Tecogen Inc

Thank you for standing by and welcome to the TCOGEN second quarter 2024 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you. I'd now like to turn the call over to Mr. Jack Whiting, General Counsel and Secretary. 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 second 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 Reform Act 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 Form 10-K and 10-Q under the caption, Risk Factors Filed with the Securities Exchange Commission, an available investor section of our website under the heading SEC Filings. While we may elect to update forward-looking statements, we specifically disclaim any obligation to do so, so you 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. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is provided in the press release regarding our second quarter 2024 earnings and on our website. I will now turn the call over to Abhinav Rangesh, TECA GEN CEO, who will provide an overview of second quarter 2024 activity and results, and Roger Deschenes, TECA GEN CEO, who will provide additional information regarding second quarter 2024 financial results.

Thank you, Jack, and welcome to TECA GEN second quarter 2024 results. I'd like to talk briefly about some new areas that we are developing, and then I will hand over to Roger to go over the results, and then I will summarize. Over the last 15 months, we've faced many challenges as a company. We've had to move our factory and spend $675,000 to build test cells. Anti-fossil fuel regulation in New York City, Boston, and many high-rate areas has meant that we've had to find new markets for our products. However, today I'm feeling extremely optimistic about the future. We've made significant headway on operations and product improvement, which we will discuss later. I also believe many of the orders we've been fighting for will close by the end of Q3. When I summarize at the end of this presentation, I will recap the last year and a half, why we had no product revenue for Q2, and why we made the strategic choices that we did. I believe that there's a once-in-a-lifetime opportunity coming. Like the railroad boom, the oil boom, the PC and social media revolution, the new boom is coming. Data centers are going to fundamentally change the energy landscape and catapult the growth of certain companies. Today, I'm going to show you why I believe TicoGen is going to be one of them. We've been working on data center projects for the past six months. I didn't want to talk about this before since the projects were too early a stage. When everyone thinks of data centers, they think of the massive facilities Amazon and Google are building. Initially, I thought that our products were going to be too small for this market. I asked one of our engineering and project development partners why he was recommending our products for data centers. Why are you specifying TicoGen's equipment? Why aren't you specifying a large engine from Caterpillar or GE? What alternatives does the customer have? He walked me through the economics and the timeline that these customers are looking for. Now that we've made progress on multiple projects, I'd like to tell you about the needs of this market, why our solution is better than the alternatives, and when we should expect to see orders from this segment. There are three sizes of data centers. Hyperscale is what kept all the press. Most data centers, though, are smaller. Most are co-location data centers. Here, multiple companies rent a portion of a bigger data center. Then there are the enterprise data centers where a bank or a law firm has their own dedicated data center. In the past, data centers were built in the lowest utility rate areas and were primarily used for data storage. Today, with AI and distributed computing, the power draw is immense and liquid cooling is essential. If you're Google, Meta, or Amazon, you can afford to build your own power plant or negotiate directly with utilities for favorable power contracts. Others are left short of power. Utilities are no longer able to provide all the power a data center needs. Power plants aren't being built fast enough. Utilities are also behind on upgrading infrastructure. The biggest need for solutions is in the co-location and enterprise tiers. If you need eight megawatts of power, in many regions, the utility will tell you that you'll get five and you'll have to source the remaining power yourself. This has become such a constraint that space is no longer being rented in some data centers by square foot. It is being rented by required power for each tenant. If you're building a co-location or enterprise data center, what are your options if you don't have enough power? You could buy a backup diesel generator or a natural gas generator. Most generators, though, are only designed for 500 hours or so of annual operation. You may or may not have the appropriate service support for the uptime you'll need. Emissions compliance for continuous operation is also tricky. Solar and wind won't work at night, but the data center needs power 24-7. You could build your own three megawatt turbine power plant, but that might take you 36 months or more to come online. Also, for an engine or turbine, greater than one megawatt, lead times for certain components like electrical panels and switch gear are more than 24 months out. As more data centers are located closer to populated areas, neighboring buildings, noise restrictions, meeting regulatory and permitting also adds additional time. How does all this affect TicoGen? If you have a data center that needs one megawatt to three megawatts of power, we have two solutions that'll solve your problem. The first solution is our DTX engine-driven chillers. These can take all of the cooling load off electricity and move it to natural gas. They can be running onsite in six months or less. Five to six units can be packaged in a container with all the connections for quick install onsite. They can even be run with dry coolers to reduce onsite water usage from cooling towers. For an eight megawatt data center, this will immediately free up one to two megawatts, which might allow a customer to open on time or add additional tenants. Chiller modules can also be added as the data center expands. The second solution is to use our inverter to generate power. We use a proprietary 480-volt inverter-based system. It avoids many of the switchgear requirements as it has built-in electrical protection. We can also use electrical panels that are readily available. As multiple inverters can be daily chained together into a microgrid, you also have redundancy. If you used a large engine from GE or Caterpillar, you would need 13.2 kilovolt or higher voltage switchgear and panels. As mentioned, such switchgear lead times sometimes can exceed 24 months. You would also need specialist electrical contractors adding cost and complexity. Today, data centers are being built near cities and other buildings. Getting approval to put an on-site power plant near other buildings is not easy. We have hundreds of systems in residential buildings. Our units are quiet, and our patented Altera system allows us to meet emission standards everywhere. As the data center expands, more inverters can be added to the microgrid. Lastly, if a customer wants a zero-carbon option, we work with a carbon capture company to extract and store all the CO2 from the exhaust. We are presently working on three data centers in the Northeast and Mid-Atlantic. I hope to announce the first purchase orders later this year. We've also signed up distributors that specialize in data centers. Right now, TicoGen is valued at barely one times revenue for the service business. There are many startups right now that are raising money at premium valuations to try and solve the power problem for data centers. Data centers can accelerate their construction timeline by 12 months or more with our chillers and inverters. They have the flexibility to add capacity later as our equipment is modular. Best of all, our equipment will continue to save money on energy expenses going forward. Technology is only one piece of the solution, however. Data centers need 24-7 support, and not everyone can do that. We already have experience with off-grid power, process cooling, and other applications that need high uptight. I believe that if we can demonstrate our solution with the projects we're working on now, this could be a great opportunity for TecaGen long-term. Backlog and cash. The backlog is presently just shy of 6 million. This is up by 1.1 million from when we reported in Q1. We also have another $5 to $7 million of prospective orders where the customer has told us to expect a purchase order sometime before the end of September. We had positive cash flow from operations in H1. However, we had to spend 600,000 in factory fit out and move. So we finished with a cash position of 841,000. Today we have 1.1 million in cash. The movement that some customers were still sending payments to our old address, and this was adding 15 to 30 days to our cash collection cycle. So we decided to draw another $500,000 into our line of credit in July. As a quick recap, we have three revenue segments. Our product revenue consists of sales of cogeneration units, microgrid systems, and chill air store range of markets and customers. Our service 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'm now going to hand over to Roger to go over the financial numbers.

