TGEN - AMEX

Greetings, and welcome to Tecogen Third Quarter 2024 Conference Call. [Operator Instructions]. 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.

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 third 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 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 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 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 third quarter 2024 earnings and on our website. I will now turn the call over to Abinand Rangesh, Tecogen's CEO, who will provide an overview of third quarter 2024 activity and results; and Roger Deschenes, Tecogen'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 center. I know we covered some of this in the last call, I'd like to take a little bit of a deeper dive into this. And then Roger will talk to us about the third quarter results, and then I'll summarize and we'll go to question some 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 are also expecting a further $2 million of orders before year-end. With the order 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. Other 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, tips to use so much electricity that data centers are finding themselves short of power. As we've been attending data center trade shows, potential customers are 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 tips 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 pen 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 Tecogen'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 on-site 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 InVerde. 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 asset central chiller plant that cools all the conventions that happened 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 have 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 is presently $1.1 million. We expect customer deposits over the upcoming 2 months. 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 of the company, we need to achieve the following. Now that we have orders, we need to increase product shipments to reach profitability. The key to doing this will be material management so that our can build and ship products without delays. On the service side, we have been testing operational improvements on 2 InVerde test sites. Preliminary results indicate a 50% increase in time between oil changes. We plan to deploy this new lubrication system to all our InVerde sites over the next 12 months, as it will result in lower cost of service, increased uptime and increased 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 Tecogen's balance sheet. Having additional capital at this juncture will be instrumental to execution. Therefore, I plan to raise $2 million through a product 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 on-site at customer facilities. I'll now hand over to Roger to review the financials.

Thank you, Abinand, 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 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 Abinand 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 $0.04 in the third quarter of 2024 compared to $0.02 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 a product has shipped creates a cash gap. Therefore, 6 months of limited product revenue and cash flow that we have experienced has restricted our supply chain, reducing products and services revenue since certain of our vendor supply inventory to both segments. Products revenue decreased 53% quarter-over-quarter. New 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 2024, which compares -- compared to the prior year period. And the increased margin is due to lower labor and material costs and the price increase we instituted in August. As we continue to focus our efforts to reduce service costs, we have been testing 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. 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 have been dormant since March of 2020, and also due to higher runouts across the fleet. Our gross margin decreased to 45% from 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 Abinand.

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 Tecogen. 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 ship the existing backlog, we will be focused on developing more projects from the data center segment. I will update investors as we make inroads into data center sales. I'll now pause here and open the floor for questions.

[Operator Instructions]. 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 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, it's -- 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 it will be -- it will -- every convention that goes in there is going to be cooled by our chillers.

So, you will you be putting out a press release?

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

Any idea -- can you deal 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 in their -- on their website, but that includes the whole project side, not just our chillers. So -- but I think -- it's mentioned purely as gas chillers in there, but we're the only ones that build gas engine-driven chillers. So, it's pretty obvious. But yes, if you could 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 -- 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 will add at least another $2 million to the backlog.

And none of these projects are -- yes, data centers, are they? These are just...

Not yet. No. The data center projects, there's a few right now that are going through their environmental assessment, those kinds of processes. That's why I'm expecting the first one to close probably early 2025. We 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 that 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 flash service on the chillers, so they wanted to just pay for that as part of the project cost.

I see.

Yes.

So that's an advanced payment for service or…

Exactly. Exactly. It will be an advanced payment for service on the chillers for the next 10 years.

That's 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 upfront 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 last question is what other information is available on the private placements had you mentioned if anything? Are you taking those calls one-on-one?

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

Thank you.

[Operator Instructions]. Our next question comes from Joe Vidich with Manalapan Oracle Advisors. Please proceed with your question.

Good morning. I appreciate your taking my call. Great news, really, really great to hear all this. I guess what I'd like to hear a little bit more about is 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 what other metrics you might use?

Sure. That's a great question. So, we do it a couple of different ways. So, in -- Mark, let's -- I'm just going to start with the cannabis industry, for example, because I think that one is -- it's a particular focus for us, right? So, we -- with the cannabis industry, we typically partner with various anti-selling complementary products into that industry. We also know which states are licensing cannabis or where the licensing is being granted to that one 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 rate for us. And with -- there's only a few different companies are really specialists in the space in terms of designing cannabis projects, designing the HVAC systems that go in that. So, by either partnering with people that are selling complementary 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 health care, 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 at 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 health care, 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 right trade shows there. Because there, it's a pretty exclusive group. There's only a handful of -- 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 an energy provider or adding other services, so we partner with them where we can. And then in some cases, we just -- 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 that require 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. I'm just curious, in terms of the Las Vegas Convention Center, what was 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 all are sustainable because they're going to use the heat to make further cooling using an absorbed from chiller. So, they want to also reduce their carbon footprint by doing that.

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

So, we actually had some consultants -- consulting engineer who is 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 went and they liked what they saw and they decided this was a good solution for them.

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

Our next question comes from Rick Teller, a Private Investor.

Good morning. The 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? 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. So -- but obviously, they have to write a check to Tecogen to get the new chillers. So what kind of return on investment or would they be looking at? I mean, 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, I -- 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 2 years, in terms of how much they can charge for that capacity. The -- 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'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 extra 3 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 from 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 2 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, they would -- our cost, they're going to be buying a chiller anyway. It's only -- it's whatever incremental premium is there on our chiller versus an electric chiller. So, the payback is even shorter in that case because they'd be buying a chiller anyway.

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

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

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. We thank you for your participation.