Tecogen Inc

Good morning, ladies and gentlemen, and welcome to the first quarter 2024 TECOGEN Investor Update Call. Our host for today's call is Jack Whiting, General Counsel and Secretary. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. I would like to now turn the call over to your host. Mr. Whiting, you may begin.

Good morning. This is Jack Whiting, General Counsel and Secretary of TECOGEN. This call is being recorded and will be archived on our website at tickagen.com. The press release regarding our first quarter 2024 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 Act the Form 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 and Exchange Commission, and available in the Investors section of our website under the heading SEC Filings. While we may like to update forward-looking statements, we specifically disclaim any obligation to do so so we should not rely on any forward-looking statements as represented in 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 first quarter 2024 earnings and on our website. I will now turn the call over to Abhinav Rangesh, TQGEN CEO, who will provide an overview of first quarter 2024 activity and results, and Roger Deschenes, TicoGen's CAO, who will provide additional information regarding first quarter 2024 financial results.

Thank you, Jack. Welcome to TicoGen's Q1 2024 earnings call. First, I'd like to start by giving investors an update on our factory move and the 83 service contracts we acquired this year. Then, I'd like to talk about our marketing. To me, our marketing has been our weakest link, but also holds the greatest upside potential. A recent experience made us look at our marketing in a new way. We were recently talking to a prospective industrial customer. They had two electrical services from the same utility into two different sides of the same factory. On one side of the building, they experienced power outages. On the other side, they didn't. Clearly, power constraints are very local, but every facility that has a problem knows that they do. This led to the question, how do we make more facilities like this one find us? Before I tell you how we changed our marketing and the results from that, let me update you on our factory move and service. We've now moved into our new facility in Billerica. Left to do is still the manufacturing space fit-out and the test cells. We saved a tremendous amount of cash by using our own labor for some of this fit-out, but it means limited production until the end of Q2. After this, we should benefit from reduced operational costs and should see product revenue recover in Q3. We saw record service revenue in Q1. We were cash flow positive in Q1, so have not had to draw further into the credit line as of today. We have acquired service for another 83 units this year to date, 16 units in February, 31 in May, and 36 coming online in the next two quarters. We also anticipate a further 30 to 50 service agreements over the next three months. We expect that these service agreement additions will add more than $700,000 in revenue this year and more than $1 million next year. Service will continue to be the foundation of our business as it provides recurring cash flow. In the meantime, we're working to close existing leads and develop a system to double our sales pipelines. Despite the anti-gas sentiments, we expect to see leads from last year close soon. Many of these came from new sales channel partners we signed, the articles we wrote, and the trade shows we attended. The next step is to find a way to sell to the thousands of customers facing power shortages. As we saw from the example before, shortages can be very localized. We needed to be able to advertise to these customers so they can find us. To do this, we focused on online marketing. To be successful with online marketing, the message must be easy to understand and compelling. You have three to eight seconds at best to get a prospect's interest and direct them to your website. Then you have a further 30 seconds to convert them into a lead. To craft our message, we interviewed existing customers and prospects. A pattern began to emerge. Before customers bought from us, they were already looking for a generator or a chiller. Our products offered tremendous savings, so they chose us. They really viewed our product as a generator that saves money or a chiller that saves money. We needed to make our message and value much easier for them to understand. Using this customer feedback, we ran Google Ads with different headlines and different messages. We tracked the percentage of people that clicked on our ads, how long people spent on our website, and what they were searching for before they clicked. The winning ad was, if you spend $100,000 on energy, slash your bill in half. We've now updated our website with case studies and specialized market pages. Prospective customers can now see how our on-site power heating and cooling will help them save money in their applications. As a result, we're already seeing qualified leads through the web. Our preliminary cost to generate leads online is comparable to trade shows. To me, though, the most exciting part is that online marketing is highly scalable. We can continue doing all of the other marketing that we're doing right now and continue running online marketing at the same time. To me, the next step is to take an even more targeted approach through other channels such as LinkedIn, which we hope will generate further leads. Backlog and cash. The backlog is presently at 4.8 million. I understand that this is lower than it has been historically. The anti-gas sentiment has meant the steady one and two unit New York City projects are now gone. However, we have around $7 million of projects that we expect to close in one to three months. Presently, we also have purchase orders for four hybrid air-cooled chillers. Our reliability testing of this product is almost complete, so we expect to start shipping units in Q4. We also expect to see sales for this product increase in 2025 and beyond. We've also established relationships with financing partners that is enabling some of the projects we expect to close later in 2024. We had positive cash flow in Q1 and finished the quarter with $1.5 million in cash. Our present cash position is roughly $1.3 million, and we have paid more than $300,000 towards our fit-out and have roughly $200,000 to $250,000 further in fit-out costs. We've not needed to draw further into our line presently. I'm hoping that with the imminent orders and associated deposits, we can leave the line of credit as a safety net. 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 It's from energy sales, including sales of electricity and thermal energy produced by our equipment on-site at customer facilities. I'm now going to hand over to Roger to go through the financial results.