Thank you, Abinad, and good morning, everybody. I'll begin with reviewing the second quarter 2024 results. Our revenues for the quarter were $4.7 million compared to $6.7 million in the second quarter of 2023, a decrease of 30%, which is due to the lack of production capacity. As you may be aware, we moved our manufacturing operations and administrative offices in April of this year. Due to the move and the resulting decrease in product revenues, our net loss for the second quarter increased to $1.54 million compared to $780,000 in the second quarter of 2023. The net loss was $0.06 per share in the current period compared to $0.03 per share during the previous year. We'll review revenue and margin further in the segment review. Operating expenses decreased 1.7% quarter over quarter, despite incurring additional rent in April. Moving expenses incurred of approximately $100,000 and cost incurred for the air cooled chiller testing, which occurred during the quarter. Moving to EBITDA and the adjusted EBITDA calculations. For the second quarter, our EBITDA loss was $1.4 million and the adjusted EBITDA loss was $1.3 million. which compares to an EBITDA loss of $583,000 and the adjusted EBITDA loss of $592,000 in the comparable period in 2023. We'll review the 2024 segment performance. Products revenue decreased 95% quarter over quarter. The products gross margin was negatively impacted due to warranty costs and unabsorbed direct labor. Our services revenue increased 4.4% quarter-over-quarter due to the acquired maintenance contracts. Our gross profit margin for services remained unchanged at 47% in the second quarter of 2024 compared to the 2023 period. We have seen significant price increases for certain parts such as engine components, in oil over the past 24 months, which have negatively impacted our gross margins. Therefore, effective on August 1st, we increased our cogeneration service pricing to reflect these higher costs with the intent to improve our margins going forward. To decrease service costs, we've 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 this year. We anticipate these efforts will result in improved margins beginning in the fourth quarter of 2024. Our energy production revenues increased 37.5% compared to the comparable period in 2023. This is due to the restart of an energy site, which had been dormant since 2020, and higher run hours across the fleet. across the fleet. Our gross margin also increased to 44% from 42% in the prior year. I'll turn the call back over to Abhinav now.

