Tecogen Inc

Greetings. Welcome to the TECO Gen Year End 2023 Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to Jack Whiting, General Counsel and Secretary. Thank you. You may begin.

Good morning. This is Jack Whiting, General Counsel and Secretary of TecaGen. This call is being recorded and will be archived on our website at tecagen.com. The press release regarding our fourth quarter and year-end 2023 earnings and the presentation provided this morning are available in the Investors section of our website. I'd like to direct your attention to our safe harbor statement included in our earnings press release and presentation. Various remarks that we make about the company's expectations, plans, and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by forward-looking statements as a result of various factors, including those discussed in the company's most recent annual and quarterly reports on Forms 10-K and 10-Q under the caption Risk Factors, filed with the Securities Exchange Commission and Available Investors section of our website under the heading SEC Violence. While we may elect to update forward-looking statements, we specifically disclaim any obligation to do so, so we should not rely on any forward-looking statements as representing our views as of any future date. During this call, we will refer to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is provided in the press release regarding our fourth quarter and year-end 2023 earnings and on our website. I will now turn the call over to Abhinav Rangesh, TKGN's CEO, who will provide an overview of fourth quarter and year-end 2023 activity and results, and Roger Deschenes, TKGN's CAO, who will provide additional information regarding fourth quarter and year-end financial results.

Thank you, Jack. Welcome to TKGN's fiscal year 2023 earnings call. I'd like to start by giving investors an update on changes to the business landscape and market, what has worked with our strategy, and what we need to do differently to reach profitability. As we've mentioned before, we need to move factory at the end of Q1 and early Q2. I will also talk briefly about this and how this will affect operations. Roger will then take us through the financial numbers and then I will wrap up with our 2024 plan. As many of our long-term shareholders know, One of the predominant markets has been large multifamily residential buildings in New York City. These projects typically have one or two unit cogeneration systems per building. We are facing significant headwinds in this market. We have seen multiple projects canceled after contractor selection over the last six months. However, we also have a big opportunity ahead of us that can give us significant tailwind. Increased electrification efforts, data centers consuming exponentially more power, and aging utility infrastructure leading to electrical capacity constraints nationwide. It is limiting customers' ability to expand, the time of day charges are becoming punitive, and there are only a few options that allow customers to address the problem. As a result, we are seeing more multiple unit cogeneration and chiller projects than ever before. In the case of our chillers, the customer completely avoids the need to connect to the utility grid. In the case of our electrical cogeneration product, the ease of interconnect with our modular inverter-based system is a huge benefit. These electrical capacity constraints are nationwide, so I believe we are just starting to see the beginning of this trend. There's also an opportunity to generate additional revenue from utility demand response programs because of these electrical capacity constraints. I'll talk a bit more about this later in the presentation. We've looked at the business carefully and feel that there is a pathway to having our recurring revenue stream cover the majority of our fixed costs. Product revenue can significantly fluctuate quarter to quarter due to the long project development cycles. We need a way to be cash flow positive and profitable irrespective of product revenue fluctuations. We increased the number of service contracts last year. As a result, we saw a 20% increase year on year in service revenue. We also took on another 48 service contracts earlier this year, 16 of those that are operating presently in the balance coming online over the next two quarters. We're currently working on more deals for service contracts that will significantly increase our service revenue and cash flow. We also made much needed investments last year to replace engines and heat exchangers. This reduced our service margin for the first three quarters, but we saw our recovery to greater than 50% in Q4. We also generated some cash in the fourth quarter. As we make further improvements to our service fleet by increasing service intervals, we expect to see margin expansion from present levels. On the other side of the equation, we need to cut operating costs. At present, we are focused on completing our factory move. We expect to see reduced rent after the move. We also expect to make other operational cost reductions to move us closer to profitability. We are specified on multiple large projects. As mentioned before, we've had to pivot the business to nationwide projects, especially those that have electrical constraints. These are multi-unit projects, and we expect to close a significant portion of these later in the year. As already mentioned, we need to move factory and reduce operating expenses. We expect OPEX reductions in Q2 and Q3. We have also started to work with customers to sign them up for demand response programs. At the moment, there appears to be significant interest in this offering. This will provide high margin revenue and utilize any excess cogeneration capacity that is available in our service suite. I will provide updates as we sign up customers. We are also working on securing more energy contracts in conjunction with development and finance partners. Backlog and cash. The backlog is presently at $5.25 million. We have additional purchase orders from orders we announced last August, but these are cannabis projects and there has been continued financing delays, so we have removed these from our backlog. As mentioned, we also have some great projects in the pipeline, one of which is a large chiller project we are exclusively specified for. This is not yet in the backlog. We hope to close this by June or July. The cash position was $1.35 million at the end of Q4 and is presently at $1.5 million. We drew $500,000 into the credit line provided by the board members. We expect to draw another $500,000 into this line for the factory move and fit-out. The timing of when we secured our recent 12-unit order and when our larger chiller order is likely to close is going to limit what we can produce in both Q1 and Q2, but we expect to be back to full capacity by Q3. Our revenue segments. We have three revenue segments. Our product revenue consists of sales of cogeneration units, microgrid systems, and chillers to a range of markets and customers. Our services revenue primarily consists of our contracted operations and maintenance services. Our energy production revenue stream is from energy sales, including sales of electricity and thermal energy produced by our equipment onsite at customer facilities. I'll now hand over to Roger to go over the financial numbers.

