# NUSCALE POWER Corp (SMR) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from NUSCALE POWER Corp's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1822966/000182296624000039/smr-20231231.htm Accession: 0001822966-24-000039 Filing date: 2024-03-15 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/SMR/ All MD&A years: /company/SMR/mda/ Previous year: /company/SMR/mda/fy2022/ (FY 2022) Next year: /company/SMR/mda/fy2024/ (FY 2024) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the financial condition and results of operations should be read together with our financial statements as of and for the years ended December 31, 2023 and 2022 together with related notes thereto. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 are not included in this report, and can 38 be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in NuScale Power Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the United States Securities and Exchange Commission (the “SEC”) on March 16, 2023. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those projected in these forward-looking statements as a result of various factors. Unless the context otherwise requires, references in this section to “NuScale,” “the Company,” “us,” “our” or “we” refer to NuScale Power, LLC (“NuScale LLC”) prior to the Transaction, and to NuScale Power Corporation (“NuScale Corp”) following the consummation of the Transaction. Overview Our mission is to provide scalable advanced nuclear technology to produce electricity, heat and clean water to improve the quality of life for people around the world. We are changing the power that changes the world by creating an energy source that is smarter, cleaner, safer and cost competitive. Our small modular reactor (“SMR”), known as NuScale Power Module (“NPM”), provides a scalable power plant solution incorporating enhanced safety, improved affordability and extended flexibility for diverse electrical and process heat applications. Our scalable design provides carbon-free energy at a reduced cost when compared with gigawatt-sized nuclear facilities. Since our founding in 2007, we have made significant progress towards commercializing the first SMR in the United States. In 2017, we submitted our Design Certification Application (“DCA”) to the U.S. Nuclear Regulatory Commission (“NRC”). On August 28, 2020, the NRC issued its Final Safety Evaluation Report, representing the NRC’s completion of its technical review. On September 11, 2020 the NRC issued its Standard Design Approval (“SDA”) of our NPM and scalable plant design. With this phase of NuScale’s DCA now complete, customers may proceed with plans to develop NuScale power plants with the understanding that the NRC has approved the safety aspects of the NPM and plant design. We expect our operating losses and negative operating cash flow to grow until the commercialization of the NPM. On January 19, 2023, the NRC published in the Federal Register a final rule that certifies NuScale’s SMR design for use in the United States, which became effective 30 days after publication. In January 2023, the Company submitted a SDA Application and the associated licensing topical reports to the NRC for a NuScale’s 6-unit 77 MWe NPM design. Once approved, customers in the United States will be able to reference the certified design and SDA for expedited construction and operating licensing of NuScale’s SMR pursuant to 10 CFR Part 52. On July 31, 2023, the NRC formally announced that it has accepted the Company’s SDA Application for formal review. Based on the NRC’s published schedule for SDA Application review, we expect the NRC will complete its review and SDA approval to be received by July 31, 2025. The Company currently has only one “Class 1” customer: RoPower Nuclear S.A. (“RoPower”), which is a joint venture established by S.N. Nuclearelectrica S.A. (“Nuclearelectrica”) and Nova Power & Gas S.A. In November 2023, we entered into the Release Agreement with CFPP LLC, the Company’s first customer, pursuant to which the Company agreed to terminate the DCRA, as amended, and our LLM Agreement. CFPP LLC was receiving funding for approximately 79% of its qualified project costs, including the long-lead materials, under a cooperative agreement with the DOE. Under the Release Agreement, we agreed to repay CFPP LLC’s Net Development Costs. Once we reimburse these costs and terminate the LLM Agreement, we are entitled to the long-lead materials (“LLM”) purchased under the LLM Agreement; however, because the Company is still in discussion with DOE regarding the means and timing for lifting a DOE lien on the long-lead materials (stemming from DOE’s funding under its cost share agreement with CFPP, LLC). We may have to pay costs to DOE (in addition to the refund to CFPP LLC) to obtain the long-lead materials free of DOE liens in order to use the long-lead materials for a project at the CFPP site or for another customer. Until the Company formalizes an agreement with DOE and CFPP, LLC regarding disposition of the long-lead materials, there is no guarantee we will be able to use such materials in another project. Merger with Spring Valley In December 2021, NuScale LLC entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Spring Valley Acquisition Corp. (“Spring Valley”) and Spring Valley Merger Sub, LLC (“Merger Sub”), a wholly owned subsidiary of Spring Valley. Pursuant to the Merger Agreement, Merger Sub merged with and into NuScale LLC (the “Merger”), with NuScale LLC surviving the Merger (the “Surviving Company”), Spring Valley being renamed NuScale Corp, and NuScale LLC continuing to be held as a wholly controlled subsidiary of NuScale Power Corporation in an “Up- 39 C” structure. On May 2, 2022, the transactions contemplated by the Merger Agreement, including the Merger (collectively the “Transaction”) were completed. The Transaction is shown as a reverse recapitalization under GAAP. Spring Valley is the acquired company, with NuScale LLC treated as the acquirer. This determination reflects Legacy NuScale Equityholders