Tecogen Inc. (TGEN) Q1 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the Tecogen’s First Quarter 2021 Earnings 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 this conference is being recorded. I will now turn the conference over to your host, Jack Whiting, General Counsel and Secretary. Thank you. You may begin.

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 for two weeks. The press release regarding our first quarter 2021 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 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 subsequent date from 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 measure is provided in the press release regarding our first quarter 2021 earnings and in the Investors section of our website. I will now turn the call over to Benjamin Locke.

Thank you, Jack. As the agenda on Slide 4 indicates, I'll start with a brief company overview, followed by a review of key takeaways from the quarter, some of which I’ve shown here. I will then go into the detailed financial results for the first quarter and additional takeaways for each of our revenue segments. I will then discuss our goals and vision to reach profitability which is described in more detail in the shareholder letter released this morning. I will then turn the call back over to the operator for questions. Turning to Slide 5, I'd like to provide a short overview of Tecogen. Tecogen sells and maintains clean and efficient energy systems that reduce greenhouse gas emissions, provide significant operational savings, and provide resiliency from grid outages. We are a leader in distributed generation technology due to our longevity and extensive technical experience. Our air-conditioning and cooling products have the highest efficiency of any other equivalently resized system. Our proprietary Ultera emissions technology ensures the cleanest emissions possible, meaning even the most stringent air quality standards, such as those in Southern California. Our flagship, InVerde, cogeneration product, is designed to transition from grid tie to off-grid operations seamlessly, providing power to a facility indefinitely until grid power is restored. Tecogen has deployed hundreds of these systems that can operate as microgrids, independent of grid operation being ranked number 3 by Wood Mackenzie in terms of operational microgrids in 2019. We are well-positioned as our country and the rest of the world looks towards a low-carbon and grid resilient future. Our high operational efficiencies enable significant carbon savings, when compared to traditional sources and our certified Smart Inverter technology allows seamless transition to microgrid load to maintain power during grid outages. And lastly, our Ultera emissions technology is recognized as cost-effective solution for reducing CO, NOx and hydrocarbon emissions across a wide range of engine platforms and sizes. Turning to Slide 6, I will discuss the financial results for the quarter in more detail. First quarter revenue came in at $6.1 million, a 24% decrease from the first quarter of 2020. This was primarily due to a drop in product revenues and decreases in the installation portion of our Service segment. The maintenance contract side of our Service segment however showed a nice increase of 12% quarter-over-quarter. Energy production revenue was down 13% quarter-over-quarter, but we are seeing encouraging progress as facility closures and COVID restrictions ease. I will talk more about each of our revenue segments in a few minutes. Our gross margin for the quarter was 49%, which is the highest we have ever attained. This is a result of a combination of the specific product mix for the quarter, as well as our efforts to improve productivity across the board. Our operating expenses also show the results of our concerted efforts to contain expenses down 21% from the first quarter of 2020. Our net income was $1.8 million, as a result of the forgiveness of our PPP loan in the quarter. So if you back that out, while we still had a small loss for the quarter, we had a positive adjusted EBITDA of about $20,000 in the quarter, compared to a negative adjusted EBITDA of $817,000 in the first quarter of 2020. So despite our revenues being down 24% quarter-over-quarter, we were able to still manage a small EBITDA gain when adjusting for the extinguishment of debt. Slide 7 shows some more detail on the adjusted EBITDA calculation, where we adjusted mostly for the PPP forgiveness in the quarter. I would like to point out again that this favorable adjusted EBITDA number for the quarter is due primarily to our OpEx reductions and margin improvements overcoming our lower product revenues. As our product revenues recover like we expect, this makes the goal of profitability