Fusion Fuel Green PLC(HTOO) - 2023 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION The company faces significant investment risks stemming from its limited operating history, the nascent green hydrogen market, intense competition, dependency on key customers, supply chain vulnerabilities, and complex regulatory environments Risks Relating to Our Business - The company has a limited operating history, which restricts the basis for evaluating its ability to achieve business objectives and operate profitably[35] - Future capital requirements are significant for research, development, and commercialization, and additional capital may not be available on favorable terms, potentially compromising growth[37][39] - The green hydrogen industry is an emerging market, and widespread market acceptance of the company's HEVO-based products is not guaranteed[40] - Fusion Fuel faces significant competition from diversified multinational companies with greater capital resources, longer operating histories, and established government relationships[47] - The company depends on a few anchor customers for a majority of its revenues, making it vulnerable to fluctuations or declines in business from these major clients[48] Risks Relating to our Products and Manufacturing - Future success is partly dependent on increasing production capacity, which is subject to risks like financing, construction delays, and reliance on third-party suppliers[50][51] - The company's products create flammable hydrogen and oxygen gases, which are inherently dangerous substances, exposing the company to potential product liability claims[56][57] - Fusion Fuel relies on a limited number of third-party suppliers for critical raw materials and components, where any disruption could impair manufacturing and increase costs[67][68] - The business plan is heavily reliant on Portugal's and Spain's Hydrogen Strategies, and any delays or changes in government priorities could materially impact projects[77][78] - The manufacturing plant in Benavente is critical for production, and if it becomes inoperable, the company's ability to produce its electrolyzers will be harmed[124] Risks Relating to Legal Matters and Regulations - The company is subject to various complex and changing environmental laws and regulations, which could impose substantial costs and cause project delays[82] - Potential product liability claims related to the production of flammable gases could harm the company's financial condition if it cannot successfully defend against them[84] - Changes in tax laws or adverse outcomes from tax examinations in various jurisdictions could negatively affect operating results and financial condition[87][89] Risks Relating to our Intellectual Property - The company's ability to compete depends on protecting its proprietary technologies, and failure to do so could undermine its competitive position[90][91] - There is no certainty that pending patent applications will result in issued patents or that issued patents will provide adequate protection against competitors[92] - The company may face claims of infringing on the intellectual property rights of others, which could be time-consuming, costly, and result in substantial damages[94] Risks Relating to our Financial Condition and Operating Results - Management identified material weaknesses in internal control over financial reporting as of December 31, 2020, which were still under remediation as of December 31, 2023[97][101] - The company's financial results are likely to fluctuate quarterly due to factors like the timing of installations, project sizes, and supply chain interruptions[103][104][107] - The company expects to experience foreign currency gains and losses, as its financial reporting is in Euros while holding significant assets in U.S. dollars[110] Risks Relating to our Operations - Success is highly dependent on attracting and retaining key management, technical, and sales personnel in a competitive industry[112] - The business plan is substantially dependent on entering into technology sale and engineering service agreements with third parties[115] - Cybersecurity risks and threats to the company's information technology networks could disrupt operations and compromise sensitive data[126][127] - The company's aggressive growth strategy includes expanding into new territories, which involves significant economic and political risks[131][132] Risks Relating to Irish Law - Transfers of Class A Ordinary Shares or Warrants held directly may be subject to Irish stamp duty, which could adversely affect the price of the securities[138] - In certain limited circumstances, dividends paid by the company may be subject to Irish dividend withholding tax, currently at a rate of 25%[143] - Attempted takeovers of the company are subject to the Irish Takeover Rules, which may limit the board's ability to defend against an unsolicited takeover attempt[151][152] - As an Irish-formed company with assets and management primarily outside the U.S., investors may face difficulties in enforcing judgments from U.S. courts[157] ITEM 4. INFORMATION ON THE COMPANY Fusion Fuel develops innovative green hydrogen solutions through its proprietary HEVO electrolyzer technology, operating across electrolyzer sales, engineering services, and project development with a focus on expanding from Iberia to global markets History and Development of the Company - The company was formed through a business combination with HL Acquisitions Corp on December 10, 2020, becoming a publicly traded entity on Nasdaq[185] - Fusion Fuel developed the HEVO, a miniaturized PEM electrolyzer, which is the core of its HEVO-Solar and HEVO-Chain product