply. Most producers today, they require a cooling water into the electrolyzer system of 30 degrees centigrade. That means if you sell your system in a very warm area, you normally have maybe 40 degrees outdoor. How to cool the water down to 30 degrees when it's in a 40-degree atmosphere, then you need some additional power. You need a chiller. We can avoid that by redesigning the new cooling water system together with the third generation of electrodes.
We will be able to run up to 50 degrees on the incoming cooling water, which again can make us able to make a totally closed loop, just like a radiator in the car, so you don't lose any water at all. You use a lot less energy also to cool the water down. This is another part, not only physically on the electrolyzer body, but when we're looking at the whole system as one. Okay. Many people have been waiting for our new electrode test. Before I start to give some numbers, I like to just be clear. A small electrolyzer, a medium-sized electrolyzer, and a big electrolyzer, they have little bit different efficiency. The most efficient unit is the big one. Point number two, I like to use the example driving car.
If you drive 100 km on the motorway, you have a certain fuel consumption in your car. If you double the speed to 200 km per hour, the fuel consumption goes up. This is the same in the electrolyzer. If you double the current density, the efficiency is not so good. The results we have done and the test we have completed now with the first run, it's done at double current density. The very, very interesting and good thing is that in this test, we measured about 7.5% less need for energy when we run at double current density compared to the old solution at normal or standard current density.
Now we are ready to repeat the same procedure, next time now, we will also run at normal current density in the test electrolyzer, so it's easier for us to compare apples to apples. The reason for us to run double current density is that in areas where the electricity cost is very low, it would be a good solution to have a double current density electrolyzer because it will save the end users on the installation. You basically just need to buy half the number of electrolyzers. We are very happy so far. We are continuing the testing, I hope in one or two more quarters, we can give you some more numbers. Our strategy is to work on technology. We have the focus on the high-pressure alkaline electrolyzer, and we have the pressure on the next generation electrodes technology.
We have a focus on electrolyzers that do not require any noble metals. We know the global footprint is important. Another target is to have more than one gigawatt production capacity within next year. Scalability for us is also important. Today, we have a train with the circuit breaker, current transformer, rectifier, two electrolyzers in parallel, one gas separator, and so on. This is a train, and this is an 11 MW train. If a customer need 100 MW or 200 MW or 500 MW, we just copy and paste. Copy and paste and copy and paste, and each train, it's living their own life. It doesn't matter what the neighbor are doing. You can still stop one unit, take it out for service, and the remaining units are still in full operation.
We also are focusing on, in the long term, the life cycle partnership, because when you have delivered one or two or 100 or 500 electrolyzers, sooner or later, they need some service. They need to be refurbished. They need to be opened. We need to put new things in. When we do that, we make sure all the new technology, all the new electrodes, et cetera, have the same dimensions, so you can upgrade your electrolyzer to be an even better unit when you do the big overhaul in the future. Again, this is just a comparison. It's what I have learned during my career in the electrolyzer business. We have been working with PEM, a good unit. We have been working with alkaline atmospheric pressure. We have been working with alkaline high pressure the last 10 years.
As you can see, the one we have today is in the column number three. This is what we call the second generation. The advantage for the second generation, it's basically, in my eyes, personally, it is you do not need any noble metals. That's number one. It is suitable for the renewable energy input, exactly the same way as the PEM electrolyzer. Some people still have the thinking that you need to have a PEM electrolyzer to be able to connect to renewable energy sources, where wind, solar, et cetera, vary the input. That is not true. The PEM and the alkaline high pressure units have the same dynamics. This is what we have been doing today, and we have been winning the big project in America by our second-generation alkaline high pressure electrolyzer.
