Tecogen Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 5 speakers on the call.

Operator

Thank you for standing by, and welcome to the Tecogen Second Quarter 2024 Conference Call. Thank you. I'd now like to turn the call over to Mr. Jack Whiting, General Counsel and Secretary. You may begin.

Speaker 1

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 Q2 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.

Speaker 1

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 Form 10 ks and 10 Q under the caption Risk Factors filed with the Securities and Exchange Commission and available 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 generally accepted accounting principles or GAAP.

Speaker 1

A reconciliation of non GAAP financial measures to the most directly comparable GAAP measures is provided in the press release regarding our Q2 2024 earnings and on our website. I will now turn the call over to Abhinav Rangesh, Tecogen's CEO, who will provide an overview of Q2 2024 activity and results and Roger Duchenne, Tecogen's CEO, who will provide additional information regarding Q2 2024 financial results.

Speaker 2

Thank you, Jack, and welcome to Tecogen's Q2 2024 Results. I'd like to talk briefly about some new areas that we are developing and then I will hand over to Roger to go over the results and then I will summarize. Over the last 15 months, we've faced many challenges as a company. We've had to move our factory and spend $675,000 to build test cells. Anti fossil fuel regulation in New York City, Boston and many high rate areas has meant that we've had to find new markets for our products.

Speaker 2

However, today, I'm feeling extremely optimistic about the future. We've made significant headway on operations and product improvement, which we will discuss later. I also believe many of the orders we've been fighting for will close by the end of Q3. When I summarize at the end of this presentation, I will recap the last year and half, why we had no revenue for no product revenue for Q2 and why we made the strategic choices that we did. I believe that there's a once in a lifetime opportunity coming.

Speaker 2

Like the railroad booms, the oil boom, the PC and social media revolution, the new boom is coming. Data centers are going to fundamentally change the energy landscape and catapult the growth of certain companies. Today, I'm going to show you why I believe Tecogen is going to be one of them. We've been working on data center projects for the past 6 months. I didn't want to talk about this before since the projects were too early a stage.

Speaker 2

When everyone thinks of data centers, they think of the massive facility that Amazon and Google are building. Initially, I thought that our products were going to be too small for this market. I asked one of our engineering and project development partners why he was recommending our products for data centers. Why are you specifying Tecogen's equipment? Why aren't you specifying a large engine from Caterpillar or GE?

Speaker 2

What alternatives does the customer have? He walked me through the economics on the timeline that these customers are looking for. Now that we have made progress on multiple projects, I'd like to tell you about the needs of this market, why our solution is better than the alternatives and when we should expect to see orders from this segment. There are three sizes of data centers. Hyperscale is what gets all the press.

Speaker 2

Most data centers though are smaller. Most are colocation data centers. Here, multiple companies rent a portion of a bigger data center. Then there are the enterprise data centers where a bank or a law firm has their own dedicated data center. In the past, data centers were built in the lowest utility rate areas and primarily used for data storage.

Speaker 2

Today with AI and distributed computing, the power draw is immense and liquid cooling is essential. If you're Google, Meta or Amazon, you can afford to build your own power plant or negotiate directly with utilities for favorable power contracts. Others are left short of power. Utilities are no longer able to provide all the power a data center needs. Power plants aren't being built fast enough.

Speaker 2

Utilities are also behind on upgrading infrastructure. The biggest need for solutions is in the colocation and enterprise tiers. If you need 8 megawatts of power, in many regions, the utility will tell you that you'll get 5 and you'll have to source the remaining power yourself. This has become such a constraint that space is no longer being rented in some data centers by square foot. It is being rented by required power for each tenant.

Speaker 2

If you're building a colocation or enterprise data center, what are your options if you don't have enough power? You could buy a backup diesel generator or a natural gas generator. Most generators though are only designed for 500 hours or so of annual operation. You may or may not have the appropriate service support for the uptime you'll need. Emissions compliance for continuous operation is also tricky.

Speaker 2

Solar and wind won't work at night, but the data center needs power 20 fourseven. You could build your own 3 megawatt turbine power plant, but that might take you 36 months or more to come online. Also for an engine or turbine greater than 1 megawatt, lead times for certain components like electrical panels and switchgear are more than 24 months out. As more data centers are located closer to populated areas, neighboring buildings, noise restrictions, meeting regulatory and permitting also adds additional time. How does all this affect Tecogen?

Speaker 2

If you have a data center that needs 1 megawatt to 3 megawatts of power, we have 2 solutions that will solve your problem. The first solution is our DTX engine driven chillers. These can take all of the cooling load off electricity and move it to natural gas. They can be running on-site in 6 months or less. 5 to 6 units can be packaged in a container with all the connections for quick install on-site.