Thank you, Amidon. Good morning, everybody. I'll begin with a review of the fourth quarter results. Our total revenues for the fourth quarter were $5.9 million, which compares to $4.5 million in the fourth quarter of 2022. This represents an increase of 30%, which is due primarily to increased products and services revenues. Our net loss for the fourth quarter of 2023 was $1.9 million or $0.07 a share compared to $1.4 million or $0.06 a share in the fourth quarter of 2022. The increased net loss is primarily due to $1.1 million in provisions recognized in the current period for bad debt from old installation receivables and for obsolete inventory. Both our products and services gross profit margin were impacted by the $403,000 obsolete inventory provision, which reduced our overall Q4 2023 margin by 6.8%. Excluding the charge that was recorded, our overall Q4 2023 gross margin would have been 46.7%. We'll discuss margin in more detail in the segment review. Operating expenses increased 10.2% to $4.2 million in the fourth quarter of 2023 from $3.8 million in the fourth quarter of 2022, due primarily to the higher bad debt provision of $744,000 that was recorded on older install receivables from the NYSERDA rebate program, which we determined that we would not achieve the milestones within the program termination date due to customer-induced delays. We are, however, continuing to pursue recovery of these rebates and will seek an extension of time with NYSERDA to complete the milestones. Excluding this bad debt provision that we booked in the fourth quarter, our operating expenses would have actually decreased 9.4%. Moving over to the full year 2023 results. Our full year 2023 revenue was $25.1 million. which is flat when you compare it to the 2022 results. The fiscal 2023 net loss was $4.6 million or $0.19 a share, which compares to a net loss of $2.4 million or $0.14 a share in the fiscal year 2022. The increase in the net loss is due to the lower gross margin and the increased provision for bad debt. Our overall gross margin in fiscal 2023 was 40.6%, a decrease of 3.7% from the fiscal year 2022 gross margin, which stood at 44.3%. The current year gross margin was negatively impacted by the increased material and labor costs incurred to address engine replacements and for the obsolete inventory provision that was recorded. Excluding the obsolete inventory charge, our 2023 overall gross margin would have been 42.2%. Operating expenses increased 1.2 million or 8.9% to 14.6 million in fiscal year 2023 from 13.4 million in 2022. This is due primarily to a $974,000 increase in the bad debt provision which is resulting from a combination of the increased $744,000 bad debt provision that we recorded in the current year on the installed receivables. And you may recall that in 2022, we had a $300,000 bad debt recovery, which reduced our bad debt expense for that period. Further, in 2023, we saw an increase in administration costs due to the maintenance contract acquisition which impacted insurance and vehicle expenses. Moving on to the EBITDA and adjusted EBITDA. For the fourth quarter, the EBITDA loss was 1.7 million and the adjusted EBITDA loss was 527,000, which compares to an EBITDA loss of 1.3 million and an adjusted EBITDA loss of 1.1 million in the fourth quarter of 2022. As previously discussed, Q4 2023 results were negatively impacted by the installation, bad debt, and obsolete inventory provisions that were reported in this period. For the full year EBITDA, our EBITDA loss was $4 million and the adjusted EBITDA loss was $2.6 million, which compares to an EBITDA loss of $2 million and an adjusted EBITDA loss of $1.7 million in FY2022. The higher loss in the current year was driven by lower gross profit margins due to the engine replacement and the one-time charges that we've recorded against earnings. Appreciation and amortization expense increased in 2023 due to the addition of several vehicles and the amortization of the customer contract intangible asset recognized as a part of the AGIS acquisition. Fiscal 2023 depreciation and amortization expense increased 139,000 from the 2022 levels. Moving to the segment performance for the fourth quarter, our products revenue increased 77 percent quarter over quarter, and we saw increases in both our cogeneration and chiller products. Our products gross margin decreased to 19.4 percent from 32.1 percent in the fourth quarter, and this is due to the obsolete inventory provision that we recorded. Excluding the provision, our product's gross margin would have been 37.5%. Services revenue increased 19% quarter over quarter due to the acquired maintenance contracts. Services gross profit decreased to 51.3% in the fourth quarter from 60.1% in the fourth quarter of 2022. And this is due primarily to the obsolete inventory provision and the higher material labor costs. Excluding the inventory provision, our services gross margin in the fourth quarter of 2023 would have been 53.6%, which is more in line with our expectations. Moving to the segment performance for the full year. Product revenue decreased 21% year over year. The chiller revenue remained constant while the cogeneration revenue decreased due to decreased demand. And as Abhinav noted in an earlier observation, the cogeneration market is being impacted by the anti-gas sentiment. The product mix continues to vary year to year, but we expect to see demand for both cogeneration and chiller products going forward to improve. Our products gross margin decreased slightly to 33.1% in fiscal 2023, which compares to 33.5% in fiscal year 2022. Excluding the inventory provision recorded in 2023, our products gross margin would have been 36.7%, which is a slight improvement over the prior year. Our services revenue decreased I'm sorry, services revenue increased 20.4% year-over-year, which is due to the acquired maintenance contract. And we also saw a 4.8% increase in existing contract revenue. For the full year 2023, gross margin decreased to 45.5% compared to 54.2% in 2022. And this is due to increased services, labor, and material costs encouraged to address the engine replacement and due also to the provision that was recorded for obsolete inventory. I'll now hand over the call to Abidjan to review our 2024 plan.

