The following management's discussion and analysis ("MD&A") provides information
that management believes is relevant to an assessment and understanding of our
consolidated results of operations and financial condition, and includes
forward-looking statements that involve risks, uncertainties and assumptions.
The MD&A should be read in conjunction with our condensed consolidated financial
statements and related notes included in Part I Item 1 in this Quarterly Report
on Form 10-Q, and the section titled "Cautionary Note Regarding Forward-Looking
Statements" included in the fore-part in this Quarterly Report on Form 10-Q.
Overview
Heliogen is a leader in next generation concentrated solar energy ("CSE")
technology. We are developing a modular, A.I.-enabled, concentrated solar energy
plant that will use an array of mirrors to reflect sunlight and capture,
concentrate, store and convert it into cost-effective energy on demand. Our
unique system will have the ability to cost-effectively generate and store
thermal energy at very high temperatures. The ability to produce
high-temperature heat, and the inclusion of thermal energy storage,
distinguishes our solution from clean energy provided by typical photovoltaic
("PV") and wind installations which do not produce thermal energy and are only
able to produce energy intermittently unless battery storage is added. The
system will be configurable for several applications, including the carbon-free
generation of clean power (electricity), industrial-grade heat (for use in
industrial processes), and green hydrogen, based on a customer's needs.
We have developed innovations in the process of concentrating sunlight which we
believe fundamentally improve the potential, to efficiently and cost effectively
collect and deliver energy to industrial processes. We believe we will be the
first technology provider with the ability to deliver cost-effective renewable
energy capable of replacing fossil fuels used in industrial processes that
require high temperature heat and/or nearly 24/7 operation. In addition, we
believe our disruptive, patented design and A.I. technology will address a
fundamental problem confronted by many renewable sources of energy:
intermittency. An intermittent power supply does not match the continuous power
demand of industry and the grid. Without storage, wind and PV-based renewable
energy generation may rapidly fluctuate between over-supply and under-supply
based on resource availability. As the grid penetration of intermittent
resources increases, these fluctuations may become increasingly extreme. We
believe our technology will contribute to solving this problem. Our solar plants
will have the ability to store very high temperature energy in solid media. This
energy will then be dispatchable, including during times without sunlight, to
cost-effectively deliver near 24/7 carbon-free energy in the form of heat,
electric power or green hydrogen fuel.
The three use categories will be configured as follows, forming the backbone of
three business lines:
HelioHeat - The production of heat or steam for use in industrial processes will
be enabled by the baseline system.
HelioPower - With the baseline system as the foundation, the addition of a
turbine generator system will then enable power generation.
HelioFuel - Building on the Power system described above, hydrogen fuel
production will be enabled by further adding an electrolyzer system to the
baseline system.
Our technological innovations will enable the delivery of our HelioHeat,
HelioPower and HelioFuel solutions to customers. HelioHeat plants will produce
carbon-free heat (e.g. process steam or hot air) to support industrial
processes. HelioPower plants will deliver solar thermal energy to a heat engine
to produce electrical power. HelioFuel plants will couple a HelioPower plant
with an electrolyzer to produce green Hydrogen fuel. All three solutions will be
enabled by Heliogen's proprietary heliostat design and artificial intelligence
technology, and will integrate TES to enable operation nearly 24/7, overcoming
the intermittency of other solar energy technologies.
For each of the three above solutions, we are offering multiple support models
to customers looking to deploy Heliogen's technology:
•Contracting with owner-operators to build turnkey facilities that deploy
Heliogen's technology (Heliogen will contract with engineering, procurement and
construction ("EPC") partners for constructing the facility);
•Selling heliostats (and associated software control systems) to owner-operators
and/or EPC contractors;
•Providing asset maintenance support services during operation, for completed
facilities that use Heliogen's technology; and
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•Providing project development support services to help customers advance
readiness to break ground in advance of final investment decisions.