On the very right-hand side, you are looking at what we call the third generation, which is even more efficient than the second generation. We know people are wondering, what's the competition from China? Some people say we should maybe block Europe from getting products from China because they are so cheap. Maybe they are right. What we can do by building up now in Europe and building up in the North American market with factories, with a supply chain, we can pick the best from all continents and put them together. That will give us a superior technology. It will give us a local presence to end users, and it will optimize our cost. This is about the life cycle model. 10 years, and we recommend to open your electrolyzer. After 10 more years, we recommend to open the electrolyzer for the second time.
The electrolyzer has been in use for 30 years, which we have as a design life. It means after 10 years, after 20 years, suddenly the turnover starts to double because all the old customers come back again and ask for the upgrade. What I will say here is that we are a manufacturer. We are producing the equipment. We are selling the equipment. We are not owning the equipment. We are not operating the equipment. We are not selling the gas. Our customers are typically aviation fuel, refineries, power, et cetera. Everyone can use hydrogen in one or another way. The most exciting that happened in the third quarter was that our partner, DG Fuels, signed the off-taker's agreement. Now it's opening a new door to a new world.
For the first, this contract will be for us in HydrogenPro 10 times bigger than the big contract we already signed and are producing on for the Mitsubishi Power in North America. It's obvious. When Delta Air Lines, Air France, they start to run on sustainable aviation fuel, what will all the others do? They need to follow. We see this as a fantastic opening, and we see this fuel, which can be put directly into the fuel tanks in the aircraft today, as a very short-term trigger to increase business. We know that the big airplane manufacturer, they are also thinking about in the future to run on hydrogen alone, but that will take some more decades. This is a very good solution, and we are excited about how this will develop. A summary.
If I should just use one word for the whole summary, I will say we are very happy these days. Things are going our way on off-taker agreements, on the backlog and on the technology. We are working on the global expansion. This is for us, it's a fantastic world. We are gearing up with new people all the time, and we are really investing the money we have got from the investor very carefully, but we think strategic and global. That's my little summary. Martin, do you come back again if there is some questions now from the audience?
Sure. Yes.
Yes, we have a few questions here. Could you please provide a comparison related to the base electrolyzer technology deliveries and experience with your competitors such as Nel, McPhy, and others?
Well, there is a lot of different solutions out there. Basically, you have the two blocks, either is PEM or is alkaline. The alkaline, again, is divided into two parts, and all of them have been on the market for a long time. I will say that we just like to talk about our product and what we like to say very clearly, the technology we have, either if it's produced by a competitor, which is exactly the same base technology, have been delivered, I think more than 2,000 plants worldwide so far. We feel very confident it is working, and we are just waiting now to kick off the third generation. That will be us alone who have the third generation. It will all be produced in Denmark in our new electrode factory there.
Very well. What can you say regarding DG Fuels's funding? What is the process and timeline on that?
One of the keystones here, it's the Department of Energy in the U.S., where DG Fuels is working directly with them. We in HydrogenPro, we are not involved in that process. We are just a partner with DG Fuels, and we are a chosen supplier for the project. We are not the one responsible for the financing.
The Department of Energy will then provide a guarantee on debt, and the plant will then be approximately 60% debt-funded, the remaining equity and vendor supply funding.
Okay. You're opening offices in the U.S. and possibly in Germany, scaling up capacity and begin building working capital to deliver on orders. How well are you funded to execute on this? Do you need to raise equity?
Yeah. Even though we are a growth company, we have an order book. As explained in the financial section, we will start to recognize revenues now, in the fourth quarter on the large contract. We will see a significant step-up now, going forward. On the cash situation, we will also then have payment milestones, which are connected to the manufacturing process. When we deliver, we will also receive funds. I can also add that if you look into then our Q3 financials and for previous quarters as well, we have not generated profits, because this has all been about taking up to the next level in order to execute on the large purchase orders.
From now on, we have a margin on the large order, and we are in a much, much better state than so to say, to be able and to do generate margins on the group level as well. We are not providing any specific guidance beyond that.
Do you have any updates to give on the capacity expansions in the U.S. and Europe? When can we expect more news on partners, joint venture structures, locations, and so on?
