Tecogen Inc. (PNK:TGEN) Q1 2024 Earnings Call Transcript

Tecogen Inc. (PNK:TGEN) Q1 2024 Earnings Call Transcript May 12, 2024

Tecogen Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the First Quarter 2024 Tecogen Investor Update Call. Our host for today’s call is Jack Whiting, General Counsel and Secretary. [Operator Instructions] I would like to now turn the call over to your host. Mr. Whiting, you may begin.

Jack Whiting: 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 first 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 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 first 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 first quarter 2024 activity and results; and Roger Deschenes, Tecogen’s CAO, who will provide additional information regarding first quarter 2024 financial results.

Abinand Rangesh: Thank you, Jack. Welcome to Tecogen’s Q1 2024 earnings call. First, I’d like to start by giving investors an update on our factory moves on the 83 service contracts we acquired this year. Then I’d like to talk about our marketing. To me, our marketing has been our weakest link, but also holds the greatest upside potential. A recent experience made us look at our marketing in a new way. We were recently talking to a prospective industrial customer. They had two electrical services from the same utility into two different sides of the same factory. On one side of the building, they experienced power outages. On the other side, they didn’t. Clearly, power constraints are very local, but every facility that has a problem knows what they do.

This led to the question, how do we make more facilities like this one find us? Before I tell you how we changed our marketing and the results from that, let me update you on our factory move on service. We’ve now moved into our new facility in Billerica. Unless they do it is still the manufacturing space fit-out on the test cells. We faced a tremendous amount of cash by using our own labor for some of this fit-out but it means limited production until the end of Q2. After this, we should benefit from reduced operational costs and should see product revenue recover in Q3. We saw record service revenue in Q1. We were cash flow positive in Q1, so we have not had to draw further into the credit line as of today. We have acquired service for another 83 units that’s year-to-date, 16 units in February, 31 in May and 36 coming online in the next two quarters.

We also anticipate a further 30 to 50 service agreements over the next three months. We expect that these service agreements additions will add more than $700,000 in revenue this year and more than $1 million next year. Service will continue to be the foundation of our business as it provides recurring cash flow. In the meantime, we are working to close existing leads and develop a system to double our sales pipelines. Despite the anti-gas sentiments, we expect to see leads from last year close soon. Many of these came from new sales channel partners we signed, the articles we wrote and the trade shows we attended. The next step is to find a way to sell to the thousands of customers facing power shortages. As we saw from the example before, shortages can be very localized.

We needed to be able to advertise to these customers so they can find us. To do this, we focused on online marketing. To be successful with online marketing, the message must be easy to understand and compelling. We have three to eight seconds in best to get a prospect’s interest and direct them to your website. Then you have a further 30 seconds to convert them into a lead. To craft our message, we interviewed existing customers and prospects. A pattern began to emerge. Before customers bought from us, they were already looking for a generator or a chiller. Our products offer tremendous savings so they chose us. They really viewed our product with a generator that saves money or a chiller that saves money. We needed to make our message and value much easier for them to understand.

Using this customer feedback, we ran Google Ads with different headlines and different messages. We track the percentage of people that clicked on our ads, how long people spend on our website and what they were searching for before they clicked. The winning ad if you spent $100,000 on energy, slash your bill in half. We’ve now updated our website with case studies and specialized market pages. Prospective customers can now see how our on-site power heating and cooling will help them save money in their applications. As a result, we’re already seeing qualified leads through the web. Our preliminary cost to generate leads online is comparable to trade shows. To me, though, the most exciting part is that online marketing is highly scalable. We can continue doing all of the other marketing that we’re doing right now and continue running online marketing at the same time.

To me, the next step is to take an even more targeted approach through other channels such as LinkedIn, which we hope will generate further leads. Backlog and cash; the backlog is presently at $4.8 million. I understand that this is lower than it has been historically. The anti-gas sentiment has met the Steady 1 and 2 unit New York City projects are now gone. However, we have around $7 million of projects that we expect to close in one to three months. Presently, we also have purchase orders for four hybrid air-cooled chillers. Our reliability testing of this product is almost complete. So we expect to start shipping units in Q4. We also expect to see sales for this product increase in 2025 and beyond. We have also established relationships with financing partners that is enabling some of the projects we expect to close later in 2024.