Thank you, Roger. We have three phases to putting TECAGEN on a pathway to financial health. The first is existing operations. Over the last year, we have increased our service revenue by assuming service contracts. We have also been working on establishing new sales channel relationships. When we look closely at our sales process, we discovered that most of our sales were made by convincing building owners about the efficiency benefits of our system. Traditionally, in HVAC industries, manufacturers' reps sell to engineers who then specify equipment into projects. However, in our case, we need to ally ourselves with project developers in key markets, such as indoor agriculture, that can make the economic benefit argument directly to building owners. Over the last year, we established relationships with some key project developers, some of whom are already selling complementary technologies, such as modular chiller plants. We are in the middle of pivoting from being dependent on the New York City multifamily market to a broader nationwide market. So far, this has increased the size of our sales pipeline and we're being specified on multiple larger projects. The second phase is to position us to take advantage of utility capacity constraints. As more renewable energy is added to the utility grid, Many electrical utilities struggle to provide sufficient power during peak times. The added cost to upgrade electrical distribution systems in many cases is prohibitive, so utilities provide lucrative payments for curtailing power during peak times. Using our established service relationships, we plan to take excess capacity from our cogeneration systems and enroll this into the utility demand response programs. To help us do this, we recently launched a self-learning intelligence system to control our cogeneration and chiller fleet. This has some wide-ranging capabilities that I'll talk about shortly. The last phase is to use financing as a strategic tool to increase incremental sales using cooling as a service. If customers are able to upgrade their chiller plant using the savings from our product and ongoing maintenance is included, I believe this will act as a catalyst for growth. As I mentioned earlier, we recently launched our self-learning intelligent control for cogeneration and chiller systems. This does three critical things. The first is that it learns a building's seasonal load profile so it maximizes run hours of equipment and also reduces the amount of energy that customers need to buy from the utility. So you can see by the chart on the left, you can see that the amount of power being bought from the utility is being minimized and the majority of the power in the building is coming from the CHP system. By increasing run hours, it helps the customer increase savings and increases our service revenue. The second is that it allows us to enroll systems into utility demand response programs. When utilities are short of power, we can ramp up hundreds of machines simultaneously to behave like a virtual power plant and be paid by the utility. The last primarily applies in the case of our hybrid chiller. We can arbitrage operating in electric versus gas, depending on time of day, to optimize savings and greenhouse gas emissions. I'd now like to talk a little bit about cooling as a service. Chillers and boilers have a finite life, so buildings have to replace boilers and chillers periodically. Given that this is a large capital expense, in many cases, customers choose lower first cost alternatives and suffer the penalty of higher operating costs and higher greenhouse gas footprint. In this model, the customer uses the energy savings from our equipment to pay for the capital recovery of the upgrade. Maintenance can also be included as part of the monthly payment so the customer has a convenient way to own and operate a chiller plant. We are working with financing partners presently to secure projects under this model. As projects are signed, I will keep investors updated. We expect this model to convert more of our pipeline where first cost acts as a barrier to sales. I'd like to summarize to say that we are continuing to increase our recurring revenue stream. This is critical to reaching profitability. We are going to make operating cost reductions over the next two quarters. We are specified on multiple larger projects, so we expect to see product revenue rise in the second half of the year. As some of these other developments come to fruition, I will keep investors updated via press releases or, if needed, a follow-on earning calls. At this point, I'll open the floor to any questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Alexander Blanton with Clear Harbor Asset Management. Please proceed with your question.

