Tecogen Inc

Greetings and welcome to the TECOGEN year-end 2024 conference call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may press star one at any time to be placed into question queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Jack Whiting, General Counsel. Please go ahead, sir.

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 tecogen.com. The press release regarding our fourth quarter and year-end 2024 earnings and the presentation provided this morning are available in the investor section of our website as well. I would like to direct your attention to our safe harbor statement included in our earnings 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 and Exchange Commission and available in the 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. Reconciliation of non-GAAP financial measures to the most recently excuse me, most directly comparable gap measures is provided in the press release regarding the fourth quarter and year-end 2024 earnings and on our website. I'll now turn the call over to Abhinav Rangesh, TKGEN CEO, who will provide an overview of fourth quarter and year-end 2024 activity and results. And then Roger Deschamps, TKGEN CAO, will provide additional information regarding fourth quarter and year-end 2024 financial results. Thank you, Jack.

Welcome to our 2024 earnings presentation. There are some exciting developments at TicoGen. As many of you have seen, we signed a sales and marketing agreement with Virta, the leader in thermal management for data centers. Before Roger gives us an overview of the financials for Q4 and fiscal year 2024, I'll provide more information on the data center market, what our target market segment is, why we signed this agreement with Vertiv and what data center sales could mean for the company. In addition to the data center market, sales prospects for our other market segments are also looking extremely favorable. We have many new leads, our backlog is strong, a majority of which we expect to ship in the next nine to 12 months. We are also expecting to close more multi-unit orders over the next few months. Our recurring revenue from service and energy has also grown to greater than $18 million for 2024. So with product revenue growth, we expect to see higher revenues in 2025 compared to previous years. Overall, Q4 revenues were in line with forecasts. We had forecast $6 million for Q4 and higher from there. Our gross profit margin also increased by 5 percentage points to 45%. Although our operating expenses were higher than in past quarters, This contains a few one-time expenses, such as a $109,000 increase to the credit loss reserve because a hospital customer that went into Chapter 11, and also a $217,000 goodwill impairment charge because a couple of energy contracts have reached an end of life. We also expect to see increased manufacturing efficiencies and hence margins as the product revenue increases. Lastly, we collected significant customer deposits, so our cash at year-end was greater than $5 million. In order to understand why we think the partnership with Vertiv is so exciting, I'd like to explain the underlying data center cooling opportunity in more detail. As we've discussed in past calls, the market opportunity for AI and data centers is massive compared to our current size. Using a simple calculation of the number of chips the main chip manufacturers are shipping per year and looking at the amount of cooling required over the next 10 years puts the market in excess of $20 billion. As the power density of AI chips has increased, the need for cooling has also increased. The cooling system for a data center needs to be designed for the worst case scenario. For example, when it's 90 degrees Fahrenheit outside, and all the AI chips are operating at full capacity. It doesn't matter if the cooling capacity is used at peak power for one minute or a thousand hours. The maximum power at the worst case scenario is what needs to be allocated to the cooling system. Once this power has been allocated to cooling, it is no longer available for computing. This means that a data center could be losing 15 to 30% of the total power available because they're using electric chillers. Given that computing is the primary revenue source for a data center, freeing up this power can directly impact a data center's bottom line. This is not just a problem for new construction data centers that are short of power. It is also a problem for existing data centers trying to upgrade to AI or repurpose existing buildings to data centers. As I've mentioned before, ArticoChill represents an easy way for a data center to free up this power because it runs on natural gas. It is also faster to install than an on-site power plant, especially in the case of an existing data center since it can use the existing cooling infrastructure. It can be a direct swap for an existing electric chiller or be installed side-by-side with an electric chiller or as a completely new build. In the case of a new build, the TECO chill doesn't need any long lead time switch gear or electrical panels to power the chiller. The TECO chill also comes as standard with our Altera emission system with best-in-class NOx and CO emissions, making it easy to obtain air permits in almost any jurisdiction. So how does the TECO chill compare against the alternatives? Compared to the nearest other gas cooling technology called an absorption chiller, The TECO chill consumes half the amount of gas for the same amount of cooling. The TECO chill has also been proven in many critical cooling applications, including hospitals, ice rinks, and