In the future, we will also be prepared to offer Heliogen's IP through a
licensing model to third parties interested in manufacturing and installing the
hardware.
Recent Developments
Customer Contracts
On March 28, 2022, Heliogen entered into a series of commercial agreements
(collectively, the '"Agreements") with
Woodside Energy (USA) Inc. ("Woodside"), a wholly-owned subsidiary of leading
Australian energy producer Woodside Petroleum Ltd. for the commercial-scale
demonstration and deployment of Heliogen's AI-enabled concentrated solar energy
technology in California and the marketing of Heliogen's technology in
Australia. Pursuant to the terms of the commercial-scale demonstration agreement
(the "Project Agreement"), Heliogen has agreed to complete the engineering,
procurement, and construction of a new 5 MWe HelioPower facility to be built in
Mojave, California for testing, research and development. The two companies also
agreed to include the scope and associated funding from Heliogen's $39 million
award from the U.S. Department of Energy's Solar Energy Technology Office (the
"DOE Award"). As a result, in addition to commercial-scale demonstration of
Heliogen's 5 MWe power module, the project will also include the deployment and
testing of an innovative approach to converting the thermal energy produced by
Heliogen's facility into power with a smaller footprint than traditional steam
turbines.
In addition to the Project Agreement, Heliogen and Woodside also signed a
collaboration agreement to jointly market Heliogen's technology in Australia
(the "Australia Collaboration Agreement") with the objective to deploy further
commercial-scale modules of HelioHeat, HelioPower, and HelioFuel offerings.
Under this arrangement, the parties expect to define product offerings that use
Heliogen's modular technology for potential customers (including Woodside) in
Australia and are establishing a roadmap to identify and engage with those
customers.
Key Development Milestone - Supercritical CO2 Power Generation System
During the first quarter of 2022, we achieved a key development milestone,
transitioning from design into testing and implementation of our supercritical
CO2 ("sCO2") power generation system to be utilized to generate carbon-free
electricity for our above disclosed 5 MWe commercial-scale deployment for our
customer, Woodside.
We also progressed several of the innovations being deployed on this project, in
collaboration with our supply chain partners. For example, working with Hanwha
Power Systems ("Hanwha"), a global leader in the development of eco-friendly
power generation solutions, we have developed a modular, high-efficiency 5 MWe
sCO2 power block integrated with high temperature solid media thermal energy
storage, designed to meet the renewable power generation requirements for
industrial customers in the energy, mining and other heavy industries. We had
previously entered into an agreement with Hanwha for the production and delivery
of the power block for the Mojave, California demonstration project. We have
also developed an advanced heat exchanger which will be used to transfer thermal
energy from thermal storage to the power block's sCO2 working fluid. Heliogen
has partnered with Vacuum Process Engineering and Solex Thermal Science for the
design and fabrication of the heat exchanger, and with Combustion Associates
Inc. for the construction of a test facility, which will validate its
performance.
Key Factors and Trends Affecting our Business
Growth Opportunity
Heliogen's growth is tied to the global phenomenon commonly described as "the
energy transition" - that is, the shift in energy supply from burning fossil
fuels to harnessing low-carbon and renewable sources of energy. Data linking the
role of carbon emissions in accelerating climate change has led to shareholders
and activists applying pressure to companies and governments to take action.
This trend has been on the rise since the signing of the Paris Agreement in
2015, led largely by Europe. As a result, the energy transition has become a
major focus of both private and public sector leaders around the world.
Companies and governments have begun setting ambitious goals to reduce
greenhouse gas ("GHG") emissions and to use renewable resources to sustainably
power their operations.
Heliogen's growth strategy is to harness the significant demand by delivering
technology that enables scalable, distributed, solar-thermal energy plants that
can create heat, steam, power, and "clean" hydrogen- i.e., without the carbon
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emissions produced by fossil fuel energy sources. Our solutions target the end
markets with a need for heat, electric power, and hydrogen. Such markets include
the oil & gas, power, cement, steel, and mining industries.