Good morning.

Good morning, Alex.

My first question is, you mentioned at the beginning of the call, headwinds in New York City and cancellations of contracts. What is the reason for that?

So I believe a large portion of that is driven by New York City becoming very, very anti-gas. And in particular, some of the city housing agencies becoming very anti-gas. We used to see a combination of projects both from co-op and condos directly, as well as a lot of low-income housing projects, which were specified by engineers, but then the projects were then funded by New York City HUD. And right now, cogeneration is no longer seen by the city as a viable way to reduce greenhouse gas emissions, despite the fact that there are significant greenhouse gas emissions. And as a result, you know, those cogeneration sections are being canceled from projects that were developed and actually had, in some cases, had gone out to bid. Contractors had been selected.

Well, given that you can reduce the greenhouse gas emissions substantially or almost completely, is New York City anti-science? What is the reason that they're doing this?

Yeah. So this is something that it's hard to tell, but I think what is happening in the background is we are working with other CHP lobbying groups to make this case. I believe there will be exemptions made, especially under Local Law 97 for cogeneration products because right now there really isn't that many alternatives and we're seeing huge increases in cost of power in New York City. this sentiment may shift, but at this point, unfortunately, we are seeing projects getting canceled as a result. I mean, that was, we had a lot of these in our pipeline. They were well along the way, and some of these got canceled right at the, you know, Q3, end of Q3, early Q4.

The cancellations driven by local political considerations, the city government ordered the the buildings to cancel the contract?

So it is being driven in some cases by the local political considerations by New York City. Because these projects, a lot of these were paid, the funding comes from the city itself. So they are essentially pulling the plug on any funding for cogeneration built into building redevelopments and improvements.

Are there city regulations established to prohibit the use of gas for this purpose? At this point... Or is it just the funding?

It's really, in this case... So there is some regulation with regards to prohibiting gas in city buildings. There's multiple different...

City buildings or privately owned?

So there's two pieces that New York City has passed with the local law. One is for city buildings, there's an earlier date in which any renovation cannot include an addition, I think, of new gas. And then for non-city buildings, again, a renovation over a certain size limits what you can do with gas. So there's more to it than that, but this is really driven by the funding itself.

Okay. Well, we can talk more offline about that. You're moving the factory to where? Has there been an announcement of this by the company?

Yes. So we did include it both last year in our 10, like all our 10Ks, I have mentioned it in previous calls. We are moving just 20 minutes up the road to Billerica. Our lease in our current facility is expiring the end of March. The new location is better set up for our operations. The factory is better laid out. allows us to do better chiller production, and will allow us to reduce our rent.

Okay, fine. And finally, the adjusted EPS without these charges for the fourth quarter, what was it? What would it be?

I'd have to get back to you on that one, Alex, right off the top of my head. I don't know. But hang on, I can probably do it because on the adjusted EBIT, that was $505,000.

Right. I was looking for EPS. Okay, thank you.