Speaker 2

They can even be run with dry coolers to reduce on-site water usage from cooling towers. For an 8 megawatt data center, this will immediately free up 1 to 2 megawatts, which might allow a customer to open on time or add additional tenants. Chiller modules can also be added as the data center expands. The second solution is to use our inverter to generate power. We use a proprietary 480 volt inverter based system.

Speaker 2

It avoids many of the switchgear requirements as it has built in electrical protection. We can also use electrical panels that are readily available. As multiple inverters can be daily chained together into a micro grid, you also have redundancy. If you used a large engine from GE or Caterpillar, you would need 13.2 kilovolt or higher voltage switchgear and panels. As mentioned, such switchgear lead time sometimes can exceed 24 months.

Speaker 2

You would also need specialist electrical contractors adding cost and complexity. Today, data centers are being built near cities and other buildings. Getting approval to put an on-site power plant near other buildings is not easy. We have hundreds of systems in residential buildings. Our units are quiet and our patented Ultera system allows us to meet emission standards everywhere.

Speaker 2

As the data center expands, more inverters can be added to the microgrid. Lastly, if a customer wants a 0 carbon option, work with a carbon capture company to extract and store all the CO2 from the exhaust. We are presently working on 3 data centers in the Northeast and Mid Atlantic. I hope to announce the first purchase orders later this year. We have also signed up distributors that specialize in data centers.

Speaker 2

Right now, Tecogen is valued at barely one times revenue of the service business. There are many start ups right now that are raising money at premium valuations to try and solve the power problem for data centers. Data centers can accelerate their construction timeline by 12 months or more with our chillers and inverters. They have the flexibility to add capacity later as our equipment is modular. Best of all, our equipment will continue to save money on energy expenses going forward.

Speaker 2

Technology is only one piece of the solution, however. Data centers need 20 fourseven support and not everyone can do that. We already have experience with off grid power, process cooling and other applications that need high uptime. I believe that if we can demonstrate our solution with the projects we're working on now, this could be a great opportunity for Tecogen long term. Backlog and cash.

Speaker 2

The backlog is presently just shy of $6,000,000 This is up by $1,100,000 from when we reported in Q1. We also have another $5,000,000 to $7,000,000 of prospective orders where the customer has told us to expect a purchase order sometime before the end of September. We had positive cash flow from operations in H1. However, we had to spend $600,000 in factory fit out and move. So we finished with a cash position of $841,000 dollars Today, we have $1,100,000 in cash.

Speaker 2

The movement that some customers were still sending payments to our old address and this was adding 15 to 30 days to our cash collection cycle. So we decided to draw another $500,000 into our line of credit in July. As a quick recap, we have 3 revenue segments. Our product revenue consists of sales of cogeneration units, microgrid systems and chillers to a range of markets and customers. Our service revenue primarily consists of our contracted operations and maintenance services.

Speaker 2

Our energy production revenue stream is from energy sales, including sales of electricity and thermal energy produced by our equipment on-site customer facilities. I'm now going to hand over to Rajat to go over the financial numbers.

Speaker 3

Thank you, Amina, and good morning, everybody. I'll begin with reviewing the Q2 2024 results. Our revenues for the quarter were $4,700,000 compared to $6,700,000 in the Q2 of 2023, a decrease of 30%, which is due to the lack of production capacity. As you may be aware, we moved our manufacturing operations and administrative offices in April of this year. Due to the move and the resulting decrease in product revenues, our net loss for the 2nd quarter increased to 1.54 $1,000,000 compared to $780,000 in the Q2 of 2023.

Speaker 3

The net loss was $0.06 per share in the current period compared to $0.03 per share during the previous year. We'll review revenue and margin further in the segment review. Operating expenses decreased 1.7% quarter over quarter despite incurring additional rent in April. Moving expenses incurred of approximately $100,000 and costs incurred for the air cooled chiller testing, which occurred during the quarter. Moving to EBITDA and adjusted EBITDA calculations.

Speaker 3

For the Q2, our EBITDA loss was $1,400,000 and the adjusted EBITDA loss was $1,300,000 which compares to an EBITDA loss of $583,000 and the adjusted EBITDA loss of $592,000 in the comparable period in 2020 3. We'll review the 2024 segment performance. Our products revenue decreased 95% quarter over quarter. The products gross margin was negatively impacted due to warranty costs and unabsorbed direct labor. Our services revenue increased 4.4 percent quarter over quarter due to the acquired maintenance contracts.

