Tecogen Inc

Greetings and welcome to TCOGEN third quarter 2024 conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jack Whiting. Thank you. You may begin.

This morning, this is Jack Whiting, General Counsel and Secretary of TECAGEN. This call is being recorded and will be archived on our website at tegagen.com. The press release regarding our third quarter 2024 earnings and the presentation provided this morning are available in the investor 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 Harbors 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 in the Investor section on 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 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, reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures provided in the press release regarding our third quarter 2024 earnings and on our website. I will now turn the call over to Abhinav Rangesh, TQGEN's CEO, who will provide an overview of third quarter 2024 activity and results, and Roger Deschenes, TQGEN's CAO, who will provide additional information regarding third quarter 2024 financial results. Thank you, Jack.

Today, I'd like to start by giving a quick business update. I'd also like to talk a little bit more about data centers. I know we covered some of this in the last call. take a little bit of a deeper dive into this. And then Roger will talk to us about the third quarter results. Then I'll summarize and we'll go to questions and answers. During the last call, I mentioned that we would be receiving multiple orders over the upcoming months. Our backlog has grown from just over 5 million at the end of Q3 to more than 10 million today. We're also expecting a further $2 million of orders before year end. With the orders in hand and our new factory location and operation, we plan to ramp up manufacturing sequentially each quarter. I'm forecasting quarterly revenue greater than 6 million in Q4, greater than 7 million in Q1, and higher Q2 onwards. We also hope to close the first of our data center projects by early 2025. As a recap, until AI came along, data centers had plenty of power and cooling. only made up a small portion of the electrical load. Now with AI, chips use so much electricity that data centers are finding themselves short of power. As we've been attending data center trade shows, potential customers and engineers are showing significant interest in our chiller solution in particular because of some key trends in the data center industry. First, AI chips are getting more powerful. so the current method of cooling server rooms is going to be insufficient. Going forward, chips will be immersed in liquid and the data center cooling will make up 30% or more of the electrical load. As the processing capacity of chips increases annually, so will the amount of heat generated. The first set of liquid cool chips are likely to come online next year, but I believe this is just the start of the trend for power-hungry chips that need more and more cooling. Second, we are likely to see existing data centers expand or switch to accommodate AI applications. It is easier to expand or repurpose an existing data center because the lead time to build a new data center can be multiple years. For these data centers, every megawatt of power that can be made available for computing is additional revenue that can be sold to data center tenants at a premium. Rather than use electrical power for non-revenue generating loads like cooling, A data center can free up electrical capacity by switching the cooling to TECAgen's high efficiency natural gas chillers. Not only is our chiller the fastest way to increase available power, as it is an easy swap with an electrical chiller, but it is also cheaper than building an onsite power plant of equivalent capacity. Our systems are also cleaner than buying electrical power from the grid and can be zero carbon if combined with carbon capture. After freeing up capacity with our chillers, customers can always add power generation such as our inverting. Therefore, all indications are positive that data centers will be a great growth area for us. I will update investors as we close projects and make further inroads into this market. Now let's take a more detailed look at backlog and cash. Currently, the backlog is 10.8 million including a $2 million 10-year extended warranty. The backlog is a mix of segments, some cannabis, some residential, and a significant chiller project for the iconic Las Vegas Convention Center. We haven't issued a press release on this project yet, as the customer only made their final decision earlier this week. Our chillers will be part of the massive central plant to a central chiller plant that cools all the conventions that happen in Las Vegas. We have also seen revival in cannabis projects for both cogen and chillers. We expect further orders in this space before year end. We've also been successful in diversifying our projects outside New York and the Northeast. Our backlog includes projects in Nevada, Florida, and we also shipped units to Missouri. Our cash position at quarter end was 1.2 million and it's presently 1.1 million. We expect customer deposits over the upcoming two months. With the orders in hand on the orders that we are expecting over the upcoming months, my next focus will be on operations. Looking out to the next 12 months as a company, we need to achieve the following. Now that we have the orders, we need to increase product shipments to reach profitability. The key to doing this will be material management so that our labor force can build and ship products without delays. On the service side, we've been testing operational improvements on two Inverday test sites. Preliminary results indicate a 50% increase in time between oil changes. We plan to deploy this new lubrication system to all our Inverday sites over the next 12 months, as it will result in lower cost of service, increased uptime, and increase service bandwidth. Lastly, we need to increase marketing to data centers and get our first few projects sold. To achieve the above objectives, I'd like to strengthen TecaGen's balance sheet. Having additional capital at this juncture will be instrumental to execution. Therefore, I plan to raise $2 million through a private placement targeted only at existing shareholders. If any of you are interested in participating, please reach out to me. As a recap, 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 review the financials.