much more attainable. Turning to Slide 8, I would like to give a little more color on the performance of each of our revenue segments for the quarter. As I mentioned, our product revenue segment was the most impacted by COVID slowdown as order flow we typically see slowed and/or was delayed during the second half of 2020. We are seeing that order flow return as the economy starts to recover, which I will touch on a bit more when I discuss our backlog. Our high margins for the quarter were helped by our product mix which included components we engineered to assist with the installation of our equipment. As I’ve said on previous calls, we are shifting away from undertaking large installation project ourselves, instead, providing these engineered accessories that reduce the complexities of a cogeneration or chiller installation for the contractor or builder. Our service revenue drop of 21% quarter-over-quarter is the reflection of that outlook as the drop was entirely due to a reduction in our lower margin installation activity, whereas the maintenance service portion of our Service segment showed a healthy 12% improvement quarter-over-quarter. This side of the business continues to have excellent performance as our service fleet expands and we’ll see an additional boost when the 26 InVerdes in Toronto come online later this year. As I mentioned, our energy production fleet was significantly impacted by COVID closures with several hotels on our fleet shutting down, some for good. However, we have seen encouraging improvements over the past few quarters from the low point in Q2 of 2020. Although we are down 13% quarter-over-quarter, we are up 48% from last quarter, and 77% over Q3 of 2020. We are also encouraged to see improved margin in this segment, up to 40% compared to 35% in Q1 of 2020. All of this contributed to our record gross margin of 49% for the quarter. Turning to Slide 9, I will discuss what I feel are important takeaways in the quarter, as we look toward to the rest of the year and beyond. First, we are seeing a gradual recovery from the economic challenges due to COVID in each of our business segments. Our product backlog is up 36% from year end, and the service contract segment of our service revenues were up 12% quarter-over-quarter and is expected to increase further when we start our Toronto service fleet later this year. In our energy production assets, while a smaller contributor to our revenues, continue to rebound from the COVID closures we experienced. Next, our cash position is stale with our quarter end cash balance at $3.7 million. We were helped by the PPP program and we expect to meet all the criteria for forgiveness of our second drawn loan later this year. Importantly, we generated $400,000 of cash from operations this quarter. Our improved margins and reduced OpEx was the result of corporate improvements that we expect to be sustainable each quarter. This makes our goal of profitability much more attainable for us and I am encouraged to see our backlog reach almost $11 million, which is almost entirely for product shipments in our core market segments shown here. Lastly, on Slide 10, I would like to provide an outlay of our plan to reach profitability. The plan is focused on growth in each of our core business segments. For our product segment, this involves expanding our sales network, particularly as it relates to the chiller market, which is an important growth area for us. We will continue to expand our service maintenance – service contracts, especially when our Ontario service fleet becomes active later this year. And lastly, we remain open to opportunities to expand our energy production assets. Turning to Ultera, while we did not provide a formal update on our emissions activities this quarter, we are continuing to support our licensing arrangement with Origin Engine as they make Ultera available on an engines for sale to a range of stationery and mobile applications. We are also finishing up work on developing a new proprietary catalyst for Ultera that could add significant benefits to our Ultera technology platform. We will have a more detailed update on our Ultera development in the next earnings call. More importantly, I believe the sustainable improvements we made to our margins and operating expenses made the goal of profitability very attainable. I invite investors to download and read our shareholders letter released this morning which described its vision and path to profitability in more detail. We’ve put a press release out this morning with the link of the letter and the link is also shown here. You can also access this on our website in the News & Events tab under News & Events. With that, I’d like to turn it over to the operator for questions.

