Tecogen Inc. (PNK:TGEN) Q1 2023 Earnings Call Transcript

Tecogen Inc. (PNK:TGEN) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Greetings, and welcome to the Tecogen Q1 2023 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. With us today are Abinand Rangesh, CEO and CFO; Roger Deschenes, CIO; and Jack Whiting, General Counsel and Secretary. It is now my pleasure to introduce your host, Mr. Jack Whiting. Thank you. Please go ahead.

Jack Whiting: Good morning. This is Jack Whiting, General Counsel and Secretary of Tecogen. Please note this call is being recorded and will be archived on the Investors section of our website at tecogen.com. A press release regarding our first quarter 2023 earnings and the presentation provided this morning are available in the Investors section of our website. I would like to direct your attention to our Safe Harbor statement included in the earnings press release and presentation. Various remarks that we may make about the company’s future 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 these forward-looking statements as a result of various important factors, including those discussed in the company’s most recent annual report on Form 10-K and quarterly reports on Form 10-Q under the caption Risk Factors, which are on file with the Securities and Exchange Commission and available in the Investors section of our website under the heading SEC Filings.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. Therefore, you should not rely on any forward-looking statements as representing our views as of any date subsequent to today. During this call, we will refer to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in the press release regarding our first quarter 2023 earnings and in the Investors section of our website. I’ll now turn the call over to Abinand Rangesh.

Abinand Rangesh: Thank you, Jack. Welcome to Tecogen’s First Quarter 2023 Earnings Call. Today’s agenda, I will start out with a progress update. In the last call, I laid out both a short- and medium-term plan. In the short term, we are focused on stabilizing the business, in particular with regards to cash. We are also building out the sales and distribution channels, so the revenue can grow. I’d like to start with this update and then cover the 2021 – I mean, 2023 results. Although we saw a decline at the end of 2022, I am happy to note that our Q1 2023 revenue was 35% higher than Q4 2022. I expect revenue for every subsequent quarter from this point forward to be better than the last. We have successfully integrated the service contracts we acquired from Aegis and are now starting to derive revenue from them.

The sales team has been working diligently to expand the sales pipeline. We have added nearly 35% more deals into the sales pipeline than in Q4. Although not yet in our backlog, we have also been working on some larger projects that cumulatively make up more than 20 units. We are optimistic these will close and ship later in the year. Our cash position remained stable. We finished the quarter with $1.6 million. Our cash position today is over $2 million. We also expect further cash to free up as inventory levels reduce when we ship more units in Q2 and Q3. Lastly, we are still owed $1.8 million in NYSERDA rebates, which we expect to collect over the upcoming quarters. Lastly, we are working on obtaining the first purchase orders for the air-cooled chiller.

Although our typical sales cycle is greater than a year, during the last investor update call, I had set a target of the first purchase order by August. We are well on our way to achieving that. Before I move on to results, I know some investors have asked about the ransomware attack the company experienced two weeks ago. We caught it quickly, and we’re able to restore all files from backup. The attack happened on Friday the 28, and we were fully operational on Monday. Our key systems are on the cloud, so we’re unaffected. Our cybersecurity vendor doesn’t believe any files were copied from the network, but we have provided all employees identity theft insurance just in case. I’d like to do a quick recap of our products and our business model before Roger reviews the results.

We have three value propositions for end customers. The first is power generation and resiliency. This is electrical cogeneration for energy savings and in some cases, for backup power in the event of a blackout. We use a natural gas engine to generate electricity and use the engine heat to produce hot water for the building. We are twice as efficient as an equivalent fossil fuel power plant as we are able to use the heat, so we have a much lower greenhouse gas footprint. The second is our clean cooling products. These products generate chilled water and hot water simultaneously in applications that require climate control, such as health care, CEA, et cetera. We are the cheapest source of producing cooling and humidity control. Typically, the highest cooling load occurs in summertime when natural gas prices are lowest.

So we also offer customers substantial energy savings. In addition to energy savings, our chillers require little to no electricity to operate, so are ideal for applications where utilities are unable to supply sufficient power. As with electrical cogeneration, our greenhouse gas footprint is cleaner than an equivalent electric chiller and boiler combination since most fossil fuel power plants are not utilizing the waste. Both our electrical cogeneration and clean cooling products benefit from a 40% investment tax credit that reduces the payback substantially. Our last value proposition to customers is our long-term service and asset management services. Our service centers provide end-to-end maintenance and allow customers to maximize their energy savings.

Our typical maintenance contracts run for longer than ten years, and we also provide ancillary services to maintain balanced supply. This is an area that our strategy will focus heavily on. We plan to increase the range of services that we offer and also increase the number of sites that we service. 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 have also had some questions from investors on our business model.