Thank you, Abhinav, and good morning, everyone. I'll begin with a review of the third quarter financial results. Third quarter revenues were $5.6 million, which compares to $7.1 million in the third quarter of 2023. And this represents a decrease of 21% compared to the prior year period. As you may be aware, we moved our manufacturing and administrative offices in April of 2024. which limited our production capacity during the second quarter and into the latter half of the third quarter of this year. Further, in the third quarter, we were cash constrained, which, again, further delayed our production ramp. As Aminat mentioned earlier, we expect that our products revenue will be higher sequentially in the subsequent quarters beginning in the fourth quarter of this year. Due to the move and the resulting decrease in product revenue, our net loss for the third quarter was $930,000, which compares to a net loss of $482,000 in the third quarter of 2023. The net loss was, the per share net loss was four cents in the third quarter of 2024, compared to two cents a share during the previous period. We'll discuss revenue and margin further in the segment review, but we did see a 3% increase in our gross margin in the third quarter of 2024. Operating expenses were essentially flat, increasing by $60,000 or 1.8% quarter over quarter. Moving to EBITDA. For the third quarter, our EBITDA loss was $769,000, and the adjusted EBITDA loss was $749,000, and this compares to an EBITDA loss of $307,000 and an adjusted EBITDA loss of $182,000 in the third quarter of 2023. Moving to performance by segment, our cash resources were stretched during the third quarter. We had to procure material to restart production, and the lag between procurement and when customer payments are received after the product has shipped creates a cash gap. Therefore, the six months of limited product revenue and cash flow that we have experienced has restricted our supply chain, reducing our products and services revenue since certain of our vendors supply inventory to both segments. Products revenue decreased 53% quarter-over-quarter. The products margin at 43% was flat compared to the same period last year. Services revenue was flat quarter-over-quarter, which is primarily due to short-term cash constraints. As we begin to receive deposits from the recent product orders and strengthening our balance sheet through the private placement offering, We expect service revenue to exceed $4.1 million per quarter going forward. Services gross margin increased 5.5% to 44.4% in the third quarter of 2024, which compares, you know, compared to the prior year period. And the increased margin is due to lower labor and material costs, and the price increase reinstituted in August. As we continue to focus our efforts to reduce service costs, we have been testing product improvements which will increase service intervals. These improvements are expected to be rolled out across the service fleet beginning in the fourth quarter of this year and will continue into fiscal 2025. We anticipate these efforts will result in improved services margin beginning in the first quarter of 2025. Any energy production revenue increased 17% in the third quarter compared to the prior year. And this is due to the restart of an energy site, which had been dormant since March of 2020, and also due to higher run hours across the fleet. Our gross margin decreased to 45% to 48% in the prior year due to higher fuel costs that were incurred in the current year. I'll now turn the call over to Abhinav.

Thank you, Roger. The business development efforts from these last 15 months are starting to pay off. Our backlog has increased to greater than 10 million. We will have more potential orders that will close before the end of the year. In addition, we also expect to close our first data center project by early 2025. Given the big changes to the data center industry with AI and the level of interest we're seeing from potential customers, I believe this is a significant growth opportunity for TikaGen. Our chillers provide the means for a data center owner to take power that would be consumed by cooling and make money from it by using it for high-value computing. Our chillers also offer fast deployment, lower operating costs, and emission benefits. As we ramp up manufacturing and shift the existing backlog, we'll be focused on developing more projects in the data center segment. I will update investors as we make inroads into data center sales. Now pause here and open the floor for questions.