cannabis. And compared to an electric chiller, the TECO chill has both a lower annual operating cost and frees up power. Lastly, the TECO chill is made in the USA, so we are less susceptible to tariffs. The economics of having more power available are highly compelling. AI data centers are typically built out in 8 to 9 megawatt chunks, with 2,000 tons to 5,000 tons of cooling. This example shows a 2,000-ton chiller plant. This is equivalent to four or five of our big PTX chillers. A larger co-location data center might have 10,000 tons of cooling or more. AI data centers charge their tenants based on the peak power needed at the rack. This example uses 160 kilowatts per month. But a recent CBRE report shows that the average in some markets is greater than $180 per kilowatt per month. This 2,000-ton TECO chill plant will free up close to 1,000 kilowatts or 1 megawatt. So this increase in available power is worth more than $2 million per year. Given that the alternative is an electric chiller, which is a cost center rather than a profit center, by increasing available power, our chiller will directly impact the data center's bottom line. Although the economics are compelling, one of the biggest challenges of a smaller company is competing against some of the incumbent electric chiller manufacturers. As you can see by this chart from a report on data center efficiency, the market is moving to larger co-location and hyperscale data centers. This means that each project is likely to have large chiller plants. However, to achieve significant sales in this market, we need to be able to influence multiple decision makers, the data center owner, the design engineer, equipment suppliers of complementary systems, etc. Having the right partner that can influence the multiple stakeholders involved in a sale will substantially improve the odds of successful sale. We believe that Vertiv is that partner because they have end-to-end expertise. They have more than $8 billion in revenue in 2024, predominantly from data centers, and have a world-renowned brand name in the industry. Conversely, for Vertiv, having Artiller as part of their offering gives them a compelling solution as power constraints become more prevalent. I believe this relationship with Vertiv is a critical part of our go-to-market strategy. Although large portions of our discussions with Vertiv are confidential, both sides see this as a precursor to a larger supply agreement. I also believe that Vertiv's market reach is going to be extremely beneficial to obtain orders from larger colocation data centers. The press release associated with the partnership has already been picked up by numerous data center publications worldwide. Given Virta's strong presence outside the USA, we are also hopeful that we will see orders from overseas locations. Last call, I mentioned we would have our first data center project by early 2025. We have a couple of pieces of good news here. The first is one of our existing sites commissioned in 2024 is powering an enterprise data center in Manhattan. we received an order for an inverting for an existing cloud storage data center in Connecticut. The customer compared us against other alternatives, including fuel cells and competitors, before choosing our inverting as the superior option. The other data center projects we're working on are still moving through the procurement process. The customers are working on signing up AI tenants before placing equipment purchases. Some of these projects have also been scaled up significantly in size because of market demand. I've also been asked by shareholders about the impact of data center sales. Here I have an illustrative example of a 50 megawatt data center. In this example, the cooling load is greater than 11,000 tons. This means that if the customer chose to install our DTX chillers for the full plant, it would result in between 13 million and 16 million in revenue for us. This means a single sale to a medium-sized data center like this could result in profitability for us. Our present adjusted EBITDA break-even point is approximately $30 million per year. Given that our present backlog is strong and other market segments are also facing power constraints, we hope to see increased quarter flow across the board. Although the PAC-3 move was highly disruptive to our revenues, cash flow, and operations last year, We are now well set up for both chiller and co-generation production. The overhead cranes in the new location allow us to move chillers easily, and we have the capacity to scale up product revenue past our breakeven point. We are presently focused on working with our supply chain to improve manufacturing throughput. The backlog is presently at 12.2 million. We're expecting another $3 million or so of projects to close over the next few months. The cash position was $5.4 million at the end of Q4 and is presently approximately $4 million. We were successful in collecting customer deposits at year end and some of the outstanding rebates. The current cash position is lower than at year end as we ramped up working capital for manufacturing and also because some of the rebate money was passed through on behalf of customers. We have also extended the repayment timeline on the credit line with John Hesopolis to 2026 so that we could use our cash for revenue increases. Just as a recap, we have three revenue segments. Our product revenue consists of sales of cogeneration units, micro-bid systems, and chillers to a 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 assistance. I'm now going to hand over to Roger to walk through our financial numbers.