holding a majority of the voting power of NuScale Corp, NuScale LLC’s pre-merger operations being the majority post-merger operations of NuScale Corp and NuScale LLC’s management team retaining similar roles at NuScale Corp. Accordingly, although NuScale Corp (f/k/a Spring Valley) is the parent company, GAAP dictates that the financial statements of NuScale Corp represent a continuation of NuScale LLC’s operations, with the Transaction being treated as though NuScale LLC issued ownership interests for Spring Valley, accompanied by a recapitalization. The net assets of NuScale LLC are stated at historical cost, with no incremental goodwill or other intangible assets recorded for the effects of the Transaction. The consummation of the Transaction resulted in NuScale LLC receiving cash equal to $341.5 million and assuming Warrant liabilities valued at $47.5 million. Key Factors Affecting Our Prospects and Future Results We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including competition from carbon-based and other non-carbon-based energy generators, the risk of perceived safety issues and their consequences for our reputation and the other factors discussed under the section titled “Risk Factors.” We believe the factors described below are key to our success. Commencing and Expanding Commercial Launch Operations In September 2020, we became the first and only company to receive NRC SDA for a small modular reactor. We believe our commercialization activities are being completed at a pace that can support delivery of NPMs to a client site as early as 2029. In December 2022, we signed a contract for Front-End Engineering and Design (“FEED”) work with RoPower Nuclear S.A, owned by S.N. Nuclearelectrica S.A. and Nova Power & Gas S.A., entities that operate under the authority of the Romanian Ministry of Energy, to advance the deployment of our NPMs to Romania. Under Phase 1 of the contract, we will define the major site and specific inputs for a VOYGR-6 SMR power plant to be deployed at the Doicesti Power Station site in Romania. We expect the site in Romania to use six modules and to be commercially operable as early as 2029- 2030. We have over 100 potential target customers in addition to RoPower, as well as ten potential customers across seven countries that we consider highly interested customers who are considering an NPM power plant deployment in the late 2020s or early 2030s. We believe the long lead-time involved with siting an SMR, the number of customers in our pipeline and the work being performed by these potential customers involving a NuScale deployment project bode well for our potential future success. Further, in December 2022, we completed our Standard Plant Design (“SPD”), which provides potential customers with a generic VOYGR power plant design that will serve as a starting point for deploying site-specific designs, including supporting client licensing and deployment activities. Regulatory Approvals In January 2023, the Company submitted a Standard Design Approval (SDA) Application and the associated licensing topical reports to the NRC for a NuScale’s 6-unit 77 MWe NPM design. Once approved, customers in the United States will be able to reference the certified design and SDA for expedited construction and operating licensing of NuScale’s SMR pursuant to 10 CFR Part 52. On July 31, 2023, the NRC formally announced that it has accepted the Company’s SDA Application for review. Based on the NRC’s published schedule for SDA Application review, we expect the NRC will complete its review and SDA approval to be received by July 31, 2025. Other factors that we believe are critical to our future success are country-level approvals of our NPM design. We also believe site-approvals by our customers to be key to facilitating broader adoption of our products and services. Obtaining these approvals before others is critical in maintaining our competitive advantage. Key Components of Results of Operations We are an early-stage company and our historical results may not be indicative of our future results. Accordingly, the drivers of our future financial results, as well as the components of such results, may not be comparable to our historical or future results of operations. 40 Revenue We have not generated any material revenue to date. All revenue that we have generated to date arises from engineering and licensing services provided to potential customers, including those as a result of those FEED services. We expect to generate a significant portion of our revenue from the sale of NPMs. We also expect to generate revenue by providing critical services, such as start-up and testing and nuclear fuel and refueling services, over the life cycle of each power plant. Expenses Research and Development Expense Our research and development (“R&D”) expenses consist primarily of internal and external expenses incurred in connection with our R&D activities. These expenses include labor directly performed on our projects and fees paid to third parties working on and testing specific aspects of our NPM design. R&D costs have been expensed as incurred. General and Administrative Expenses G&A expenses consist of compensation costs for personnel in executive, finance, accounting, human resources and other administrative functions. G&A expenses also include legal fees, professional fees paid for accounting, auditing, consulting services, insurance costs and facility costs. Other Expense Other operating expenses consist primarily of compensation costs (including indirect benefits and equity-based compensation expense) for operating personnel. Sponsored Cost Share As our commercialization activities advance, we have continued to enter into cost share agreements with various entities, including both governmental and private, under which the Company is reimbursed for specific R&D activities. Generally, as our qualifying operating costs change, there is a corresponding change in the reimbursable amounts. The amount of any reimbursement is recognized in the period that we recognize