Speaker 3

Gross profit margin remained for services remained unchanged at 47% in the Q2 of 2024 compared to the 2023 period. We have seen significant price increases for certain parts such as engine components and oil over the past 24 months, which have negatively impacted our gross margins. Therefore, effective on August 1, we increased our cogeneration service pricing to reflect these higher costs with the intent to improve our margins going forward. To decrease service costs, we've been testing product improvements which will increase service intervals. The impact of these product improvements are expected to be rolled out across the service fleet later this year.

Speaker 3

We anticipate these efforts will result in improved margins beginning in the Q4 of 2024. Our energy production revenues increased 37.5% compared to the comparable period in 2023. This is due to the restart of an energy site, which had been dormant since

Speaker 2

2020 and

Speaker 3

higher run hours across the fleet. Our gross margin also increased to 44% or 42% in the prior year. I'll turn the call back over to Abhinav now.

Speaker 2

Thank you, Roger. I know some of you may be wondering why we had no product revenue for the Q2. The Q2 loss may also be a concern. I'd like to take a step back to walk through our strategic and operational choices and give some context on where the company is going. When I took over last year, I knew that there were carbon regulations like Local L97 and Berto that were going to make it harder to sell our products in the Northeast and New York.

Speaker 2

I also knew that we had to reduce our cash burn immediately or risk diluting investors with an equity raise. Lastly, I knew that we had to move factory and deploy significant capital over a short period of time while having production disruption. Given those factors, the first thing we did was to try to grow recurring revenue to cover a larger portion of OpEx. Our assumption of a significant number of maintenance agreements did just that. I was expecting a gradual decline in product revenue in New York City and the Northeast driven by the anti fossil fuel sentiment, but we saw a much sharper decline than expected.

Speaker 2

We talked to customers, engineers and even our competitors. Unfortunately, this decline does not appear to be temporary. In fact, we saw projects funded through city agencies get canceled after engineering and bidding. At this point, we had a couple of options, pivot to other technologies or find new markets. We felt that there were still many areas nationwide that were good candidates for our products.

Speaker 2

And with the power constraints affecting utilities, we felt we could grow the product revenue above previous levels. The business development efforts from these last 12 to 15 months is what I expect to see closed soon. Our backlog is presently at 6,000,000 We have an additional $5,000,000 to $7,000,000 of projects that we've had verbal commitments from customers that they would be issuing POs within the next 3 months. We also hope to have the deposits from these projects around the same time scale. Given the timing of product order, the biggest risk during Q2 was cash flow.

Speaker 2

We had to deploy significant amounts of cash in a short period of time. If we decided to ship product during Q2, we would have had to buy material for building those orders. That could have put us in a deep cash crunch if the projected orders were delayed. If we also hadn't used our own labor to do some of the pick up on the factory and we'd ship product, we would have needed an additional $1,000,000 or more in cash. Right now, with our recurring cash flow and lower OpEx from the new location and other operational improvements, I believe we can remain cash flow positive until these orders come through.

Speaker 2

We are now back to production this quarter and expect to have Q3 revenues between $5,700,000 $6,200,000 Assuming the product orders come through for the timing I outlined above, Q4 should be much stronger than Q3. I'm excited to continue to take advantage of the tailwinds in the data sector market, continue to grow the CEA market and find more power constrained customers that can use our products. At this point, I'll open the floor for questions.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Alexander Blanton from Clear Harbor Asset Management. Your line is

Speaker 4

open. Hi, how are you? This is a great report. I think Thank you, Alex. Really a master class it seems to me in how to overcome adversity.

Speaker 4

And I congratulate you. You should call a part of the

Speaker 2

business group. Thank you, Alex. I appreciate you saying that.

Speaker 4

You should call a part of the business group and get them to do a case on this. In the Small Business Management area. I wanted to ask the 3 projects that you mentioned you expect to get orders finalized this quarter. What is the dollar volume involved there

Speaker 2

in the 3? So there's 2 different pieces here, right. The 3 things and orders in the data center space, I don't want to mention the dollar volume yet because it's still that one I have not mentioned before. The $5,000,000 to $7,000,000 that I mentioned we expect to get this quarter, that one only one piece of that is the data center. The rest is actually other projects that we have got in power constrained or areas that are friendly to gas.

Speaker 4

Well, the $5,000,000 to $7,000,000 is that the order amount?

Speaker 2

Yes, that's the total. There's about there's multiple projects out of that $5,000,000 to $7,000,000 But yes, that's what we're expecting. At the low end, probably $5,000,000 at the high end $7,000,000 depending on which projects close when.

Speaker 4

And these data center jobs, what is the size and dollar volume of an average one that you are targeting?