So I would like to highlight some key points of the way we operate. When we look at the core of our business, we make money by selling product and then obtaining cash flow for many years as a result of the service contracts that are sold with the unit. Over time, this makes the business significantly more valuable. This is the reason that we took on additional service contracts from Aegis and plan to keep expanding the service business as much as possible. At this point, I would like to hand over to Roger to talk about the Q1 2023 results.

Roger Deschenes: Good morning, and thank you, Abinand. As has already been mentioned, we saw a revenue decline towards the end of 2022. As a result of this, our top line revenue was $5.4 million in Q1 2023, which compares to $7.2 million in the first quarter of 2022. This resulted in a net loss of $1.49 million in the current quarter or $0.06 per share. Our gross profit in Q1 2023 was $2.09 million, which compares with $3.09 million in the first quarter of 2022, and this was primarily due to the revenue decline. We also saw a margin reduction, which decreased to 38.9% in the quarter compared to 41.6% in the first quarter of 2022. Abinand will provide more context on the margin reduction and on our plans to increase margin in the segment performance review.

Our operating expenses were higher in the first quarter, which was predominantly due to onetime costs associated with the launch of the air-cooled chiller. The Q1 2022 operating expenses benefited from onetime gains associated with the disposal of some energy-producing assets and from the disposition of other assets. Moving forward to EBITDA. For the first quarter of 2023, EBITDA was a loss of $1.4 million, and adjusted EBITDA was a loss of $1.3 million. I’ll now hand the call over to Abinand to talk about the performance by segment.

Abinand Rangesh: Thank you, Roger. During our last call, I mentioned that we should start to see margin recover in 2023. Looking at product margin, it initially appears lower than the second half of 2022 and significantly lower than Q1 2022. When analyzed by product, the chiller margin increased to more than 40%. However, the cogeneration units reduced the overall product margin substantially. This was driven by a supply contract from 2022 with an existing customer. This has now expired. And going forward, we are now using 2023 pricing, so we expect an increase in cogeneration margin. On the service side, we had an increase of 8% in revenue. The segment had margins of 44%. We typically expect gross profit margins of 50% or more.

This varies quarter-to-quarter based on actual expenses incurred to maintain the service fleet. We have a significant number of engines in Toronto that were all installed around the same time. As supply chain constraints are easing, we made these engine replacements, so there was a disproportionate increase in cost in Q1. In addition, Q1 typically also has higher service costs since chillers are prepared for the summer cooling season. In context, Q4 2022 had an atypically high margin at 60%. So when taken in context, we haven’t seen any permanent changes to service margin. On the energy production segment, we had 8% lower revenue, primarily due to changes depending on outside weather conditions and how many cogen units ran that particular winter.

Our approach to increasing margin is going to come from multiple avenues. We have implemented better metrics to track business performance. This is going to allow us to catch cost excursions quickly. We’re also working on increasing service intervals. If we are successful, this will significantly improve our service margins. We have started a program to perform additional billable service work such as balance of plant. This is high-margin incremental revenue and improved cogeneration plant performance. We are continuing to improve our products, especially our chillers to reduce cost of major items. However, I believe the biggest improvement in product margin will come from increasing – biggest improvement in product margin will come from increasing product volume.

To recap our strategy, we plan to free up cash and stabilize the business. We plan to grow the service division and make our products easier to install and sell. We’re expanding our sales distribution system via the right channel partners and developers. And we plan to build up the backlog for the air-cooled seller. I think Tecogen is at a turning point. The company has impressive technology and a business model that generates consistent cash flow over the long term. However, in order to grow significantly, we need to make some major changes. With the introduction of the hybrid chiller and other future hybrid products, a revamped sales and distribution system, the potential for higher utility rates nationwide resulting in improved savings and partnerships with financing companies to make purchasing of our products easier for customers, I am confident that Tecogen has a promising future.

I would like to now hand over to the operator for any further questions.

Q&A Session

Operator: Ladies and gentlemen the floor is now open for questions. [Operator Instructions] The first question today is coming from Alex Blanton of Clear Harbor Asset Management. Please go ahead.

Operator: Thank you. The next question is coming from Jeff Grampp of Alliance Global Partners. Please go ahead.

Operator: Thank you. The next question is coming from Amit Dayal of H.C. Wainwright. Please go ahead.

Operator: Thank you. [Operator Instructions] The next question is coming from Jake MacRobbie [ph] a Private Investor. Please go ahead.

Operator: Thank you. The next question is coming from Michael Zuk, a Private Investor. Please go ahead.

Operator: Ladies and gentlemen, that brings us to the end of the question-and-answer session. We would like to thank you for your participation and interest in Tecogen. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.