Thank you, Roger. I know some of you may be wondering why we had no product revenue for the second quarter. The Q2 loss may also be a concern. I'd like to take a step back to walk through our strategic and operational choices and give some context on where the company is going. When I took over last year, I knew that there were carbon regulations like Local Law 97 and Berto that were going to make it harder to sell our products in the Northeast and New York. I also knew that we had to reduce our cash burn immediately or risk diluting investors with an equity raise. Lastly, I knew that we had to move factory and deploy significant capital over a short period of time while having production disruption. Given those factors, the first thing we did was to try to grow recovering revenue to cover a larger portion of OPEX. Our assumption of a significant number of maintenance agreements did just that. I was expecting a gradual decline in product revenue in New York City and the Northeast, driven by the antifossil fuels. But we saw a much sharper decline than expected. We talked to customers, engineers, and even our competitors. Unfortunately, this decline does not appear to be temporary. In fact, we saw projects funded through city agencies get canceled after engineering and bidding. At this point, we had a couple of options. Pivot to other technologies or find new markets. We felt that there were still many areas nationwide that were good candidates for our products, and with the power constraints affecting utilities, we felt we could grow the product revenue above previous levels. The business development efforts from these last 12 to 15 months is what I expect to see close soon. Our backlog is presently at 6 million. We have an additional $5 to $7 million of projects that we've had verbal commitments from customers that they would be issuing POs within the next three months. We also hope to have the deposits from these projects around the same time scale. Given the timing of product ordering, the biggest risk during Q2 was cash flow. We had to deploy significant amounts of cash in a short period of time. If we decided to shift product during Q2, we would have had to buy material for building those orders. That could have put us in a deep cash crunch if the projected orders were delayed. If we also hadn't used our own labor to do some of the fit-out on the factory and we'd shipped product, we would have needed an additional $1 million or more in cash. Right now, with our recurring cash flow and lower effects from the new location and other operational improvements, I believe we can remain cash flow positive until these orders come through. We are now back to production this quarter and expect to have Q3 revenues between 5.7 and 6.2 million. Assuming the product orders come through per the timing I outlined above, Q4 should be much stronger than Q3. I'm excited to continue to take advantage of the tailwinds in the data sector market, continue to grow the CEA market, and find more power-constrained customers that can use our products. At this point, I'll open the floor for questions.

Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question comes from a line of Alexander Blanton from Clear Harbor Asset Management. Your line is open.

Hi, how are you? This is a great report. I think... Thank you, Alex. Really a master class, it seems to me, and in how to overcome adversity, and I congratulate you. You should call up Harvard Business School and get them to do a case on this in the small business management area. I wanted to ask the three projects that you mentioned you expect to get orders finalized this quarter. What is the dollar volume involved there in the three?

So there's two different pieces here, right? The three things and orders in the data center space, I don't want to mention the dollar volume yet because it's still you know, that one I have not mentioned before. The $5 to $7 million that I mentioned that we expect to get this quarter, that one, only one piece of that is the data center. The rest is actually other projects that we have got in power constraint or areas that are friendly to gas.

Well, the $5 to $7 million, is that the order amount?

Yeah, that's the total. There's about... There's multiple projects out of that five to seven million, but yeah, that's what we're expecting. At the low end, probably five. At the high end, seven, depending on which projects close when.

And these data center jobs, what is the size and dollar volume of an average one that you are targeting?