Speaker 2

So most of those projects are going to be per project around $2,000,000 per project. And there are some bigger ones that are much larger. And then there are some smaller ones, which might be under $1,000,000 which might then expand with additional capacity later. The way I see the data center projects coming through, you might see them, for example, it might have a $2,000,000 project, but it might happen in 2 chunks of $1,000,000 they might fit out. Because one of the advantages, as I mentioned, was our equipment is modular.

Speaker 2

So the way a lot of these data centers are operating right now, they're taking existing data centers sometimes and converting them from what would have been just data storage into AI or other high power demand type scenarios. So when they add additional tenants, they need to add either additional power capacity or additional cooling. So they just add some of our equipment and then when they add another tenant, they add one more chunk. So that's I believe how it's going to play out over the next 6 months or so. We're going to see a lot of small data center things that will then expand into bigger ones.

Speaker 4

Have you done any of these

Speaker 2

up until now? So honestly, data centers, we've only ever done one small data center years ago. The main reason that we have never done data centers before was because they were just they used to be put in areas that had very, very low utility rates. And they had that our economic savings advantages didn't help in those cases. But now the driver is very different.

Speaker 2

The data center is now it's really driven by ability to get a solution deployed quickly and then the ability to do this in a modular fashion and also be able to handle some of these urban environments. So the requirement of data centers now is very different than it was even 6 months or a year ago.

Speaker 4

Okay. So what are these data centers doing right now if they're not using your equipment?

Speaker 2

So right now, a lot of them are just buying power from the grid, but because they're changing what the data center is doing, they're suddenly needing to add a lot more power capacity or additional cooling.

Speaker 4

I see. Okay. So this is the alternative here an alternative to buying power from the grid, which is getting more expensive.

Speaker 2

It's also the grid is not able to provide them the power because there's 2 types of scenarios happening with data centers. 1 is an existing data center that is changing what they're doing within the data center. They're needing more and more power and the grid isn't able to provide it to them. And then there are whole new data centers being built again that the grid is just not able to give them enough power.

Speaker 4

What's the payback period for the data center and using your equipment versus buying power from the grid?

Speaker 2

So based on what we've seen in most of the projects right now, they're looking at to get even enough power from the grid, they're looking at least 1 to 2 years to get that power. So the payback essentially is being able to open that data center almost a year early. And in most cases, it they actually pay for themselves right now from what I've seen in under 2 years, just because of how much money data centers make by being able to open early.

Speaker 4

Okay. But if aside from that, what's the saving using your equipment versus the grid?

Speaker 2

It really depends on the location because they're all over the place. We're seeing stuff that have really low utility rates that might have very little economic savings. But we're also seeing projects in Virginia, New York, Massachusetts, where the savings would have, if you were just purely doing it on savings, it'd be pretty typical, 3 to 5 years. But right now, that's not where the economics are coming from. It's the ability to actually get open on time.

Speaker 4

One more question. Do you have an estimate of the total available market from data centers?

Speaker 2

Honestly, it's a little early for us because I mean, if you look at just pure dollars being deployed by the big entities, I mean, there are 100 of 1,000,000,000 of dollars right now being spent on building data centers. But how much of that we can target, I don't know. Our goal is to the next step within the next 12 months, right, is to restore product revenue beyond where we were before and get us profitable. And then I think at that point, once we've gotten a few, I think we'll be able to really assess how many data centers are able to use our equipment and how quickly it scales in that space. But I think hitting where we were before with just the combination of the data centers plus what we're working on right now, I think is totally doable.

Speaker 4

One more question. How are you doing the marketing to this market?

Speaker 2

So there's a few different channels we're doing. One, as I mentioned, we've actually signed up some manufacturers reps who only do data centers. They only sell equipment to data centers. They sell in the past, there's things selling things like electrical cooling, but now that they need they're seeing these power constraints. They're wanting to sell our solutions.

Speaker 2

We are going to some of the data centers directly. Some of them are calling us actually directly because they've heard about our solutions and they're giving us a call. We're also working through other companies that have relationships with the data center space, that are selling either other equipment or they are a developer associated with data center. So we're taking multiple approaches there. And then of course, we're still continuing to do the online marketing targeting data centers directly.

Speaker 4

And do you have capacity to meet this demand?

Speaker 2

I think I'm hoping that we'll get to the point where we have to expand capacity to meet the demand. But as of right now, I think we do for the next 6 months.

Speaker 4

Okay. Thank you. Thank you very much.

Speaker 2

Thank you, Alex, and thank you for the kind comments.

Operator

And there are no further questions. So this will conclude today's question and answer period and also today's conference call. We thank you for participating. You may now disconnect.

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Tecogen Q2 2024
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