Heliogen's technology platform allows modular plants for heat, steam, power,
and/or hydrogen to be built at customer locations. The Company's strategy to
achieve scale is through modularity and repeatability, with minimal custom
re-engineering compared to prior iterations of this technology. The majority of
the plant will be built in a factory that can be scaled to produce many plants
per year. Heliogen will be able to further scale by replicating that factory in
multiple regions as we expand globally.
Leveraging the modularity of the system and repeatability of its implementation,
in the near to medium term, Heliogen will partner with contractors and other
supply chain participants to execute projects. In the long term, the Company
expects to license our core, patent-protected technology to owner-operators and
EPC companies who can each deploy many plants, to achieve a scale and growth
trajectory that can take advantage of the size of the market opportunity.
Licensing could enable Heliogen to improve the pace of our deployments, as well
as increase our profit margins, beyond what could be achieved solely through our
direct implementation.
In order to support Heliogen's growth as described above, we will continue our
dedication to research and development and to iterating on our novel combination
and integration of hardware and software. We are working to harness our
specialty of using more software, more automation, more robotics, and more
algorithms to reduce the quantity of materials, the amount of human labor, and
the duration of time required to deliver our projects at scale.
Geographically we are focused initially on the U.S., but plan to position the
Company to respond to global demand in locations with strong solar resource such
as Mexico, South America, Australia, Africa and parts of Europe in the future.
Global energy demand is expected to increase by 35% in the next two decades, due
to an increase in population and the economic growth of developing countries.
Demand for carbon-free replacements for current energy sources will further
increase the demand for Heliogen's products.
Market Opportunity
Capital expenditure investments for solar and on- and off-shore wind capacity
between 2020 and 2030 are projected to be approximately $8.5 trillion globally
in order to achieve the carbon emissions reductions that would support the 1.5
degree global warming target established by the Paris Agreement. The global
renewable energy market had total revenues of $692.8 billion in 2020,
representing a compound annual growth rate ("CAGR") of 8.9% between 2016 and
2020. The global renewable energy market is expected to continue its upward
growth over the next several years, reaching $1.1 trillion by 2027. At the same
time, the global total addressable market for energy storage is predicted to
reach approximately $56.0 billion by 2027 in comparison to $8.0 billion in 2020,
representing a CAGR of approximately 33%. Growing at a CAGR of approximately 43%
between 2020 and 2027, the cumulative requirement for global storage capacity is
expected to become a 534 gigawatt-hour opportunity in 2027.
We plan to also provide solutions for hydrogen production and industrial heat,
so we believe our total addressable market is even larger. Our potential sales
pipeline is diverse, ranging from utilities and independent power producers, oil
and gas companies, mining and metals companies, and manufacturers of steel and
cement. The worldwide energy industry generates annual revenues of approximately
$8.6 trillion. In addition, the worldwide clean energy market is expected to
reach $24 trillion by the end of the decade.
Government Targets and Corporate Initiatives
Governments, corporations, and investors are making concerted efforts and
setting aggressive targets to reduce GHG emissions and phase out fossil fuel
use. Such initiatives include setting timelines for zero-emission targets,
establishing caps on CO2 emissions, and instituting certain other environmental
sustainability initiatives. For example, in the U.S., the Biden Administration
has declared the following key environmental targets: (i) a carbon
pollution-free power sector by 2035, (ii) a net-zero (i.e., carbon reduction is
equal to or greater than carbon emissions) economy by 2050 and (iii) to achieve
in 2030 a 50-52% reduction from 2005 levels in economy-wide net GHG pollution.
In the private sector, companies have also committed to environmental
sustainability initiatives. Leading financial and corporate institutions have
requested that all boards of directors prepare and disclose a plan to be
compatible with a net-zero economy and to commit to launching investment
products aligned to a net-zero pathway. Individually and collectively, these
initiatives support the increased demand for renewable fuels, transportation,
energy storage, renewable power, low-carbon process heat, and energy efficiency.