solutions[187][211] - Key facilities include the H2Evora demonstration plant and a manufacturing facility in Benavente, Portugal, which started production in Q2 2022[191][193][194] - The company's HEVO-Portugal project was selected for the IPCEI Hy2Infra program, positioning the €650 million, 630 MW project for significant funding negotiations[214] Business Overview - Fusion Fuel's mission is to accelerate the energy transition by providing innovative green hydrogen solutions to decarbonize key industrial sectors[215][217] - The company operates through three core business lines: Electrolyzer System Sale, Engineering & Procurement Services, and Project Development[222][225] - The core technology is the HEVO, a proprietary miniaturized PEM electrolyzer, which is integrated into the modular and scalable HEVO-Chain product[224][226][227] - The company faces competition from traditional and green hydrogen producers but believes its cost-competitiveness for projects under 10 MW is a key advantage[237][238] Organizational Structure - Fusion Fuel Green PLC (Ireland) is the parent holding company for its operating subsidiaries in Portugal, the USA, Spain, and Australia[255] Property, Plants and Equipment - The company entered into a sale-and-leaseback agreement for its Benavente, Portugal facility on December 20, 2022, with an initial lease term of 20 years[257] - Fusion Fuel Portugal also subleases office, logistical, and industrial space from Negordy, a related party, under an agreement with an initial five-year term[256] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The company recognized its first revenues in 2023 but incurred a wider operating loss of €37.1 million due to high cost of sales, while its liquidity remains critical with substantial doubt about its ability to continue as a going concern Operating Results | Metric | 2023 (€'000) | 2022 (€'000) | | :--- | :--- | :--- | | Revenue | 4,144 | - | | Cost of Sales | (20,088) | (8,765) | | Gross Loss | (15,944) | (8,765) | | Administration Expenses | (15,835) | (18,416) | | R&D Expense | (1,925) | (908) | | Impairment of PP&E | (2,165) | (3,321) | | Operating Loss | (37,063) | (34,747) | | Net Finance Income | 6,451 | 8,062 | | Total Comprehensive Loss | (31,016) | (27,347) | - The company recorded its first revenues of €4.1 million in 2023, primarily from the Exolum and CSIC technology sale projects[267][268][270] - Cost of sales in 2023 included significant impairment charges, with a €13.9 million increase for inventory and a €3.3 million impairment for a development project[274] - Net finance income was €6.9 million, primarily due to fair value gains on the company's publicly traded warrants (HTOOW)[282] Liquidity and Capital Resources - As of December 31, 2023, the company had a cash position of €1.2 million, down from €8.2 million at the end of 2022[295][526] - The company has been funding operations through its At the Market (ATM) facility, which raised approximately $3.3 million in 2023, and has received €11.4 million in grant funding[295][306] - In November 2023, the company entered into an agreement for up to $20 million in financing via senior convertible notes with a Macquarie Group entity[302] - The company has secured significant grant approvals for its Portuguese projects, including €10M for its Benavente facility and €36M for its Sines Green Hydrogen Valley Alliance[298][299][300] - Management acknowledges that the company is highly dependent on its ability to find additional funding and that there is substantial doubt about its ability to continue as a going concern[308][570] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES The company's leadership includes an experienced executive team and a board with independent committees, with aggregate executive compensation totaling €3.8 million in 2023 while non-executive directors deferred their cash fees Directors and Senior Management | Name | Position | | :--- | :--- | | Jeffrey E. Schwarz | Chairman of the Board | | Frederico Figueira de Chaves | Chief Executive Officer and Director | | Gavin Jones | Chief Financial Officer | | Andre Antunes | Chief Operating Officer | | João Teixeira Wahnon | Chief of Business Development Officer | | Jaime Silva | Chief Technology Officer and Head of Innovation | Compensation - The aggregate compensation for Fusion Fuel's Executive Officers in fiscal year 2023 was €3.8 million, with no variable compensation awarded[332][334] - For 2023, the non-executive directors deferred their cash compensation due to the company's capital position, with fees settled in March and April 2024[335] Board Practices - The Board of Directors is divided into three classes with staggered three-year terms[331][337] - The company maintains separate standing audit, nominating, and compensation committees, each composed of independent directors[340][341][345][347] - The Board has determined that Jeffrey Schwarz, Rune Magnus Lundetrae, Alla Jezmir, and Theresa Jester are independent directors[338] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS Key shareholders include MAK Capital, Negordy S.A., and Chairman Jeffrey Schwarz, while significant related-party transactions with entities controlled by major shareholders and the CEO are overseen by the audit committee Major Shareholders | Shareholder | % Total Voting Power | | :--- | :--- | | MAK Capital Fund LP | 18.87% | | Negordy S.A | 17.93% | | Jeffrey Schwarz (Chairman) | 11.34% | | Wendy Schwarz | 5.45% | | Richard Leahy | 5.1% | Related Party Transactions - The company has a policy requiring the audit committee to review and approve related-party transactions to ensure terms are favorable[356][358] - Fusion Fuel has critical