What we are doing, we are planning now 500 MW in the U.S. and 500 MW in Europe. We are in discussions with very positive partners, and we will do this as one team together with the partners.
Do FEED study have cost of goods sold, or are cost of goods sold only applicable to electrolyzer sales?
By cost of goods sold, I expect you're referring to raw materials and consumables used and all for FEED studies. That is mainly our brain power that's used. That is then the mainly payroll expenses, which are expensed for the FEED studies. As I mentioned, we were awarded now a FEED study this quarter, which now our clever engineers are working on at our office in Porsgrunn.
Very well. You reported revenues of NOK 14.5 million and cost of goods sold of NOK 11.5 million. Is that a range of gross margin we can expect in the future?
No, we have now, again, validated our technology. We have got paid, actually, with Mitsubishi running a joint validation program with Mitsubishi. Now going forward, it is likely to be even higher margins on newer projects. Again, this, of course, boils down to how competitive is this market. If I might add on that as well, what we start to see now from the clients is that they are more aware of the demand, that we actually are able to have the capacity available to meet the client's demands. That's a new trend. It's more focus on the ability to actually deliver on the large projects.
Yes. To you, Richard. Will you, Richard, continue as CEO for the next years, or are you searching for a new CEO? If yes, when do you expect the new CEO to start?
Yeah. I was the CEO the first seven years. When we entered the stock market, I felt other people were better than me to do it because I'm a technical guy. I think I can contribute best inside the HydrogenPro to work on innovation, R&D, and so on. Yes, we are looking for a new CEO. We are talking to people. I don't like to say exactly when people will accept and when they will start, this process is ongoing.
Okay. What has to happen that you get the $500 million project from DG Fuels? How big has the project to become?
Well, if we get the $500 million project next year, we are now preparing for the project. That's why we have established a America office, and that's why we are talking to good partners to build up production capacity, and so on. The first project in Louisiana, will in, for HydrogenPro, be in the range of $500-plus million US dollars. If you do that smoothly together with DG Fuels, similar projects will also pop up. It will be a huge future turnover for our company, and we need to have a strong backbone, to be able to not only do the engineering and the fabrication and the commissioning, but we also need to be a little bit strong on the financial side.
Again, that equates then to the $500 million. That equates to an electrolyzer capacity of at least 840 MW.
Will you announce your U.S. plant in 2022, or would it rather be in 2023?
I think realistically we will do in 2023.
Okay. You now say that you will have more than 1 gigawatt capacity next year. Is that a reduction from the 1.3 gigawatt total capacity you have targeted previously?
Well, we are targeting the half gigawatt in America, half gigawatt in Europe, but we will still have the 300 MW in China. What we think, in the beginning, it will be a supply chain cooperation to get the best solutions from Europe, America, and China with regards to cost, quality, et cetera. In the long run, we see the China factory might also be increased to serve the internal market in China.
The short answer is no. No reduction in the target.
Okay. What % of the $500 million will be added for life cycle services?
Nothing. The $500 million is for the project itself. The life cycle agreement, it's not negotiated yet.
Oh, very well. Is it likely or possible that additional, not yet published or awarded electrolyzer orders will be manufactured and shipped with full revenue recognition in 2023?
Yeah, we will have then the manufacturing capacity at our site now in Tianjin, when we have completed the fabrication for the large U.S. order. Of course, if the size is not too large, we will be able then to fabricate that in the last part of next year. Of course then recognize that fully if we are able then to deliver it with our capacity and production capacity in China.
Will you raise further money for your next factories, or will you build them with the money from partners?
Well, it might be a combination. We will see what is the final agreements we end out with.
Okay. Last question here. Are you producing electrodes in Europe, or are you producing them in China and bringing them to an assembly line in Norway? What is your European footprint? Thanks.
The new third-generation electrodes, they are produced in Denmark.
That was the last question. Thank you.
Okay. Thank you all. Wish you a nice day.