the qualifying expenses. Income Tax Effects NuScale LLC was historically and remains a partnership for U.S. federal income tax purposes with each partner being separately taxed on its share of taxable income or loss. NuScale Corp is subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to its distributive share of any net taxable income or loss and any related tax credits of NuScale LLC. 41 Results of Operations [[GREPCENT_TABLE]] [["(in thousands)","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Revenue","","22,810","","","$","11,804","","","$","2,862"],["Cost of sales","","(18,961)","","","(7,317)","","","(1,770)"],["Gross margin","","3,849","","","4,487","","","1,092"],["Research and development expenses","","156,050","","","127,662","","","94,388"],["General and administrative expenses","","65,404","","","55,307","","","38,725"],["Other expenses","","57,960","","","51,513","","","42,279"],["Loss from operations","","(275,565)","","","(229,995)","","","(174,300)"],["Sponsored cost share","","61,031","","","72,514","","","73,522"],["Change in fair value of warrant liabilities","","23,627","","","12,148","","","\u2014"],["Interest income (expense)","","10,792","","","3,760","","","(1,715)"],["Loss before income taxes","","(180,115)","","","$","(141,573)","","","$","(102,493)"]] [[/GREPCENT_TABLE]] Comparison of the Years Ended December 31, 2023 and 2022 Changes in Presentation For the year ended December 31, 2022, sponsored cost share totaling $177 that was previously included in Interest income (expense) has been reclassified to Sponsored cost share to conform to the current year presentation on the accompanying consolidated statements of operations. No such reclassifications were required for the other years. For the year ended December 31, 2022, amounts totaling $4,246 and $3,504 were reclassified out of G&A expenses and into R&D expenses and Other expenses, respectively, while for the year ended December 31, 2021, amounts totaling $1,252 and $5,249, respectively, were reclassified out of G&A expenses and into R&D expenses and Other expenses, to conform to the current year presentation. Revenue The increase in revenue was attributable to activities in support of the Engineering, Procurement and Construction Development Agreement for CFPP, as well as nuclear technologies consulting services. R&D Expense R&D expenses increased due to the Release Agreement with CFPP in the amount of $49.8 million, partially offset by lower compensation costs of $8.7 million as we transition from R&D to commercialization activities, as well as lower professional fees. G&A Expenses G&A expenses increased as a result of $4.3 million in compensation costs due to an increase in headcount and $7.3 million in marketing and advertising costs as we continue to build brand recognition across the globe, partially offset by lower professional fees. Other Expense Other expenses increased as a result of higher equity-based compensation of $4.1 million and higher software license expenses of $2.8 million, partially offset by lower compensation costs. Sponsored Cost Share 42 Sponsored cost share decreased due to a lower share percentage and funding from the DOE, partially offset by increases in United States Trade and Development Agency and subrecipient cost share for other projects. Change in fair value of warrant liabilities The price of the Warrants, which is used to calculate their fair value, has decreased year-over year resulting in larger income in the current period. Liquidity and Capital Resources Liquidity On August 9, 2023, NuScale entered into a Sales Agreement with Cowen and Company, LLC, B. Riley Securities, Inc. and Canaccord Genuity LLC as sales agents under which the Company may offer and sell shares of the Company’s Class A common stock, having an aggregate sales price of up to $150.0 million from time to time through the sales agents (“ATM Program”). During the year ended December 31, 2023, the Company issued and sold 1,737,378 shares of Class A common stock at a weighted average price of $5.96 per share, generating gross and net proceeds of $10.4 million and $9.8 million, respectively. The aggregate compensation paid to the sales agent in connection with the sales was $0.3 million during the year ended December 31, 2023. As of December 31, 2023, we have 18,262,622 shares authorized and available under the ATM program at an aggregate sales price of up to $139.6 million of Class A common stock remained eligible for sale under the ATM Program. Since NuScale’s inception, we have incurred significant operating losses and have an accumulated deficit of $240.5 million, with negative operating cash flows. As of December 31, 2023, we had cash and cash equivalents of $120.3 million and restricted cash of $5.1 million with no debt, while using 183.3 million of cash in operations. Historically, our primary sources of cash included investment capital, DOE and other government sponsored cost share agreements to support the advancement of the Company’s SMR technology both domestically and abroad. As we transition from a focus on research and development to commercialization of our technology, the Company is focusing on revenue producing commercial contracts. These factors combined with the execution of the Release Agreement with CFPP LLC have impacted our cash flow from operations during the year ended December 31, 2023 and on our forecasted cash flow from operations during the 2024 fiscal year. In January 2024, management implemented cost reduction measures which included a workforce reduction of 154 full-time employees. Management is currently in active negotiations with potential customers to secure revenue producing contracts. Should the execution of customer contracts or capital raising activities be delayed, management plans to implement a phased cost reduction program within our control to reduce cash outflows, as needed, during the next twelve months. As a result of these plans, we believe we will have sufficient funds available to cover required R&D activities and operating