Thank you, Abhinav. Good morning, everybody. The first quarter of 2024 revenues were $6.2 million, which compares to $5.4 million in the comparable period of 2023, which represents an increase of 15%, which is due primarily to, as I spoke previously, increased services revenue and also increases in our energy production segment. Our net loss of the first quarter was $1.1 million, which compares to $1.5 million in the first quarter of 2023. The decrease in the net loss is primarily due to increased revenues and increased gross profit margin. Our net loss per share was $0.04 per share for the first quarter of 2024, which compares to $0.06 per share during the comparable period. we will discuss margin and segment review. Our operating expenses increased 2.5% quarter over quarter, and this is due to duplicate rent costs, which resulted in approximately $160,000 of additional costs, which were incurred in the first quarter of 2024, and also an increase in testing costs as we prepare our air-cooled chiller for deployment in the fourth quarter. Looking at our EBITDA and adjusted EBITDA, for the first quarter, the EBITDA loss was $924,000, and the adjusted EBITDA loss was $898,000. This compares to an EBITDA loss of $1.3 million and an adjusted EBITDA loss of $1.25 million in the first quarter of 2023. Moving forward to segment performance. Our products revenue decreased 13% quarter over quarter, while our products gross margin increased slightly by 1% to 30%, which is primarily due to the product mix shift during the quarter. As I mentioned previously, our services revenue increased 28% quarter over quarter, and this is due to the acquired contracts, which added about $758,000 to our first quarter revenue. Gross profit increased to 48% in the first quarter of 2024 from 45% in the prior period. While we are still experiencing increased material costs for some of our products, we will be instituting service price increases for these products. To decrease service costs, we have been testing product improvements, which will increase service intervals. The impact of these product improvements are expected to be rolled out across the service fleet later in the year. and we anticipate these efforts will result in improved margins beginning in the fourth quarter of 2024. Our energy production revenue increased 28 percent quarter over quarter, and this is due in part to the restart of an energy site which had been dormant since March of 2020 and a high run hour rate across the fleet. Our gross margin was negatively impacted by the higher natural gas prices and additional maintenance costs that were incurred in the first quarter of 2024. I'll now turn the call back over to Avinash.

Thank you, Roger. In summary, we plan to finish up the factory move this quarter so we can be back to full production by Q3. We're going to keep growing the service revenue and cash flow. This has already grown 20% year-on-year, and we expect a further 20% growth this year. For me though, the most exciting bit is that we finally worked out a recipe to consistently get new leads using advertising. This is highly scalable. As a country we're running out of power, TicoGen has compelling solutions to this problem. Now we have a way to reach customers who have power constraints. We published a short shareholder letter on our website outlining this problem and how TicoGen is solving this. If anybody wants a present, once it can be found on the presentation section of our website, or I can email it to anybody that wants. I also hope to be able to announce further orders within the next one to three months, some of which should be pretty significant and are with these power constraint customers. And I hope now that with this new advertising, we're going to see some product growth over the next three to six months. At this point, I'll now hand over to the operator for questions.

At this time, we will conduct the question and answer session. If you would like to ask a question, please press star then the number 1 on your telephone keypad now, and you will be placed in the queue in the order received. Once again, to ask a question, please press star then the number 1 on your telephone keypad. Your first question comes from Alex Blanton with Clear Harbor Asset Management. Your line is open.

Good morning. Just a little housekeeping item at the moment. I don't know if other people experience this, but the sound quality coming from the speakers from TCAGEN is distorted quite a bit. The person from the conference call company is fine. So it's not my end, I don't think. But you might want to look into that. I wanted to ask the service revenue that you forecast, $0.7 million this year and $1 million next year, is that an additional $1 million?