At this time, we'll be conducting a question and answer session. If you'd 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'd 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 questions. Our first question comes from Alexander Blanton with Clear Harbor Asset Management. Please proceed with your question.

Good morning.

Good morning, Alex.

How are you? I was pleased to hear about the Las Vegas Convention Center. Could you fill us in more on that? Is that a meeting? a rework of the existing center or is this a brand new building?

This is a major renovation project the convention center is undertaking. So they are going to replace a lot of their existing mechanical equipment and expand the existing convention center. So we are part of the cooling plant that is going in there. So this has been a project that we've been working on for quite a while and unfortunately it took a lot longer than any of us wanted to get it to the finish line, but the board finally approved the project earlier this week, which is why we haven't put a press release out, but every convention that goes in there is gonna be cooled by our chillers.

Will you be putting out a press release?

We will be, yes, likely next week, possibly if delayed maybe the week after.

Any idea, can you reveal the size of this in dollars?

Not at this stage, but we may include it in the press release. It's just we're not sure how much. I mean, some of the information is already public on their website, but that includes the whole project size, not just our chillers. Can we find your name? It's mentioned purely as gas chillers in there. but we're the only ones that build gas in ginger and chiller, so it's pretty obvious. But, yes, you can just go to their website. You can see it.

And is that in the current backlog, or is that going to be added?

That is in the current backlog, but there are going to be other projects that aren't in the backlog that are very, very close to it. There are a bunch of cannabis projects that we're working on right now that we're trying to get closed in the next month at the latest so those are not yet in the backlog that'll add at least another two million to the backlog and none of these projects are yet data centers are they these are just not yet not yet no the data center projects there's a few right now that are going through their environmental assessments those kind of processes um that's why i'm expecting the first one to close probably early 2025 It might close before that, but they're moving along nicely. It's just hard to predict when they'll close because they go through various different steps internally to assess not just the technology but the overall impact on the data center permits, that kind of thing.

And you mentioned when you talked about the backlog, something included $2 million of what? I wasn't clear on what that was.

So we included... The Las Vegas Convention Center actually included a 10-year prepaid warranty slash service on the chillers. So they wanted to just pay for that as part of the project cost.

I see.

So it'll be, yes.

So that's an advance payment for service?

Yes, exactly. Exactly. It'll be an advance payment for service on the chillers for the next 10 years.

That sounds sort of unusual. Why would they want to pay in advance for 10 years?

I think they wanted to include it in their capital budget, so they didn't have any operating costs on the chiller. They'd rather just pay us up front for it, and for us it's great because we get additional capital. And for them, they don't have to factor in an operating cost on the chiller beyond the gas.

And the last question is, could What other information is available on the private placements that you mentioned, if anything? Are you taking those calls one-on-one?

Right now, nothing public, but if anybody's interested, just reach out to me and I can provide the documentation, the numbers, that kind of thing.

Okay, thank you.

Thanks, Alex.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Joe Vittish with Menelapan Oracle Advisors. Please proceed with your question.

Yeah, good morning. I appreciate your taking my call. Great news. Really, really great to hear all this. I guess, you know, what I'd like to hear a little bit more about is, you know, there's The country is very big. You're a small company. If you could talk a little bit about how you focus your marketing efforts and whether or not you're looking at specific regions where electric generation is tight or whatever other metrics you might use.