cash needs for the next twelve months. Comparison of Cash Flows for the Years Ended December 31, 2023 and 2022 The following table sets forth the primary sources and uses of cash and cash equivalents for the periods presented below: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["(in thousands)","2023","","2022","","2021"],["Net cash used in operating activities","$","(183,254)","","","$","(148,609)","","","(99,162)"],["Net cash provided by (used in) investing activities","48,275","","","(52,332)","","","(1,952)"],["Net cash provided by financing activities","16,127","","","368,064","","","173,344"],["Net change in cash, cash equivalents and restricted cash","$","(118,852)","","","$","167,123","","","$","72,230"]] [[/GREPCENT_TABLE]] Cash Flows used in Operating Activities Net cash used in our operating activities increased during year ended December 31, 2023 due to the Release Agreement payment to CFPP LLC in the amount of $49.8 million, partially offset by a buildup of our accounts payables and accruals associated with the manufacture of our long-lead materials. 43 Cash Flows used in Investing Activities Investing cash flows generally reflect capital expenditures on computer equipment and software. However, in 2022, we invested $50 million in short-term investments, while in 2023, we sold those short-term investments. Cash Flows provided by Financing Activities During 2023, our cash provided by financing activities consisted of proceeds from our ATM sales and the exercise of options, while in 2022 the majority of the cash consisted of proceeds from the Transaction, with another $28.7 million received for the exercise of warrants and options. Commitments and Contractual Obligations We do not have any material commitments and contractual obligations. Off-Balance Sheet Arrangements Under the Release Agreement, the Company is required to have credit support to fund the amount of its potential reimbursement of demobilization and wind down costs with CFPP LLC. This account is identified as restricted cash in the amount of $5.1 million, on the accompanying consolidated balance sheet and acts as collateral for the $5.0 million letter of credit outstanding at December 31, 2023. Critical Accounting Policies and Estimates Our financial statements have been prepared in accordance with GAAP. Preparation of the financial statements requires our management to make a number of judgments, estimates and assumptions relating to the reported amount of expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on our financial statements. Our significant accounting policies are described in Note 3 within our “Notes to the Consolidated Financial Statements”. Additional information about our critical accounting policies follows: Revenue Recognition In addition to advancing the commercialization of our SMR, we provide engineering services to customers. We recognize fixed price contract revenue with multiple performance obligations as each obligation is completed. We allocate the transaction price to each performance obligation using an estimate of the stand-alone selling price of each distinct service in the contract. Revenue recognized on contracts that has not been billed to customers is classified as a current asset under accounts and other receivables on the consolidated balance sheet. Amounts billed to clients in excess of revenue recognized are classified as a current liability under deferred revenue on the consolidated balance sheet. We recognize time and material contract revenue as incurred, while our cost plus fixed-fee contract revenue is recognized over time, matching continuous transfer of control to the customer. The Company accounts for these contracts as a single performance obligation and recognizes revenue using the percentage-of-completion (“POC”) method, based primarily on contract cost incurred to date compared to total estimated contract cost. The POC method (an input method) is the most faithful depiction of the Company’s performance because it directly measures the value of the services transferred to the customer. Changes to total estimated contract cost or losses, if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client. Revenue recognition and profit is dependent upon a number of factors, including the accuracy of a variety of estimates made at the balance sheet date, such as engineering progress, material quantities, the achievement of milestones, penalty provisions, labor productivity and cost estimates. Variable consideration is included in the estimate of transaction price only to the extent that a significant reversal would not be probable. We continuously monitor factors that may affect the quality of our estimates, and material changes in estimates are disclosed accordingly. We exclude all taxes assessed by governmental authorities from our measurement of transaction prices that are both 44 (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Accordingly, such tax amounts are not included as a component of revenue or cost of sales. We generally provide limited warranties for work performed under our engineering contracts. The warranty periods typically extend for a limited duration following substantial completion of our work. Emerging Growth Company Accounting Election Section 102(b)(1) of the JOBS Act exempts EGCs from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect not to take advantage of the extended transition period and comply with the requirements that apply to non-EGCs, and any such election to not take advantage of the extended transition period is irrevocable. We expect to be an EGC at least through the end of 2024 and will have the benefit of the extended transition period. We intend to take advantage of the benefits of this extended transition period. Recent Accounting Pronouncements Refer to Note 3 in the consolidated financial statements for a summary of recently adopted and recently issued accounting standards and their related effects or anticipated effects on our consolidated results of operations and financial condition.