Thank you, Abhinav. Good morning, everybody. Our total revenues in the fourth quarter of 2024 were $6.1 million, which compares to $5.9 billion in a comparable period in 2023, which represents an increase of 3%. $1.2 million, which compares to $1.9 million in the fourth quarter of 2023. Our gross profit increased 16% and operating expenses decreased by 7% quarter over quarter. The gross margin for the fourth quarter of 2024 rose by 5% to 45% from 40% in 2023. Included in the fourth quarter 2024 operating expenses are $109,000 credit loss provision for a hospital customer who filed for bankruptcy under Chapter 11 and the $217,000 goodwill impairment. The goodwill impairment was a result of certain ADG contracts that had reached end of life. And then we also need to point out in the fourth quarter of 2023 included in the operating expenses was a $744,000 credit loss provision for certain installation receivables, which redeemed uncollectible. For the full year, revenues were at $22.6 million, which compares to $25.1 million in the FPA. in fiscal year 2023, a decrease of 10%. The decline in revenue was driven primarily by our factory move, which constrained production, reducing our products revenues, and partially by a pause in sales activity driven by the anti-gas sentiment. The recurring revenue from services and energy production increased 10.10% year over year. Given our current backlog, we believe we are poised for revenue growth in 2025. The net loss for fiscal year 2024 was $4.8 million, which compares to a net loss of $4.6 million in 2023. The increase in net loss in the current year is due to lower products revenues, which results in consequently lower gross margin dollars. Our overall gross profit margin increased 3% to 44% in the fiscal year 2024 from 41% in fiscal year 2023. And this is primarily driven by the increases in our services margin. Our operating expenses were essentially flat year over year. The fiscal year 2024 operating expenses were impacted by the one-time charge for the credit loss provision and the goodwill impairment. We will discuss sales and gross margin further in the segment performance review. In terms of EBITDA and adjusted EBITDA, for the fourth quarter of 2024, the EBITDA loss was $1 million, and the adjusted EBITDA loss was $692,000, which compares to the EBITDA loss of $1.7 million and an adjusted EBITDA loss of $527,000 in the fourth quarter of 2023. For the full year, the EBITDA loss was $4.1 million, and the adjusted EBITDA loss was $3.6 million, which compares to an EBITDA loss of $3.9 million and an adjusted EBITDA loss of $2.6 million in fiscal year 2023. The higher loss in the current year was driven by the lower products revenue, which is due in part to the factory relocation during the current year. I'll review the performance by segment for the fourth quarter. Products revenues decreased 18% quarter over quarter to $1.4 million in 2024 from $1.8 million in 2021. GENERATION SHIPMENTS AND SALES OF ENGINEERED ACCESSORIES. THE PRODUCT MARGINS INCREASED TO 31 PERCENT QUARTER OVER QUARTER FROM 19 PERCENT IN 2023. AS YOU MAY RECALL, THE 4TH QUARTER OF 2023 GROSS MARGIN WAS IMPACTED BY THE OFFICE ELECTED PROVISION THAT WAS RECORDED DURING THAT PERIOD. SERVICES REVENUES INCREASED 14 PERCENT QUARTER OVER QUARTER TO $4.1 MILLION IN 2024 from $3.6 million in 2023, which is due to a mix of the 11% increase in revenue from the acquired maintenance contracts and a 14% increase in revenue from our existing contracts. The gross margin was essentially flat at 51% in both periods. Energy production revenue increased by 2% quarter over quarter to $550,000 in 2024 from $542,000 in 2023. The gross margin increased 9% to 39% in 2024, which compares to 30% in 2023. And the gross margins impacted by seasonality and utility rates in the energy production segment. For the full year segment performance, products revenue increased 50% year over year. Again, the group decrease is predominantly due to the factory move, which constrained our manufacturing operations for nearly two quarters. Our products revenue for Q2 were minimal and revenues in the other quarters in fiscal year 2024 were also lower due to move preparation and subsequent fit out and production restaff in our new facility. Going forward, we expect to see growth in products revenue. The products gross margin was flat year over year, but we do expect our products margins to improve with increased volume and increased efficiencies. Our services revenue increased 20% year over year to $16.1 million in 2024 from $14.5 million in 2023, which is due to a 42% increase in revenue from the acquired maintenance contracts. and a 6% increase in existing services contract revenue. For 2024, our gross margin increased 48%, which compares to a gross margin of 44% in 2023, which is due to decreased labor and material costs incurred to address engine replacements, and also a reduction in the provision of obsolete inventory in 2024 compared to 2023. year-over-year to $2.1 million in 2024 and $1.75 million in 2023. Our gross margin increased slightly by 1% to 38% in 2024 compared to 30% in 2023. And again, the gross margin is a function of seasonality and utility rates, which affect the energy production segment margins. And one other point I'd like to add is during the fourth quarter, we collected 860,000 of the pieces Abaddon alluded to earlier. These are installation projects which date from the 2028 to 2020 period. With that, I'll conclude my review of the financials, and I'll turn the call back over to Abaddon. Thank you, Roger.