Yeah. Yeah. If you do it, yeah, yeah. It's going to be around $0.03.

Okay, thank you. $0.03 loss, you mean?

Yeah, $0.03 loss, yeah.

Okay, thank you.

Correct. Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Michael Zuk. Please proceed with your questions.

Good morning, everybody. A couple of technical questions, I guess, to our chief financial officer. I noticed that we had a state tax liability that virtually doubled in 2023. We didn't earn any money. How come state taxes are doubling?

Yeah, that has to do with the state of New York. And it's really a franchise-based tax. So it's not so much based on your profitability, but it's based on your asset base in the state. And they actually raised the rate significantly in 2023.

Well, it seems like it's an impediment to do business in New York.

What can I say?

Also, on the balance sheet under the liabilities section, there's a current acquisition liability of $845,000 and an unfavorable contract liability of the current year of $176,000. Are those amounts payable this year? Is that a cash item?

For the speaker line, could you please check if you self-muted yourself?

Oh. Hello, can you hear me now? Hello?

We can hear you, Michael. I just can't hear the speaker line right now. Are you self-muted?

I shouldn't be. And I'm not on speakerphone.

Michael, can you hear me?

I can hear you. Can you hear me?

Yes, I can hear you. I think we're good. Okay. Can you hear me now? This is Roger, Michael.

Right. We are good.

Okay.

On the liabilities and stockholder equity line, there's an acquisition liability current and an unfavorable contract liability current. Are those cash items due this year?

Okay. So the first one, the acquisition liability current, Mike, that has to do with, as I was mentioning, when we acquired the Aegis contracts, we reviewed the fleet of engines and noted that there were some delays and actually some engines that weren't operating. So under the accounting rules, we're permitted to record a liability as of the date of acquisition. So in some cases, in terms of the cash flow on that, You know, there will be some money spent this year, you know, for those, to replace some of those engines. It won't, it's not 845,000. It's probably more in the line of about $250,000. And then the unfavorable contract liability, that has to do with the acquisition of, or the merger with ADG back in 2017. And at that time, you know, a calculation was done, you're looking at the contracts and it was a termination that the expected profit from the contract wasn't up to what we had expected it to be. So again, under the purchase accounting rules, you're permitted to record a liability at that time. This liability, Michael, is really just a It's a non-cash benefit, actually, because we debit the liability. We credit our amortization expense. So there's no cash being issued to relieve that liability.

And so then under the long-term liabilities, there's the same entry, except it's much larger numbers. Are those amortized over a period of years, or how does that work?

Okay, so then the other aspect of the acquisition liabilities I didn't discuss also has to do with we recorded a contingent liability. So the payment for the AGIS acquisition is being paid over a period of seven years, and it's based on revenue times a percentage. depending upon whatever revenue levels are achieved. So at the time of acquisition, we record the anticipated color royalty that will be paid over seven years using a discounted cash flow model and record what we anticipate to pay in one year's time as a current liability and then anything past the one year to the seven year period we record that as a long-term liability. So the acquisition liabilities over time will be paid in cash. And the unfavorable contract liabilities, again, are just a non-cash, you know, the liability will be reduced in a non-cash method.

Mike, just so you're aware, the percentage that we pay ages on the revenue is between, it starts at like 5%, and then at the seven year point, it goes up to 10% of revenue. But we are escalating the contracts every year, and therefore the margin coming from those contracts should not decrease. What you're really doing is just paying for the acquisition as a percentage. It's basically a commission, right? That's all you're doing.

Okay. And then, There's a couple of other, I think, interesting items. It shows that we have an unrealized loss on investment securities. What investment securities do we have, and how come they're at a loss?

This was the Eurosite shares that Decogen has owned for many years, so we have to mark the market. So we have 1.8 million shares of Eurosite power, and it fluctuates and we have to mark the market.

The bottom line is why do we still own it? It seems like it's a drag on us.

I think this is one where we will at some point sell it. It's a pretty tricky one the way it's held right now. Some of those shares need to be registered and then sold. We will sell it at some point. It just hasn't, at this point, the business really has to focus on getting our cash flow in order, getting this move done, getting ourselves, getting our costs under control first. And then I think we'll start optimizing these other aspects, but I feel like these are, like the business has to stay very, very focused on getting these items resolved first.