Correct. Well, no. Oh, sorry. No. So the 700,000 this year, it's going to, so we're currently a run rate per quarter, right, of about 4 million. So we're talking somewhere around 15 million for the year. So this year, we'd probably see an additional 700,000. And then next, so we'll be at 16.7 or so. And then next year, we'll be in the 17-something range. Okay. Because of the timing of these service contracts coming online, we won't necessarily see a full year worth of revenue over there.

So it's not $1 million on top of the $700,000?

No, not at this point. I'm going to try.

Okay. Okay, fine. Okay. I wanted to ask about the condition of the move. You said the move was finished at the beginning, and then you said the move was going to be finished this quarter. Are you completely out of the order?

I need to clarify that. Yeah. So what's happened is we've moved all of the offices, all the material, everything is in place. But to actually be able to build the product and ship it, we need all our test cells operating. And that is going to take a little longer because some of it's being held up by permits. Some of it is just the amount of labor that it takes to put the test cells back together. So there's just a little more fit out that needs to happen for those test cells to be fully operational. And that's really what's going to limit how much product. I mean, that's combined with the order cycles right now. We're going to limit how much product go out this quarter. So our product revenue for Q2 is going to be weak. But Q3 onwards, we should be back to full production.

That's what I was getting at, because when we had our last conference call in January, it sounded like you were going to be in that situation in the first quarter. But no, you had shipments actually rise in the first quarter above last year. But the drop in shipments is going to be in the second quarter then.

Yeah, that's kind of where it's shaking out right now because there were certain delays that happened towards the end of the first quarter in permits. So it just ended up we were able to do more production in the first quarter, but it's hitting us more in Q2. So that's where I think we're going to be. We're, of course, going to try and get this done as quickly as possible, but I believe it's going to be weak in Q2 for product shipment.

Right. And then you're going to have a catch-up period, right?

That is where things are looking like. Because the first, as I mentioned, right, the New York City orders, they've dropped down substantially. But we've got a bunch of projects that are very, very close to getting purchase orders right now. The timing on those, we're pushing as hard as we can to get those projects in, get the deposits, and get producing. But the timing on those looks like one to three months to get them. So once we get them, in theory, we can start shipping those units in Q3. So it should be – my hope is that Q3 and Q4 will be much stronger on product shipments. So that combined with the strong service number should put us in a very – very solid position for the second half of the year.

And could you characterize the kinds of projects those are in terms of the kinds of customers we're talking about here?

Yes, I can give you some broad brushes there. I won't get into specifics. So some of those are industrial customers that are looking to do expansions where, again, they don't have enough power. In fact, we just recently sold one air-cooled chiller to a customer like that. We're also looking at a couple of large facilities that have time of day charges that are getting to be punitive. So they're looking to use some of our chillers to reduce those time of day charges. And then there's a few other similar type of requirements but they're all over the country. They're not just in the Northeast. So those are the kind of customers that we're seeing right now for our products.

All over the country?

Yes. I mean, there's some – they're not in our normal Northeast region. There's some in Florida, some – I mean, we shipped some last year to – Yeah, it's in different parts of the country right now. Again, once we get our orders in, I will announce these, and you'll be able to see the kind of projects we have.

And finally, how did you get those projects? How did you come into traditional marketing that you've been doing, and how long have you had them in your backlog of projects?

So these are actually not in the backlog right now, because again, we don't have the purpose.

I mean, the backlog is projects, not you.

Yes. Yeah, it's in the pipeline. So these ones, we started working on them early part of last year. They came through some of the sales channel partners that we signed up last year. Some of them came through some of the articles that we wrote in the various trade publications. And then, you know, the rest, yeah, so those were sort of the areas that we really got some of these projects through. And that's also why we're going to continue that approach. But what I see going forward is we've now added online marketing as well to our arsenal of marketing tools that we have. So we've now got another way to generate new leads.

Okay. Thank you very much.

Thanks, Alex. And we'll take care of the sound issue. It seemed fine on the sound check that we did, but clearly it wasn't. So we'll check into that for the next call.

Thank you.

Your next question comes from Norman Heyman with Technology Investment. Your line is open.