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We had positive cash flow in Q1 and finished the quarter with $1.5 million in cash. Our present cash position is roughly $1.3 million, and we have paid more than $300,000 to our reserve fit out and have roughly $200,000 to $250,000 further in fit-out costs. We have not needed to draw further into our line presently. I’m hoping that with the imminent orders and associated deposits, we can leave the line of credit as a safety net. We have three revenue segments. Our product revenue consists of sales of cogeneration units, microgrid systems and chillers through a range of markets and customers. Our services revenue primarily consists of our contracted operations and maintenance services. Our energy production revenue is from energy sales, including sales of electricity and thermal energy produced by our equipment on-site at customer facilities.

I’m now going to hand over to Roger to go through the financial results.

Roger Deschenes: Thank you, Abinand, and good morning, everybody. First quarter 2024 revenues were $6.2 million, which compares to $5.4 million in the comparable period in 2023, which represents an increase of 15%, which is due primarily to as Abinand spoke previously, increased services revenue and also increases in our energy production segment. Our net loss for the first quarter was $1.1 million, which compares to $1.5 million in the first quarter of 2023. The decrease in the net loss is primarily due to increased revenues and increased gross profit margin. Our net loss per share was $0.04 per share for the first quarter of 2024, which compares to $0.06 per share during the comparable periods. We will discuss margin in the segment review.

Our operating expenses increased 2.5% quarter-over-quarter, and this is due to duplicate rent costs, which resulted in approximately $160,000 of additional costs, which were incurred in the first quarter of 2024 and also an increase in testing costs as we prepare our air cooled chiller for a deployment in the fourth quarter. Looking at our EBITDA and adjusted EBITDA, for the first quarter, the EBITDA loss was $924,000 and the adjusted EBITDA loss was $898,000. This compares to an EBITDA loss of $1.3 million and an adjusted EBITDA loss of $1.25 million in the first quarter of 2023. Moving forward to segment performance, our products revenue decreased 13% quarter-over- quarter, while our products gross margin increased slightly by 1% to 30%, which is primarily due to the product mix shift during the quarter.

As I mentioned previously, our services revenue increased 28% quarter-over-quarter, and this is due to the acquired contracts, which added about $758,000 to our first quarter revenue. Gross profit increased to 48% in the first quarter of 2024, from 45% in the prior period. While we are still experiencing increased material cost of some of our products, and we will be instituting service price increases for these products. To decrease service costs, we have been testing product improvements, which will increase service intervals which will increase service intervals. The impact of these product improvements is expected to be rolled out across the service fleet later in the year, and we anticipate these efforts will result in improved margins beginning in the fourth quarter of 2024.

Our energy production revenue increased 28% quarter-over-quarter, and this is due in part for the restart of energy site, which had been dormant since March of 2020 and a higher run hour rate across the fleet. Our gross margin was negatively impacted by the higher natural gas prices and additional maintenance costs that were incurred in the first quarter of 2024. I’ll now turn the call back over to Abinand.

Abinand Rangesh: Thank you, Roger. In summary, we plan to finish up the factory move this quarter, so we can be back to full production by Q3. We are going to keep growing the service revenue and cash flow. This has already grown 20% year-on-year, and we expect a further 20% growth this year. For me, though, the most exciting bit is that we finally worked out a recipe to consistently get new leads using advertising. This is highly scalable. As a country we’re running out of power, Tecogen has compelling solutions to this problem. Now we have a way to reach customers who have power constraints. We published a short shareholder letter on our website outlining this problem on how Tecogen is solving this. If anybody wants — it can be found on the Presentation section of our website or I can e-mail it to anybody that wants.

I also hope to be able to announce further orders within the next one to three months, some of which should be pretty significant and par with these power-constrained customers. And I hope now that with this new advertising, we’re going to see some product growth over the next 3 to 6 months. At this point, I’ll now hand over to the operator for questions.

Operator: [Operator Instructions] Your first question comes from Alex Blanton with Clear Harbor Asset Management.

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Q&A Session

Alex Blanton: Good morning. Just a little housekeeping item at the moment. I don’t know if other people experienced this, but the sound quality coming from the speakers from Tecogen is distorted quite a bit. The person from the conference call company is fine. So it’s not my end, I don’t think, but you might want to look into that. I wanted to ask the service revenue that you forecast $0.7 million this year and $1 million next year. Is that an additional $1 million?

Abinand Rangesh: Correct. No, sorry, no. So the $700,000 this year, it’s going to — so we’re currently a run rate per quarter, right, of about $4 million. So we’re talking somewhere around $15 million for the year. So this year, we’d probably see an additional $700,000 and then next — so we’ll be at $16.7 million or so, and then next year we’ll be in the $17 million-something range. Because of the timing of these service contracts coming online, we won’t necessarily see a full year worth of revenue over there.

Alex Blanton: So it’s not $1 million on top of the $70,000.