And then with regard to the inventory write-down, How did we get saddled, if you will, with quote-unquote obsolete inventory? Are they parts? Are they engines? What are they?

Yeah, so there's a few different things over there. There's a portion of it that comes from some of our chillers that we were servicing until recently, but they were chillers from the 1980s that had you know, our large 1,000-ton chillers from years and years ago. So those chillers finally have been replaced, so we don't need those parts anymore. And then there's certain components that were related to, you know, ILEOS and those aspects. Again, we have not sold anything in that range for a while. And then there's a few different pieces. Again, we look back four years to see what parts have been used because, of course, the service business We support products for many, many years, so we sometimes do have components that have very low turnover, but at the same time are still being used. But in some cases, when we look back, we just find things that are not being used, and that's really what it was. And honestly, we felt like this is something, at some point, did not have a value to the business anymore. and we weren't going to be able to convert this into cash to anything reasonable, so we chose to take the write-off at this point.

And then with regard to the bad debt provision, is there any process by which we can attempt to recover some of the bad debt? I mean, can we just go out and pick up the chillers or whatever the units are and refurbish them and sell them to somebody else?

So in this case, they were really NYSERDA rebates that the company had discounted the value of the project by the rebate amount. And it required the customer to do certain things. And the customer did not do those certain things. And unfortunately, it means that the rebate becomes at risk. In some cases, the customer actually even removed the units. So we are going to take, we're going to use legal means to take collection efforts, and I believe we'll recover a portion of this money. Again, the amount that will be recovered, it's uncertain. The cost to recover it, there's going to be a portion associated with that, so again, we can keep, we can say that we can leave it on our books, but again, it didn't at this point seem like it was getting harder and very unlikely to collect these portions, so we chose again to write it off at this point and but we are going to continue collection efforts to collect as much of that money as we can.

And when you say these were rebate items, does that mean that units were installed and then some governmental entity was going to give a rebate to the end user and the end user didn't give the rebate back to us? Is that the way it works?

So in this case, TECOGEN was actually discounting the value of the project by that anticipated end

um rebate amount so these projects go back yeah um yeah and hence in the future we shouldn't we shouldn't do that i mean get the rebate uh get the full up front price and then uh if the rebate comes you can negotiate accordingly i totally agree with you on that one and and then uh Finally, you said that we are now emphasizing a, we're looking at a national market rather than local geographic markets. And when you say we're looking at a national market, what exactly does that mean? Are we having distributors or are we talking to engineering firms? What are we doing to widen our national market effort?

So there's a couple of things we've done. We've really gone into this more by looking at market segments first, because there are certain segments that we have an advantage on, right? So there are, as you already know, we have a pretty significant advantage on indoor agriculture. We have, we believe, a significant advantage in things like certain types of process cooling. We also have an advantage wherever a customer is doing cooling and dehumidification. So there's a few different things we're doing. One is that we are actually attending trade shows really targeted at these segments. We are also working with some project developers that really specialize in these segments. They have relationships with end users, they have relationships with process facilities We're also working with gas companies where we can in places like Florida where, again, it's a relatively gas friendly market to identify customers that could potentially switch to a gas cooling or a cogeneration technology. We are also looking, like making advertising in, again, these kind of process type application magazines, specialist trade publications, writing articles to educate customers. We're, lastly, in the process of updating our website to also make it much more market-driven so that we get customers looking for, let's say, a chiller for a brewery. If they are searching for that on the internet, it will be one of the websites that show up. We're working on all of that. The way to go after that market really is by market segment, and then, of course, we We do work with engineers. We do a lot of lunch and learns. We try and educate them on the benefits of our technologies, especially some of the engineering firms that operate in multiple states. We try to get to as many of the regional offices as we can because, again, we believe that there's going to be customers, especially the ones that have power constraint issues, that we need to get in front of them because those ones don't really have that many choices. But some of that also comes from these market segments, but the broader areas it is coming from some of the engineering community and some of the consultants that work in this space.

And then a personnel question. Do we have engineers that specialize like in cooling? Do we have engineers that perhaps specialize in indoor agriculture? Or do we have engineers that specialize in the code generation area? Or do we have generalists that apply their knowledge across those different segments?