[Operator Instructions] Our first question comes from Sameer Joshi with ‎H.C. Wainwright. Please state your question.

Thanks. Thanks for taking my questions.

Hi, Sameer. Sure.

How are you doing?

Good. Good. Good.

So, the first question, in terms of product revenue, we see that cogeneration actually suffered quite a lot this quarter. Is that just because of timing issues? Or how are you looking that backlog of time or pipeline going forward?

Yes, yes, the cogen was light this quarter. I wouldn’t read too much into that. We are going to have quarters where cogen is heavy and chillers alike and vice versa. It was of course exacerbated by the simple fact that order flow in general was down. But I wouldn’t read into that that abnormal ratio of cogen to chillers this quarter. It could be a reverse in the next quarter. The cogeneration stuff that’s still going strong. That’s what I was talking about a lot with this order pipeline, Sameer. There is a sort of an established process for the equipment being specified and engineered and procured and all that thing. And that takes time and we see that. That’s how our backlog gets formed. And as that process that really slowed in 2020, we had some momentum going into COVID, because we had – that order flow was there. It had some momentum to it. But we really started to feel the effects of it late in 2020 and still a little bit in this first quarter, but that backlog number has got a fair amount of cogeneration and chillers in it. It’s pretty well balanced. So, I think you’ll see a good balance of the two product streams going forward.

Understood. Got it. And then, on the service revenues, we understand you are moving away from the installation services and supplying smaller, like parts or products that maybe used in the installation. In terms of gross service margin dollars, is this coming out net positive for you? Or are you losing some service margin dollars because of this?

No, I don’t think so. In fact, I think this helps our margins, because when we have these big construction projects and if you remember, Sameer, we kind of had to take these on. It was part and parcel of that new arc in center the cogeneration manufacturer that do the installation and take responsibility for it. So those mostly ended now and they ended up being low margin things, hiring riggers and electricians and all that. It’s okay to do on a small project, but it gets pretty this difficult on larger ones and the margins start to hurt. So, part of the reason why our margins are higher is because we don’t have that anchor on us anymore. That installation part is much less. It’s always going to be some part of it of our – we are always going to be doing some constructions, Sameer. But I just want to be careful that we are not get stuck into these bigger jobs that then end up being an giant on our margins. Even though they increase our revenues if they are at their lower margin and I think we need to be focusing on our margins now.

Understood. Got it. Just a couple more. One on Ultera. Did I hear right that you are finishing work on the catalysts and working on the new catalysts or maybe I misheard that?

Yes. That’s right. That’s right. And we didn’t give too much detail on at this call. Although, there is a bit of detail on that, the work we are doing on that and the shareholder letter, when you get a chance to look at that. But yes, this is a – and I don’t speak and look what there if it needs to, but this is the – the catalysts that we are currently using is a commercially available catalyst for Ultera. But this new catalyst that we are developing will be proprietary and it has some very specific qualities to it that are helpful, but I won’t go into the technical details of. But the important thing is, this will be the best – the best catalyst for Ultera and this will have our IP behind it, where the existing Ultera systems, we have IP in the process of course, but the catalyst itself is not proprietary. So, we are working with the third-party unit – I could say, they are in surplus research yet. And they’ve been working on it and we are expecting that the work to be finished this summer and I imagine we’ll do some testing on it and hopefully that our next Ultera update, we’ll be able to give you some good news on that front.

Understood. So, it is a new catalyst, mainly for proprietary reasons. But there was nothing wrong or shortfalls of the previous catalyst that was used in the process?

Yes, I can clarify that a little bit. This is Bob Panora. The – what the Southwest research was super experts on catalyst recognized is that the particular temperatures that we are operating in that second stage allow somebody who is more sophisticated to say, hey, you should use maybe some different materials, some different approaches and you would improve the performance and so what does that mean, that means you can make the catalyst smaller, right? And they also – their earlier test with small little miniature size catalyst on a test bench indicated that the temperatures we can operate over could be a much wider range. So that what makes the control easier and perhaps have other – that’s obviously the advantage. You can see the downsize, the ease of change of component as well. So, it’s something I think is very important, because it could reduce the cost of the two main components significantly. And anyway, that’s all I want to say about. But that’s why we are doing it. And it’s provided here.

Yes. I know that. Thanks for that color. Just one last one on the operating expenses front, those have come nicely down. Should we expect these to remain at these levels going forward? Or as COVID recovery happens, you might need to add resources and this could increase a bit?

Yes. Right now, I think you can expect it. Our goal here, Sameer, is to reach profitability and then, once that happens, things could change, we could bring on some more sales people for example or make some more investments. But I think the runrate you are seeing right now, at least for the rest of the year is probably pretty predictable.