Yes. Thank you for taking my call. I have a lot of history with technology. with Techogen, Charlie Maxwell, John Estopoulos. So I've been following you guys, and I've owned your stock for an extended period of time. I'm also an engineer by training. I must applaud you for doing the hard work that it takes to get here to there, and that is a true felt compliment. The question I have is more top-down, in a sense. One is the impact of time of day. It kind of seems to me that's a highly identifiable and marketable technique, and I wonder if you're traction from that concept is real or will it take an extended period of time?

Thank you, Norman. The time of day question, that's a very interesting question. So what we initially tried to do to identify some of the regions where we might have good opportunities was not only look at areas, again, with these high time of day charges, but also look at areas where The utility is offering programs to curtail power in those kinds of days. So we've definitely done some marketing in that space. But what has typically happened is customers, in a lot of cases, don't even – it just gets baked in and they don't – it's not enough of an impetus for a lot of them to actually make a change in that space. tends to be the same for any energy-saving technology. To create that sense of urgency, they either need to do something right now, and some of that is driven by the need to put a generator and put some of these other metrics, and that's really what we're finding. The time of day, the very, very high utility rates helps us close the deal, but typically the driver underneath has to be something much more time-constrained.

Okay, great answer. I appreciate it. It'll take time. That's fine. But I think it's real. Second question has to do with these large AI centers. their need for constant power. I have a colleague who is in the field, and I really wonder about how large an energy demand you can satisfy. Is the AI large centers beyond your size of generation, or is that, in fact, still an opportunity?

So that, again, great question. The AI data centers typically running above five megawatts. So they are better suited by the large turbines. We're probably not the ideal for that size range, but the place that we can help in that area is the cooling. Because a lot of those areas are still not only power constrained, they're cooling a lot of these big data centers. A lot of them operate at slightly higher temperatures than they did before, but they still need a lot of cooling. And that's really where we're trying to break into that market. If you happen to have any introductions there, we'd love some. It's a pretty tough market to break in. We are working with partners trying to get into that. But the other knock-on effect of those AI data centers is everything around it. And that's also where we see the big opportunity because There's a ton of industrial facilities that have power needs between 100 kilowatts and one megawatt. And they also have cooling in that size range. And that's really what we're targeting right now, because those people are all constrained by these data centers taking all the available power. So when they're trying to expand, the power is not available. So there is where I see the market for Decogen's products.

What kind of customer would that be, not specifically, but generically?

Pretty much any industrial customer that has a need for heat, either as processed hot water or an industrial customer that is requiring climate control. So just to give you an example, you know, food processing, right? Anywhere, like let's just take meat processing as an example. I mean, they need a cool, dry environment. They, again, they would use our chillers. They would use the chiller to cool the air and then remove the humidity from there and then warm it back to the temperature they need using the waste hot water. We've seen people like Chocolate Manufacturing, which, again, they've used our equipment. There's plenty of industrial processes that use hot water year-round. And then, of course, any multifamily, any residential building, I mean, they don't tend to be quite as large a set of power users, but they have a consistent hot water load. So those are all good customers for us as well.

Would that include, what do you call, centers for aged centers or whatever you want to call it, medical facilities for home or, you know, general care, home for aged people, stuff like that? Because these are relatively large systems, the systems meaning numbers of buildings. Does that represent a market?

Yes, definitely, and I'm glad you mentioned that. Yeah, the healthcare industry as a whole is a very, very good market for Ketogen's products. I mean, we see large hospitals using our chillers, again, because the need for it, the power, can be used in other parts of the hospital for MRI machines and things like that, so they use our chillers. Then a lot of these rehabilitation and nursing facilities use our cogeneration machines, They're usually smaller, but they do have a constant need for hot water for domestic and other requirements, some cases for heating, and they'll use the power year-round. So pretty much for the co-gen product, anywhere with a bed is a very good fit for us. And with the chiller product, anywhere that you are controlling the climate is a good – where you're controlling both temperature and humidity is a very good fit for us.

I'm sorry, final last question. I don't mean to take this much time, but the third top-down question is the question of regionality. I kind of sense that over the last two or three years you've expanded your geography. That's a generic question. I don't know if that's true. And how would you describe your expansion of your geography or not, either one?