business contracts with MagP, a company in which major shareholder Negordy holds a 71% stake, with transactions amounting to €3.8 million in 2023[361][362][758] - Key Family Holdings (KFH), an entity controlled by CEO Frederico Figueira de Chaves, provided short-term, non-interest-bearing bridge loans to the company[369][370][762] ITEM 8. FINANCIAL INFORMATION This section provides the company's consolidated financial statements and confirms that no cash dividends on Class A Ordinary Shares are expected in the foreseeable future - The company's audited consolidated financial statements are included in Item 18 of the annual report[374] - Fusion Fuel currently does not expect to pay any cash dividends on its Class A Ordinary Shares[376] ITEM 9. THE OFFER AND LISTING The company's Class A Ordinary Shares and Warrants are traded on the Nasdaq Capital Market - The Class A Ordinary Shares are listed on the Nasdaq Capital Market under the symbol "HTOO"[378] - The Warrants are listed on the Nasdaq Capital Market under the symbol "HTOOW"[378] ITEM 10. ADDITIONAL INFORMATION This section details material contracts, including financing facilities and the Benavente factory sale-leaseback, and outlines the material U.S. and Irish tax consequences for security holders Material Contracts - The company has an At Market Issuance (ATM) Sales Agreement, allowing it to sell up to $10 million of Class A Ordinary Shares, raising net proceeds of $3.3 million in 2023[388][395] - On December 20, 2022, the company completed a sale-leaseback of its Benavente manufacturing factory for a purchase price of €9.3 million[398][399][400] - In November 2023, the company entered into a Securities Subscription Agreement with a Macquarie Group entity for up to $20 million in convertible promissory notes[402] Taxation - U.S. Holders may face adverse tax consequences if the company is classified as a Passive Foreign Investment Company (PFIC), though the company does not believe it was a PFIC for 2023[160][419][421] - Transfers of shares held outside of DTC may be subject to a 1% Irish stamp duty, though transfers settled through DTC are exempt[440][442][443] - Dividends paid by the company may be subject to a 25% Irish Dividend Withholding Tax (DWT), although exemptions are available for residents of treaty countries like the U.S[444][446][450] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's primary market risk exposure is foreign exchange risk due to holding U.S. dollar assets while reporting in Euros, with no significant exposure to other market risks - The company's main market risk is foreign exchange risk, stemming from holding U.S. dollar-denominated liquid assets while reporting in Euros[469] - The company does not believe it is exposed to significant interest rate, credit, or liquidity risk and does not trade financial instruments or derivatives[470] PART II ITEM 15. CONTROLS AND PROCEDURES Management concluded that disclosure controls and procedures were not effective as of year-end 2023 due to identified material weaknesses in internal control over financial reporting, which are currently under remediation - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were not effective[478] - Material weaknesses were identified in internal control over financial reporting related to control processes, segregation of duties, and IT general controls[483] - Remediation measures are ongoing, including redesigning key processes, engaging external advisors, and hiring additional finance staff[484] ITEM 16. Corporate Governance and Other Matters This section covers governance topics including the designation of an audit committee financial expert, adoption of a Code of Ethics, auditor fees, and reliance on home country practices in lieu of certain Nasdaq rules - The board of directors has determined that Mr. Rune Magnus Lundetrae qualifies as an "audit committee financial expert"[487] Principal Accountant Fees | Fee Type | 2023 | 2022 | | :--- | :--- | :--- | | Audit Fees | €355,000 | €357,250 | | Other | €0 | €25,000 | | Total | €355,000 | €382,250 | - As a foreign private issuer, the company follows its home country (Irish) practice in lieu of Nasdaq rules requiring shareholder approval for certain equity issuances[494] - The company has implemented procedures to manage cybersecurity risks, with oversight from the Board and the Audit Committee, and has experienced no material attacks to date[498][500] PART III ITEM 18. FINANCIAL STATEMENTS The audited financial statements are presented with an independent auditor's report expressing substantial doubt about the company's ability to continue as a going concern and highlighting two critical audit matters - The independent auditor's report highlights a material uncertainty that raises substantial doubt about the company's ability to continue as a going concern[513] - Critical Audit Matters identified by the auditor include the fair value assessment of an energy production plant held for sale and the value-in-use calculation for another plant[517][518][521] Consolidated Balance Sheet Highlights | Metric | As at Dec 31, 2023 (€'000) | As at Dec 31, 2022 (€'000) | | :--- | :--- | :--- | | Total Assets | 42,351 | 65,365 | | Total Liabilities | 39,620 | 36,012 | | Total Equity | 2,731 | 29,353 | | Cash and cash equivalents | 1,147 | 8,164 | ITEM 19. EXHIBITS This section provides a comprehensive list of all exhibits filed as part of the annual report, including foundational corporate documents, material contracts, and required officer certifications - This item lists all exhibits filed with the Form 20-F, including foundational corporate documents, material contracts, and required officer certifications[504]