I'd just like to recap by saying that we've made significant progress towards our strategic objectives. we couldn't have a better partner than Vertiv in the data center space. We also expect to see more data center activity from the projects we have been developing ourselves. Margins are also expanding across the board, especially in the service group, thereby increasing our recurring cash flow stream. Finally, our other market segments are looking strong, so I'm very optimistic about what the future brings. I'll now turn the floor over for questions.

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. Once again, that's star 1 to be placed in the question queue. Our first question is coming from Alex Blanton from Clear Harbor Asset Management. Your line is now live.

Thank you very much. Well, I like the outlook. The backlog compares with what, last quarter?

So last quarter when we reported, the backlog was 10.5. So we finished the year just over 12. Yeah, now we're at 12.2 or so.

Okay, fine. The $20 billion market you mentioned, over what period is that?

So I estimated that over a 10-year period. So I just did a very simple calculation. I've seen various reports, but we just took the number of chips that are being shipped and said, how much cooling does each one of those ships need? How much cooling equipment do you need if you put new equipment for all of that, assuming most of the center's not built? And I think at least 20 billion.

And so right now, that mark's being met primarily by electric-powered chillers, is that correct?

Predominantly, yes.

And is there competition in what you do in the natural gas chillers?

So as I mentioned, the only competing gas chiller technology that exists is called an absorption chiller. It's typically less than half the efficiency of our chiller. It's rarely used in this kind of critical cooling type application because it's not really designed for this kind of high reliability, you know, constant uptime. type scenario and so I would say right now there's no direct competition on the gas chiller market what people are doing is just building the power plant on site much bigger and then using that to power an electrical chiller but that means that you're giving up a huge portion of your potential revenue because you're not able to send that power to additional chips now could you give us the background of the uh

The relationship with Vertiv that developed. How did that happen?

So I recognized the potential for the market, but also I knew that we needed a partner that was going to be able to help us get some of these bigger sales. So I actually just cold emailed the Vertiv CEO, and he introduced me to the key people on the thermal booth. And we started discussing sometime last year and they could see that there was a big potential in the gas or potential to do cooling with gas. So we basically built, we started the relationship, built a key partnership with some of the thermal division at Vertiv. But getting the agreement in place just took a little longer. Now that we have the agreement in place, they can go full speed on the marketing.

And had they known anything about TicoGen before you called?

No, they had not.

Now, what is the strategy that's going to be pursued with them? Are they going to market your product with their customers? Is that what's going to happen?

Correct. I mean, they have a broader marketing strategy, right, when it comes to any product, whether it's theirs or ours. I mean, they have their existing channels that they put information out. They do various learning opportunities. Plus, they have relationships already with a large number of the bigger co-location owners. So they have various different ways that they approach that market. Some of the details of that are confidential, so I can't get into that, but that's Because they have a lot of these existing relationships, they're in a very strong position to just present this, knowing which customers are building AI, which ones have power constraints, that kind of thing.

Well, they're a major supplier globally of equipment to data centers, correct?

Correct. They're arguably the largest data center supplier of everything from switchgear, thermal systems, I think there was a Dell study that voted them number one in terms of the thermal management for data centers. So they control everything from the cooling or they have equipment that can handle everything inside the data center to distribute the cooling as well as the actual cooling equipment itself. And I believe they provide some of the design services to help customers make decisions on with NVIDIA on designing cooling for some of the chips that NVIDIA is launching.

Now, you may not know the answer to this, but their stock peaked last November at around 150 or so, and it's been going down about a third since then. Meanwhile, the data center market has been expanding. rapidly. Do you have any idea why that stock has been going down?

If you look at their actual financial results, their numbers have been getting stronger. I think that's just market sentiment. I think that's just the ups and downs of general market sentiment and people's approach to what they think AI is going to be in the future. I don't think the underlying fundamentals appear to still be very strong and they continue to be growing in that space. But as far as we're concerned, right, it doesn't matter for us because just even as I showed, even one data center can mean a huge difference to our revenues and profitability and the scale of this company. So it shouldn't make much difference what happens on their business.

Absolutely. Now, they're a global company. If there's a lot of new business flows into Pikachu, you might not have the capacity in your plant Is there a, I'm thinking that you could use their plants because they've got plants all over the place. And you can supply Europe for one of their plants, for example. Is that part of the plan?

So if you look at the, again, part of this work, you know, is confidential, so I won't go into the details of it. But if you look at the general structure of the sales and marketing agreement we signed with them, one of the first pieces that is included in there is that they will help us with some of our supply chain. And it does build in potentially the ability to license, although we haven't, all those kind of details would be worked out as part of a broader supply agreement. I think the way we see it is that this is a true partnership where we figure out the best way to supply the market. And as long as both parties can make a good return on the time and energy required to do that, we see this as a way to grow together to supply these power-constrained things. So I think there's not a final answer on any of that yet, but it's part of the overall discussions.

It would seem to me that what you have to offer, if it becomes part of their overall product offering for a data center, is going to give them a competitive advantage Is that correct?

That is definitely correct because it allows them to use this as a tool to sell a lot of their other equipment, whereas a competitor that might not have, might only have an electrical cooling system isn't going to be able to do that.

So they could actually improve on their growth rate given what you have to offer them, correct?

I wouldn't – that's at a point where I think I would be speculating if I – I would hope that we could be meaningful to their growth rate, but I don't know if that would be the case.

Okay. Well, it just seems to me that you're giving them a competitive advantage because it's a cost reduction in supplying the data center. Okay. Very, very interesting. I will pass it along to the next person. Thank you.

Thank you, Alex. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

Thank you very much for attending. If anybody has any further questions, feel free to send management an email. We look forward to updating investors as we get further improvements in the space.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.