Got it. Okay. Thanks, Ben. Thanks, Bob. Have a good day.

Of course. Thank you, Sameer.

[Operator Instructions] Our next question comes from Alex Blanton with Clean Harbor Asset Management. Please state your question.

Hi.

Good morning.

Good morning, Alex.

That’s not clean harbor, it’s clear harbor, CLEAR.

Got it.

Yes. I was going to ask about the catalyst, but I think you’ve covered that. That’s very interesting. What has happened with the lift fork project with Caterpillar Mitsubishi. You had the main fellow that Japanese and he was stuck in Japan, because of COVID. So, could you bring us up to date on what’s going on there?

Yes. I’ll tell, Alex, what’s going on – and the answer is not too much and it’s – that’s not all bad news though. They – obviously, COVID distracted them significantly as we have indicated for a while. But in that period of time, Alex, we developed our licensing arrangement with Origin Engine. And in fact, the much more likely way for Ultera to arrive in a MCFA work, they are calling it now MLNA now, Bob, right? They changed their name then MCFA. But the more likely that for Ultera to getting their fork truck is through Origin Engine, because that Caterpillar – Mitsubishi, MLNA, Crown many of these fork truck manufactures are customers, are potential customers for Origin. And so – and I think, Origin could very well be in touch with MLNA right now discussing it. But the more practical way for a fort truck manufacturer to get the hands our technology is through our licensing partner, which is Origin Engine. And that’s great by me, because they have all the relationships to make that happen.

Do they actually sell these engines to these lift truck manufacturers currently or not?

No. They are developing their engines for the fork truck market. They’ve been an industrial engine supplier currently. And so, they are - that’s going through the design and the certification of the engines. At the same time, of course, they’ve been talking to all the manufacturers about – they are doing this because I think they have strong queues from the industry that they are looking for other sources for these engines, which is long story, but there is some supply problems with who they are dealing with now. So, I think, they queues are that they are going to have a pretty good customer base when they get this done.

So, the actual Caterpillar Mitsubishi thing is not going forward at all?

Well, I wouldn’t say that, it’s just – I mean, we still keep in touch with them. You might remember, they were part of a PERC’s program. They were a partner in this Propane Research Council program that we were part of too and it’s still an active part of PERC and you know, we still talk to them. It’s just that their urgency to get something done directly with us isn’t there and our urgency to get something directly with them moving quite there as much anymore, because we’ve got Origin now to accomplish this commercialization path. So, there could be another outcome where we work with them. Again, Alex, I wouldn’t rule that out entirely. Just at this particular point in time, this is the path we are going and they are going to do their own thing.

Is there actually more of a normal business arrangement where somebody like MCFA, MNLA right now, they would want to buy an engine that was completely suit to nuts is a kit, completely certify and not have to even know much more than that about the engines. So, this is a cleaner path and a more conventional business approach. So, I think, when Origin has that engine available in that size range, I think, another size ranges, as well, I think, Origin may be interested. I mean, not Origin, MCFA, MNLA may be interested. I don’t know why they wouldn’t be, because the people they have seen, the sales people seem very – still very pro in this system – pro in this low emissions product.

And in fact, just switch one more on that Alex is, the milestone, it’s for both projects is – was essentially the same. The milestone with MNLA and the milestone now with Origin is to get this thing certified – to get it working and certified. So, that’s what’s important to us, right? This is shell that works and the shell that it can start on being sold.

The new Biden administration has a goal of cutting greenhouse gas emissions more than half by 2030 something like that. And they are looking to convert the automobile industry to electric cars by 2035. But what is the possibility for you recouping fleets of trucks or there might be hybrids that might use cost of fuel or whatever to with this Ultera technology. Have you been looking into that? I mean, that lift trucks… things like that, UPS trucks, post office trucks, things like that.