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The key driver for renewable energy generation and storage will be increased
reliance on intermittent renewable energy resources like solar PV and wind. As
penetration of these renewable sources increases, the intermittency of these
resources can put strain on the grid if the operator is unable to fully match
supply with demand. This strain can lead to an inability to supply power when it
is needed and increased costs to consumers.
Energy storage can help reduce this strain. However, beyond a threshold level of
renewable penetration, current solutions to energy storage, such as batteries,
are insufficient to ensure grid reliability. Research from the National
Renewable Energy Laboratory, a national laboratory of the U.S. Department of
Energy, suggests that this threshold may be around 30% renewable penetration
based on its Eastern Renewable Generation Integration Study; which found that
the Eastern Interconnection, one of the largest power systems in the world, can
accommodate upwards of 30% of wind and solar photovoltaic power. California is
already at this level and we expect other specific geographies both in the
United States and abroad will be there soon. Bloomberg New Energy Finance
projects that the United States as a whole will exceed this target by 2029. In
order to maintain system stability and achieve mandated decarbonization goals,
longer duration energy storage options must be deployed. We believe Heliogen's
technology will be among a small list of available technologies that will be
able to respond to this energy storage need in order to maintain grid
reliability.
To note, changes in elected officials may directly result in changes to U.S.
government mandates and available programs as well as indirectly result in
changes to support from the private sectors. Such changes may have an adverse
impact on the growth of renewable energy.
Competitive Strengths
We believe we have a first-mover advantage over other industry competitors as we
have been committed since our founding in 2013 to the development of solar
energy solutions that enable decarbonization of our economy. This is evidenced
by our rich portfolio of intellectual property. We have demonstrated capability
to concentrate sunlight to produce heat at temperatures ranging from 150 to
1,000 degrees centigrade, made possible by our first-of-a-kind ability to
achieve high mirror adjustment accuracy. We have patented the most valuable
parts of our technology at each stage of development. Beyond the patents, our
journey as a company and the deep bench of experience across our leadership team
has provided and continues to provide invaluable learnings and technical
know-how that we believe will be difficult to rival. We continue to develop and
maintain our knowledge base, which we believe provides us with a substantial
strategic head start and competitive advantage against competition in the
concentrated solar energy and energy storage spaces. We also continue to target
incremental and transformational improvements across all aspects of our
technology in order to reduce costs and improve performance.
Raw Materials
The most important raw materials required for our CSE systems are steel (sheet,
tube, bar, extrusions), stainless steel (pipe), glass (float glass), copper
(wiring), aluminum (die castings, extrusions), commodity electrical &
electronics components, ceramics & ceramic fibers, thermal insulation materials,
bauxite particles and/or silica sand and concrete. Our components are produced
by suppliers both domestically and internationally where most raw materials are
readily available and purchased by those independent contractors and suppliers
in the country of manufacture. Many major equipment and systems components are
procured on a single or sole-source basis, but where multiple sources exist, we
work to qualify multiple suppliers to minimize supply chain risk. We also
mitigate risk by maintaining safety stock for key parts and assemblies with
lengthy procurement lead times. We use a variety of agreements with suppliers to
protect our intellectual property and processes to monitor and mitigate risks of
the supply base causing a business disruption. The risks monitored include
supplier financial viability, the ability to increase or decrease production
levels, business continuity, quality and delivery.
The ongoing COVID-19 pandemic has resulted in significant supply chain
disruptions globally, and similar to other companies in our industry, we have
observed significant commodity price inflation in recent months, in some cases
by upwards of 30% to 100%. Russia's invasion of and military attacks on Ukraine,
including indirect impacts as a result of sanctions and economic disruption,
have and may continue to further complicate existing supply chain constraints.
Shortages, price increases and/or delays in shipments of our raw materials and
purchased component parts, such as steel, glass, concrete and adhesives, which
are used as components of supplies or materials utilized in our operations, have
occurred and may continue to occur in the future which may have a material
adverse effect on our results of operations if we are unable to successfully
mitigate the impact.