Yes, that is definitely the case. In the past, our sale has been predominantly dominated by high utility rate areas and very driven by just pure payback on the equipment. In most cases, we can have the energy cost, but then if your energy cost is low to start with, the payback is going to be further out. We've typically stayed in areas which have had very high utility rates like New York, Connecticut, Massachusetts, and the West Coast. But now we're seeing the combination of power constraints and then utility rates becoming much more time of day based. And then right now, I mean, we have the tax credit that's helping improve the payback. But it also seems that customers are looking at our types of solution. Just part of how we're selling has also changed a little bit in terms of really showing a customer that you've got – having some savings is better than none. And, I mean, you don't necessarily need a really short payback. A lot of the existing equipment, like a chiller – it's just a net cost to the customer. Whereas our equipment, even if it has a slightly longer payback in a region that has a lower utility rate, everybody sees that utility rates are going up with time. So putting something in now during a replacement cycle can help them benefit. So we've also changed how we sell, how we go to market. A lot of the sales channel partners that we have right now have good customer relationships that they're taking us So the end owner can see that benefit.

I guess I was directed more to the service side, the expansion of your service capability. Is that true or not?

So right now the service expansion has been predominantly in the areas that we've already got service. Okay, thank you. Yeah, but we will add additional service. If we see a certain concentration of engines in a region, we'll put a service center there.

Okay. Thank you very much. Appreciate the answers.

Once again, to ask a question at this time, please press star, then the number one on your telephone keypad. Your next question comes from Michael Zuck, a private investor. Your line is open.

Good morning. Good morning, Mike. There are new mandates coming down from the federal government with regard to converting systems utilizing heat pumps. We have a legacy heat pump technology. Is there any opportunity to expand that area for us?

So my view, and this is where I think there's an opportunity. We're still looking at this very carefully. The heat pump market is pretty interesting in the sense that there are a lot of legacy buildings that would go heat pump for heating. But the way heating is usually set up in a lot of these buildings, they're designed for boilers, which operate at relatively high temperatures. So where we see a potential opportunity is retrofits on those buildings because they hit most heat pumps that you buy. Electric heat pumps are really designed for lower temperature. So if you did a retrofit, you're either going to lose capacity on an electric heat pump. You'll need one much larger than what you would have had before with a boiler. Or you have to change all of the hot water distribution system in the buildings. Where we think there's an opportunity is by having an engine-driven heat pump that's much larger that could be built on the back of our air-cooled chiller that might be able to boost the temperature. But this is something that we are very early on just looking at it as a potential opportunity. We don't know how big that opportunity is. If we think there is enough potential, then we may put a product out. The Ilios heat pump is still there. It's something that The customer really wants we could, but we don't see that as being where the market really is going to go. We see it really in the retrofit where people are trying to do this, they don't have necessarily enough electrical capacity, or they don't want to replace everything and all the piping inside the building where we might have an advantage.

Good. Fair enough. And then can you give us an update on the activity in Florida?

So we've definitely been pushing for new projects over there. Some of what's in the backlog already right now is down in Florida. We've got a few other projects that are brewing out there that we hope to close over the next three to six months that are all, again, very good market for us, both co-gen and chillers. So that's a market that we're really trying to expand right now.

And refresh my memory, do we have a service center in Florida?

Yes, we do.

Is there the potential to add a second center at some point in time?

So, yes. What we may do is expand the service center more towards the Georgia-Alabama region, where we see some opportunities there as well. Our service center right now is closer to Tampa, so having something a little further north might help us also handle some of that region.

And then a question on a personal note, would I be able to stop by sometime in July and see the new facility? I'm going to be in the New England area for a couple of weeks.

Of course, anytime. Just let me know, and I'm happy to host you.

All right. And congratulations on the progress of moving to the new facility. It sounds like we're going to be much more efficient in our new plant facility.

Thank you. Yes. And I mean, it's the other thing that, you know, we didn't mention, but it's taken a lot of energy from some of our key people here. So we're also going to see improved productivity just by not having that move looming in front of us. So hopefully we're going to see much stronger results over the second half.

Well, I'm looking forward to a productive quarter three and quarter four. Thanks, Mike.

Bye. At this time, there are no further questions in queue. I'd like to turn the call back over to our presenters for any closing remarks.

Thank you all for attending our TicoGen Q1 2024 conference call. If anybody has any further questions, feel free to email me, and I'll be happy to answer them by email or set up a separate call. Thank you.

This concludes the first quarter 2024 TicoGen investor update call. Thank you for attending. Have a wonderful rest of your day.