So we do have, there's a little bit of overlap on the two, you know, on the engineering team. We, there's some, there's a couple of our team there, especially on the sales team that have a more in-depth knowledge on certain markets versus others. Our key sales team have sold both code generation and chillers. They're still worse than that, but there's definitely some market specialization on a couple of the members there. And then again, we also work with some of the project developers to really understand what their needs are. And as we do that, we also improve our knowledge of what it takes to support that market.

And then with regard to sales efforts on servicing, are we making an effort to apply servicing perhaps to areas where we haven't installed our own units? Can we service other people's units?

So that is definitely an expansion opportunity. But what we've done, and actually I'm glad you mentioned this, we've hired some sales people for the service side alone. And where there's an immediate need is actually just where our machines interface with the building itself. There's all the pumps, there's the heat exchangers, there's the controls. And then there's also the demand response side of things. So even addressing that will add a significant amount to our service revenue. and more importantly, to allow our machines to run more efficiently and increase run hours. And there, it's a relatively straightforward sale because the customer already knows about the machine, they know about the benefits, and they're also understanding our, by actually putting a service salesperson in front of a customer, we also find out what the other customer pain points are. I think eventually we might look to service other pieces of equipment But just expanding the box, doing some of this billable work is going to give us significant increases in sales.

Well, that sounds like a pretty good plan. If we have a chiller system in place, then our technicians are already on site. And what you're saying is that there is a possibility that we can add servicing of other components in that facility. Because we're already there. Am I approaching this correctly?

That's exactly right. And doing that, in some cases, can increase run hours by 10%, 15%, 20% just by improving how the system is set up. So it's a big win both for us as well as the customer.

Well, it sounds to me like – It sounds to me like we should be making a monumental effort in that segment because we're already on site, and it's just a matter then of increasing what we perform on that site.

Yes. So stay tuned on this. I will be providing more updates in this space. This is definitely a huge priority for me that we do increase that stream there.

Well, I want to thank everybody for their effort and I look forward to improvement. It looks like the remainder of this quarter and next quarter are going to be transition quarters for us and that really we should be firing, if you will, on all cylinders in the third and the fourth quarter. Am I correct in assuming that?

That is spot on. Yeah, the way I look at these next two quarters, There's going to be disruption on the product side. We're going to continue focusing on the service side of the business to really get the revenue up, the margin up over there. We're going to be focusing on securing more service contracts and some of this billable work. So the service side of the business, we're hopefully going to see no disruption on that. On the product side of the business, we're definitely going to see a disruption this quarter and next quarter. But Q3, we should be back on at full steam on all aspects of it. And then when we do the Q1 earnings presentation, I'll talk a little more about the operating cost side of things and what we're really trying to do. Because even a year ago, I don't believe we had enough recurring revenue stream to cover a large portion of our overhead. But I think now we're getting closer and closer to that point. And I think with a little more, with all these changes done, We're going to look at what the numbers look like and then start really looking at the OPEX and getting ourselves cash flow positive and profitable.

Well, fair enough. Thanks for all of the input.

Thank you, Mike. Thanks for being a supporter as always.

Thank you. Our next questions come from the line of Alexander Bland with Clear Harbor Asset Management. Please proceed with your questions.

Just a follow-up. You talked about the different markets.

outside the new york nationwide could you characterize the the last two orders that you announced publicly could could you tell us where those are and how they fit into that plan so one of the one of the orders the one for the hybrid chiller as well as the inverters that one was down in florida um the 12 unit order was actually a mix of it's a project developer that's operating all over the northeast it wasn't specifically one market. It was across, you know, all the way going from, you know, Connecticut down, downwards. So it was, that was a lot of smaller orders that were, smaller projects that were linked together as one blanket order. But we definitely had projects last year that some that were in Missouri were seeing projects now, Illinois, Nevada, that, again, we had never really looked at before. So we're starting to see a lot more of that.

These are potential orders you're talking about.

Well, there were some last year. So there were some last year that shipped to Missouri. But now we have some potential orders for the second half of the year that are, you know, in different parts of the country as well. So some that are in Nevada, some that are out. West and Oregon, some that are, yeah, Illinois, Texas, those kind of things. Yeah, so we're seeing projects all over the country right now.

I think that's very encouraging.

Yes, I do believe that this, like, we're really just going through the pivot right now. These things will start seeing these projects come to fruition.

Okay, thank you.

Thank you. That does conclude our question and answer session for today. And with that, that concludes our teleconference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.