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COVID-19 Pandemic
In March 2020, the World Health Organization classified the COVID-19 outbreak as
a pandemic. As the pandemic has continued to evolve, including the emergence of
additional SARS-CoV-2 variants that have proven especially contagious or
virulent, the ultimate extent of the impact on our businesses, operating
results, cash flows, liquidity and financial condition will be driven primarily
by the severity and duration of the pandemic, the pandemic's impact on the U.S.
and global economies. During the period ended March 31, 2022, despite the
continued COVID-19 pandemic, we continued to operate our business at full
capacity, including all of our manufacturing and research and development
operations, with the adoption of enhanced health and safety practices for our
stakeholders.
Results of Operations
Key Components of Our Results of Operations
Revenue - For our contracts with customers, we recognize revenue over time using
the incurred costs method for projects under development and engineering and
design services. For government grants, we recognize grant revenue based on the
amounts determined to be reimbursable for costs, including permitted indirect
costs, incurred during a given period and we have reasonable assurance of the
funds being received under the grant.
Cost of Sales - Cost of sales consists primarily of direct labor and direct
external vendor costs related to our revenue contracts. No allocation of
depreciation and amortization has been recognized due to the nature of work
being performed and the impact would be immaterial.
Selling, General and Administrative Expense - SG&A expense consists primarily of
salaries and other personnel-related costs, professional fees, insurance costs,
and other business development and selling expenses.
Research and Development Expense - Research and development ("R&D") expense
consists primarily of salaries and other personnel-related costs; the cost of
products, materials, and outside services used in our R&D activities.
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Comparison of the Three Months Ended March 31, 2022 and 2021
Three Months Ended March 31,
$ in thousands 2022 2021
Revenue $ 3,539 $ 516
Cost of revenue:
Cost of revenue 3,524 516
Provision for contract losses 33,737 -
Total cost of revenue 37,261 516
Gross loss (33,722) -
Operating expenses:
Selling, general, and administrative 20,395 2,152
Research and development 9,605 1,608
Total operating expenses 30,000 3,760
Operating loss (63,722) (3,760)
Other income (expense):
Interest income, net 194 40
Gain (loss) warrant remeasurement 4,026 (303)
Other expense, net (76) (33)
Net loss before taxes (59,578) (4,056)
Income tax benefit 610 -
Net loss (58,968) (4,056)
Total comprehensive loss $ (59,348) $ (4,068)
Revenue and Gross Loss
During the three months ended March 31, 2022, we recognized revenue of $3.5
million driven primarily by project revenue for work associated with the
development and planned deployment of our technology and product offerings on a
commercial scale, including $1.5 million of grant revenue recognized under the
DOE Award. Under a commercial-scale demonstration agreement (the "Project
Agreement") executed with a customer in March 2022, we will complete the
engineering, procurement, and construction of a new 5 MWe concentrated solar
energy facility to be built in Mojave, California (the "Facility") for
customer's use in testing, research and development. The Facility is expected to
serve as a fully operational model for the customer's use in demonstrating the
Company's technology and product offerings at a commercial scale to aid in the
development, engineering, and construction of larger, commercial scale
facilities under separate agreements between the Company and the customer or
other third-party customers.
We recognized gross loss of $33.7 million during the three months ended March
31, 2022 driven primarily by recognition of a contract loss of $32.9 million
related to the Project Agreement and Facility. The contract loss recognized
during the first quarter reflects our best estimate as of March 31, 2022 of the
full expected loss on the entire facility given consideration expected to be
realized under the Project Agreement (net of the fair value of related warrants
grant to the customer) and the DOE Award. Revenue expected to be recorded for
the Mojave, California project is approximately $84.5 million over the full term
of the project, of which $42.6 million is identified as noncancelable at
March 31, 2022. Our cost estimates as of March 31, 2022 for the anticipated
final scope of the facility are subject to further refinement as we continue
detailed engineering and design with the customers, obtain firm pricing from
subcontractors, order long-lead items, and better understand short- and
long-term commodity and market impacts on cost inputs to the Project Agreement
and Facility. As a result, the actual loss for the Project Agreement and
Facility could vary from our current estimates.