Sure. That's a great question. So we do it a couple of different ways. So in Mark, I'm just going to start with the cannabis industry, for example, because I think that one is a particular focus for us. With the cannabis industry, we typically partner with various entities that are selling complementary products into that industry. We also know which states are licensing cannabis or where the licensing is being granted because that's public information. So typically we go with these partners. We try and identify where licensing has been granted. We typically also look for places that might have higher utility rates for cannabis. That combination tends to be a good hit rate for us. And there's only a few different companies that are really specialists in this space in terms of designing cannabis projects, designing the HVAC systems that go in that. So by either partnering with people that are selling complimentary systems like the air handlers or other items, or with the engineers who are actually designing this, we can get early access to a lot of these projects. In some cases, the customers are aware of us. They've either bought a facility that has our chillers, then they contact us. But in a lot of cases, we go to this market through those kind of channel partners. In cases in some other segments, let's just say the healthcare, that one tends to be much more regional focused. So there we use traditional HVAC sales reps who do come across projects where customers might be either power constrained or they're looking to make a change of an existing chiller. In those cases, again, we try to have reps that don't have a directly competing product. But in some cases, we do have reps that have both electrical chillers and ours. But healthcare, that tends to be the channel that we go to market there. For things like data centers, we're really partnering. We're going to the great trade shows there because there it's a pretty exclusive group. There's only a handful of it. There's a set of engineers that are specialists in designing those critical applications. There are other channel partners or other companies that are selling services to this, either as a energy provider or adding other services that we partner with them where we can. And then in some cases, we're doing a lot of online advertising as well, targeting just broadly people that have power constraints or energy issues. So sometimes that brings us leads as well. So we take, in some ways, with certain industries, it requires a much more broad approach. In other ones, we know who the people are that are designing those projects, and we really try and build relationships with them so we get an early in into those projects. So does that kind of give you a flavor of the approaches we're taking to get to market?

It does. It does. I'm just curious, you know, in terms of the Las Vegas Convention Center, what was the, you know, the hook there?

So for them, it was very much, they were seeing their peak time electrical rates going up. And in particular, because conventions are very, they're either on or off, right? You might have days where you got nothing in there and then you'll have a big convention that caused a big spike in electrical load. They were finding that their electrical bill was disproportionately being impacted by peak time charges. By being able to shave the peak by using our chillers, they can reduce their overall energy expenses substantially and also be more sustainable because they're going to use the heat to make further cooling using an absorption chiller. So they want to also reduce their carbon footprint by doing that.

Right, right, right. But was it they came upon you guys through trade magazines or through channel partners or who, you know, how did they find out about you?

So we actually had some consultants, a consulting engineer who was familiar with our technology. So they recommended to the Convention Center that they investigate us further. They then saw some of our other sites. They liked what they saw, and they decided this was a good solution for them.

Great, great. Okay, great, great. I appreciate it. I will reach out to you regarding the private placement just to get some information.

Thanks, Joe.

Our next question comes from Rick Teller, a private investor. Please proceed with your question.

Good morning. This data center business certainly looks like it has a lot of potential. I'm just wondering if you could Tell us how the proposition looks to a data center owner. In other words, they would swap out their electrical chillers with your natural gas-powered chillers, which would free up some electricity that they can then sell at a higher price, but obviously they have to write a check to TicoGen to get the the new chillers. What kind of return on investment would they be looking at? Obviously, it depends on the state they're in and the price of electricity and peak rates and all this other stuff that you've been talking about, but how compelling is it to a data center owner to make that switch?

So that is a great question, Rick. So some of this information isn't very easily available, but from what we're hearing from engineers, the payback on freeing up the cooling can be under two years in terms of how much they can charge for that capacity. If you just imagine a data center that's running, let's just say, 10 megawatts of power and 30% goes into cooling, that 30 it's essentially completely blocked off because it it's not something that they would be able to count on to use for the chips especially if the chips were going to be running at full load they're going to need the cooling at that same time so that that extra three megawatts really the way especially for ai applications the way the tenants are being charged now it's based on the amount of power they're drawing, not necessarily on space in the data center. It's really coming down to how much power they need. So the power draw is directly charged to the tenant by the data center owner. And the rates, based on what I'm hearing, the payback on our chillers would be less than two years. It really depends on whether they have any electrical chillers right now, what they're really planning on. Because in a number of cases, they're also trying to expand an existing data center. In that case, our cost, they're going to be buying a chiller anyway. It's whatever incremental premium is there on our chiller versus a electric chiller. So the payback is even shorter in that case because they'd be buying a chiller anyway.

So in other words, it looks like just for a round number, they could be thinking in terms of a 50% return on investment, that kind of thing.

Easily, yeah. It could be much better than that in some cases.

All right. Well, that sounds pretty good. Thanks so much.

Thank you, Rick.

We have reached the end of the question and answer session, and this concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.