Tecogen Inc. (PNK:TGEN) Q4 2023 Earnings Call Transcript

Tecogen Inc. (PNK:TGEN) Q4 2023 Earnings Call Transcript March 14, 2024

Tecogen Inc. beats earnings expectations. Reported EPS is $-0.02, expectations were $-0.04.
TGEN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Tecogen Year-End 2023 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I’ll now turn the conference over to Jack Whiting, General Counsel and Secretary. Thank you. 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 fourth quarter and year-end 2023 earnings and 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 our earnings press release and presentation. Various remarks that we may 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 fourth quarter and year-end 2023 earnings and on our website. I’ll now turn the call over to Abinand Rangesh, Tecogen’s CEO, who will provide an overview of the fourth quarter and year-end 2023 activity and results; and Roger Deschenes, Tecogen’s CAO, who will provide additional information regarding fourth quarter and year-end financial results.

A man in overalls soldering a large water heater inside a manufacturing facility.

Abinand Rangesh: Thank you, Jack. Welcome to Tecogen’s fiscal year 2023 earnings call. I’d like to start by giving investors an update on changes to the business landscape and market, what has worked with our strategy and what we need to do differently to reach profitability. As we’ve mentioned before, we need to move factory at the end of Q1 and early Q2. I will also talk briefly about this and how this will affect operations. Roger will then take us through the financial numbers, and then I will wrap up with our 2024 plan. As many of our long-term shareholders know, one of the predominant markets has been large multifamily residential buildings in New York City. These projects typically have one or two-unit cogeneration systems per building.

We are facing significant headwinds in this market. We have seen multiple projects canceled after contractor selection over the last six months. However, we also have a big opportunity ahead of us that can give us significant tailwind. Increased electrification efforts, data centers consuming exponentially more power and aging utility infrastructure leading to electrical capacity constraints nationwide. It is limiting customers’ ability to expand the time of day charges are becoming punitive, and there are only a few options that allow customers to address the problem. As a result, we are seeing more multiple unit cogeneration and chiller projects than ever before. In the case of our chillers, the customer completely avoids the need to connect to the utility grid.

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Q&A Session

In the case of our electrical cogeneration product, the ease of interconnect with our modular inverter-based system is a huge benefit. These electrical capacity constraints are nationwide. So I believe we are just starting to see the beginning of this trend. There is also an opportunity to generate additional revenue from utility demand response programs because of these electrical capacity constraints. I’ll talk a bit more about this later in the presentation. We’ve looked at the business carefully and feel that there is a pathway to having our recurring revenue stream cover the majority of our fixed costs. Product revenue can significantly fluctuate quarter-to-quarter due to the long project development cycles. We need a way to be cash flow positive and profitable irrespective of product revenue fluctuations.

We increased the number of service contracts last year. As a result, we saw a 20% increase year-on-year in service revenue. We also took on another 48 service contracts earlier this year, 16 of those that are operating presently in the balance coming on line over the next two quarters. We are currently working on more deals for service contracts that will significantly increase our service revenue and cash flow. We also made much needed investments last year to replace engines and heat exchangers. This reduced our service margin for the first three quarters, but we saw a recovery to greater than 50% in Q4. We also generated some cash in the fourth quarter. As we make further improvements to our service fleet by increasing service intervals, we expect to see margin expansion from present levels.

On the other side of the equation, we need to cut operating costs. At present, we are focused on completing our factory move. We expect to see reduced rent after the move. We also expect to make other operational cost reductions to move us closer to profitability. We have specified on multiple large projects. As mentioned before, we’ve had to pivot the business to nationwide projects, especially those that have electrical constraints. These are multiunit projects, and we expect to close a significant portion of these later in the year. As already mentioned, we need to move factory and reduce operating expenses. We expect OpEx reductions in Q2 and Q3. We have also started to work with customers to sign them up for demand response programs. At the moment, there appears to be significant interest in this offering.

This will provide high-margin revenue and utilize any excess cogeneration capacity that is available in our service fleet. I will provide updates as we sign up customers. We are also working on securing more energy contracts in conjunction with development and finance partners. Backlog and cash. The backlog is presently at $5.25 million. We have additional purchase orders from orders we announced last August, but these are cannabis projects, and there’s been continued financing delays, so we have removed these from our backlog. As mentioned, we also have some great projects in the pipeline, one of which is a large chiller project we are exclusively specified for. This is not yet in the backlog. We hope to close this by June or July. The cash position was $1.35 million at the end of Q4 and is presently at $1.5 million.

We drew $500,000 into the credit line provided by the Board members. We expect to draw another $500,000 into this line for the factory move and fit-out. The timing of when we secured our recent 12-unit order and when our larger chiller order is likely to close is going to limit what we can produce in both Q1 and Q2, but we expect to be back to full capacity by Q3. Our Revenue segments. 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 go over the financial numbers.

Roger Deschenes: Thank you, Abinand, and good morning, everybody. I’ll begin with a review of the fourth quarter results. Our total revenues for the fourth quarter were $5.9 million, which compares to $4.5 million in the fourth quarter of 2022. This represents an increase of 30%, which is due primarily to increased products and services revenue. Our net loss for the fourth quarter of 2023 was $1.9 million or $0.07 a share compared to $1.4 million or $0.06 a share in the fourth quarter of 2022. The increased net loss is primarily due to $1.1 million in provisions recognized in the current period for bad debt from old installation receivables and for obsolete inventory. Both our products and services gross profit margin were impacted by the $403,000 obsolete inventory provision, which reduced our overall Q4 2023 margin by 6.8%.

Excluding the charge that was recorded, our overall Q4 2023 gross margin would have been 46.7%. We’ll discuss margin in more detail in the segment review. Operating expenses increased 10.2% to $4.2 million in the fourth quarter 2023 from $3.8 million in the fourth quarter of 2022, due primarily to the higher debt – bad debt provision of $744,000 that was recorded on older install receivables from the NYSERDA rebate program, which we determined that we would not achieve the milestones within the program termination date due to customer-induced delays. We are, however, continuing to pursue recovery of these rebates and will seek an extension of time with NYSERDA to complete the milestones. Excluding this bad debt provision that we booked in the fourth quarter, our operating expenses would have actually decreased 9.4%.