During the three months ended March 31, 2021, we recognized revenue of $0.5
million and no gross profit or loss associated with an engineering and design
services contract.
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Selling, General, and Administrative Expense
SG&A increased approximately $18.2 million, from $2.2 million for the three
months ended March 31, 2021 to $20.4 million for the three months ended March
31, 2022. The increase was primarily driven by our growth to support commercial
operations, resulting in higher headcount and related employee expenses of
approximately $14.3 million, professional and consulting services to support
public company readiness efforts of $2.1 million, and facilities and office
related expenses of $1.8 million due to increased space requirements in our
Pasadena, California and Long Beach, California facilities.
Research and Development Expense
R&D expense consists primarily of salaries and other personnel-related costs;
the cost of products, materials, and outside services used in our R&D
activities.
R&D expense increased $8.0 million, from $1.6 million for the three months ended
March 31, 2021 to $9.6 million for the three months ended March 31, 2022. The
increase was primarily due to headcount growth and related consulting services
associated with our efforts to ramp up and further develop our commercial-scale
offering.
Warrant Remeasurement
As part of the Business Combination, we assumed the outstanding public and
private warrants of Athena, which are accounted for at fair value based on the
closing share price of the Company's common stock. We incurred a $4.0 million
gain during the three months ended March 31, 2022 related to the change in
valuation on our warrant liabilities, compared to a loss of $0.3 million during
the three months ended March 31, 2021.
Liquidity and Capital Resources
Heliogen's principal source of liquidity has historically been proceeds from
private investors through the issuance of SAFE Instruments, preferred stock, and
common stock. Upon closing of the Business Combination with Athena completed in
December 2021, Heliogen received net cash proceeds of $159.4 million. In March
2022, Heliogen entered a series of commercial agreements with a customer for the
commercial-scale demonstration and deployment of Heliogen's AI-enabled
concentrated solar energy technology in California and the marketing of
Heliogen's technology in Australia, and is in the process of negotiating further
revenue contracts. These contracts will provide a significant source of cash for
the Company. Our principal uses of cash are for project-related expenditures,
selling, general and administrative expenses and R&D expenditures in support of
Heliogen's development of its technology and operational growth efforts. To
date, Heliogen has not had any material bank debt and has no material
outstanding debt on the balance sheet as of March 31, 2022. Total liquidity for
Heliogen, including cash and cash equivalents and available-for-sale
investments, totaled $191.9 million and $222.4 million as of March 31, 2022 and
December 31, 2021, respectively.
With the funds raised in connection with the Business Combination, we believe
that our existing liquidity should provide the ability to meet our contractual
obligations and continue our current R&D efforts and development of our first
commercial facilities and will be sufficient to meet our near-term cash
requirements. However, we could potentially use these available financial
resources sooner than expected due to delays in project execution or higher than
anticipated costs and, thus we may need to incur additional indebtedness or
issue additional equity to meet our operating needs. In the event that
additional financing is required from outside sources, we may not be able to
raise it on terms acceptable to us or at all. If we are unable to raise
additional capital or generate cash flows necessary to expand our operations and
invest in developing our new technologies, this could reduce our ability to
compete successfully and harm our business, growth and results of operations.
While we believe we will meet longer-term expected future cash requirements and
obligations through a combination of our existing cash and cash equivalent
balances, cash flow from operations, and issuances of equity securities or debt
offerings, our future capital requirements and the adequacy of available funds
will depend on many factors, including those disclosed in Part I, Item 1A in our
2021 Form 10-K/A for the year ended December 31, 2021.
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