Abinand Rangesh: No, not at this point, though I’m going to try.

Alex Blanton: Okay, fine. I wanted to ask about the condition of the move. You said the move was finished and at the beginning, and then you said the move was going to be finished this quarter. Are you?

Abinand Rangesh: I’ll clarify that? Yes. So what’s happened is we’ve moved all of the offices, all the material, everything is in place but to actually be able to build the product and ship it, we need all our test cells operating. And that is going to take a little longer because some of it’s being held up by permits. Some of it is just — the amount of labor that it takes to put the test cells back together. So there’s just a little more fit-out that needs to happen for those test cells to be fully operational. And that’s really what’s going to limit how much product that — I mean, that’s combined with the order cycles right now. We’re going to limit how much product go out this quarter. So our product revenue for Q2 is going to be weak. But Q3 onwards, we should be back to full production.

Alex Blanton: This is what I was going at because when you had in our last conference call in January, it sounded like you were going to be in that situation in the first quarter. But no, you had shipments to actually rise in the first quarter above last year. But the drop in shipments is going to be in the second quarter then?

Abinand Rangesh: Yes. That’s kind of where it’s shaking out right now because there were certain delays that happened towards the end of the first quarter in permits. So it just ended up — we were able to do more production in the first quarter, but it’s hitting us more in Q2. So that’s where I think we’re going to be. We’re, of course, going to try and get this done as quickly as possible. But I believe it’s going to be weak in Q2 for product shipment.

Alex Blanton: Right. And then you’re going to have a catch-up period in the second half?

Abinand Rangesh: That is where things are looking like because the first, as I mentioned, right, the New York City orders, they’ve dropped down substantially, but we’ve got a bunch of projects that are very, very close to getting purchase orders right now. The timing on those we’re pushing as hard as we can to get those projects in, get the deposits and get producing. But if the timing of those looks like one to three months to get them so once we get them in theory, we can start shipping those units in Q3. So it should be — my hope is that Q3 and Q4 will be much stronger on product shipments. So that, combined with the strong service number should put us in a very, very solid position for the second half of the year.

Alex Blanton: And could you characterize the kinds of projects those are in terms of the kinds of customers we’re talking about here.

Abinand Rangesh: Yes. So I can give you some broad brushes there. I won’t get into specifics. So some of those are industrial customers that are looking to do expansions where, again, they don’t have enough power. In fact, we just recently sold one air-cooled chiller to a customer like that. We’re also looking at a couple of large facilities that have time-of-day charges that are getting to be punitive. So they’re looking to use some of our chillers to reduce those time-of-day charges. And then there’s a few other mix — similar type of requirements, but they’re all over the country. They’re not just in the Northeast. So those are the kind of customers that we’re seeing right now for our products.

Alex Blanton: All over the country.

Abinand Rangesh: Yes. I mean there’s some — they’re not in our normal Northeast region. There’s some in Florida, some in — I mean we shipped some last year to yes, it’s in different parts of the country right now. Again, I will — once we get our orders in, I will announce these — you’ll be able to see the kind of projects we have.

Alex Blanton: And finally, how did you get those projects? How did you come into a traditional marketing that you’ve been doing and how long have you had them in your backlog of projects?

Abinand Rangesh: So these are actually not in the backlog right now because again.

Alex Blanton: I mean the backlog of projects of that –.

Abinand Rangesh: Yes, it’s in the pipeline. So these ones we started working on them early part of last year. They came through some of the sales channel partners that we signed up last year. Some of them came through some of the articles that we wrote in the various trade publications. And then the rest — yes, so those were sort of the areas that we really got some of these projects through. And that’s also why we’re going to continue that approach. But what I see going forward is we’ve now added online marketing as well to our arsenal marketing tools that we have. So we’ve now got another way to generate new leads.

Alex Blanton: Okay, thank you very much.

Abinand Rangesh: Thanks Alex. And we’ll take care of the sound issue. It seemed fine on the sound check that we did, but clearly, it wasn’t. So we’ll check into that for the next call.

Operator: Your next question comes from Norman Heyman with Technology Investment.

Unidentified Analyst : Yes. Thank you for taking my call. I have a lot of history with Tecogen, Charlie Maxwell, John Hatsopoulos. So I’ve been following you guys and I’ve owned your stock for an extended period of time. I’m also an engineer by training. I must applaud you for doing the hard work that it takes here to there, and that is a true felt complement. The question I have is more top down in a sense. One is the impact of time-of-day — it kind of seems to me that’s a highly identifiable and marketable technique. And I wonder if your traction from that concept is real or will it take an extended period of time.