So most of those projects are going to be per project around $2 million per project. And there are some bigger ones that are much larger. And then there are some smaller ones which might be under $1 million, which might then expand with additional capacity later. The way I see the data center projects coming through, you might see them, for example, it might have a $2 million project, but it might happen in two chunks of $1 million. They might fit out Because one of the advantages, as I mentioned, was our equipment is modular. So the way a lot of these data centers are operating right now, they're taking existing data centers sometimes and converting them from what would have been just data storage into AI or other high power demand type scenarios. So when they add additional tenants, they need to add either additional power capacity or additional cooling. So they just add some of our equipment. And then when they add another tenant, they add one more chunk so that's i believe how it's going to play out over the next six months or so we're going to see a lot of small data center things that will then expand into bigger ones have you done any of these up until now so honestly data centers we've only ever done one small data center years ago the main reason that we have never done data centers before was because they were just they used to be put in areas that had very, very low utility rates. And they had our economic savings advantages didn't help in those cases. But now the driver is very different. The data center is now, it's really driven by ability to get a solution deployed quickly. And then the ability to do this in a modular fashion and also be able to handle some of these urban environments. So the requirement of data centers now is very different than it was even six months or a year ago.

Okay. So what are these data centers doing right now if they're not using your equipment?

So right now, a lot of them are just buying power from the grid, but because they're changing what the data center is doing, they're suddenly needing to add a lot more power capacity or additional cooling.

I see. Okay. So this is the alternative. You're an alternative to buying power from the grid, which is getting more expensive.

It's also the grid is not able to provide them the power. Because there's two types of scenarios happening with data centers. One is an existing data center. that is changing what they're doing within the data center. They're needing more and more power, and the grid isn't able to provide it to them. And then there are whole new data centers being built, again, that the grid is just not able to give them enough power.

What's the payback period for the data center in using your equipment versus buying power from the grid?

So based on what we've seen in Most of the projects right now, they're looking at, to get even enough power from the grid, they're looking at at least one to two years to get that power. So the payback essentially is being able to open that data center almost a year early. And in most cases, they actually pay for themselves right now from what I've seen in under two years, just because of how much money data centers make by being able to open early.

Okay. But aside from that, what's the saving using your equipment versus the grid?

It really depends on the location, you know, because they're all over the place. We're seeing stuff that have really low utility rates that might have very little economic savings. But we're also seeing projects, you know, Virginia, New York, Massachusetts where the savings would have, if you were just purely doing it on savings, it'd be pretty typical, you know, three to five years. But right now that's not where the economics are coming from. It's the ability to actually get open on time.

One more question. Do you have an estimate of the total available market from data centers?

Honestly, It's a little early for us because, I mean, if you look at just pure dollars being deployed by the big entities, I mean, there are hundreds of billions of dollars right now being spent on building data centers. But how much of that we can target, I don't know. Our goal is to, at the next step, within the next 12 months, right, is to restore product revenue beyond where we were before and get us profitable. And then I think at that point, once we've gotten a few i think we'll be able to really assess how many data centers are able to use our equipment and how quickly it scales in that space but i think hitting where we were before with just a combination of the data centers plus what we're working on right now i think is totally doable one more question how are you doing the marketing to this market so there's A few different channels we're doing. One, as I mentioned, we've actually signed up some manufacturers, reps who only do data centers. They only sell equipment to data centers. They sell, you know, in the past, they're selling things like electrical cooling, but now that they need, they're seeing these power constraints, they're wanting to sell our solutions. We are going to some of the data centers directly. Some of them are calling us actually directly because they've heard about our solutions and they're giving us a call. We're also working through other companies that have relationships with the data center space that are selling either other equipment or they are a developer associated with data center. So we're taking multiple approaches there. And then of course, we're still continuing to do the online marketing targeting data centers directly.

And do you have capacity to meet this demand?

I think, I'm hoping that we'll get to the point where we have to expand capacity to meet the demand. But as of right now, I think we do for the next six months.

Okay, thank you. Thank you very much.

Thank you, Alex, and thank you for the kind comments.

Again, if you'd like to ask a question, please press star 1 in your telephone keypad. And there are no further questions, so this will conclude today's question and answer period and also today's conference call. We thank you for participating. You may now disconnect.