Yes, I think we actually have – we have envisioned that and so, I think, as I’ve said maybe in previous calls, getting this to an automotive OEM is – would be very, very difficult in years and years and years and years if you are ever going to get there. Whereas getting into the retrofit market is an ideal approach for this Ultera. Again, the analogy being, these delivery vans that Amazon got that they had convert it to natural gas for better efficiency. We could have just as little bit underneath those things putting on Ultera at the same time cost-effectively. And then they would have gotten a delivery vehicle. So that path is there. But the steps they get there is, and there is partners involved that we have to work with. So that potential is there, Alex, certainly. We are just not quite there yet and that would require a little bit of more business development which I think will happen originate in the first step.

To me, Amazon would be – is going to target, because they are so geared to the new stuff, the new technology.

Yes, yes. They thus then return my email. So, but you are right. You are very much right. And I think, one of our approach here is with Origin is going to – because Origin has tremendous relationships in this industry, more deep than us and not just with industrial engines as Bob indicated, but again, with these mobile applications, not just fork trucks. So, I think the more we work with Origin, the more we enable Origin to succeed. The closer we are to some of these possibilities like these delivery trucks.

Okay.

There is one question behind you there, Alex, so.

If there are more questions, I get off to listening. We got into the half hour I guess, the transcripts for this call, will it going to be posted? Are the transcripts of past calls posted on your website?

They are posted. Yes. you can find them on our website. They will be there.

An hour after this call they should be there.

How long will it be there?

Couple weeks.

Only a couple weeks, still, so. I can’t find the transcript of the last call. Is that right? Like the December call.

Did you downloaded it after the call.

No, no. I was just looking for the transcript of your prior call for the fourth quarter. It’s gone?

Alex, I can have one of my assistants answer you here.

Yes. Hi, Alex. So, our transcripts are actually available on requests. I have sent you an email regarding that and he would like to respond. I can absolutely send you the transcripts. They are on the website from past years. But from 2020 they are available upon request as well as this call. The archived audio is available for two weeks, but if you want the written transcript just let us know. We can send it to you.

Okay. I’ll get in touch with you offline. Thanks. Thank you.

Okay. Great.

Okay. Thanks, Alex. Appreciated.

Thank you. [Operator Instructions] Our next question comes from Michael Zuk. Please go ahead with your question.

Hi, Mike. How are you?

Good morning and doing great out here on the great points.

Good. Good.

Can you bring us up to date on any activity in New York City? I know, it’s been a challenge since COVID-19, but historically, it’s been one of our larger markets.

Sure. Yes. Yes. And it’s still is. I mean, the spike spread in New York still probably the strongest anywhere in the country. And despite this move towards electrification and all the goals et cetera, that are – might immediately the fossil fields are going to disappear from New York, it’s not very likely in any case. Our cogeneration is recognized as part of the solution, not part of the problem. We are on efficiency measure. We help utilities reach their greenhouse gas goals by – because we are 90% efficient, sometimes even higher. And if there a deal become penalties for buildings in New York, if they don’t reach their carbon reduction limits, then there is going to be a real monitory value to have in the cogen in there, because, you can get back your carbons in your building by a significant amount. You can put up solar. You might have already done your light bulbs. You need to put bank for the buck and cogen really provides bank for the buck in terms of carbon savings. In addition of course, to the operational savings that these people see. So I still see, New York being a strong market. I am not going to think about the world 20 years from now, when everything is electric, I can’t imagine every building in New York heating with electricity on the coldest day in the winter. You think the grid strained in the summer time. That’s – it’s difficult to concede. So, I am looking at the horizon. It’s in front of me of 5, 10, 15 years and I see gas is still being a very important part of New York City and our equipment being an efficiency measure that’s going to be needed for them to reach their goals.

Is there a issue with gas supply in New York City? I know that, sometimes the delivery pipelines have been overwhelmed, because the demand for gas has been so high. Is there an issue there that is resolvable or what’s happening?

We’ve not seen – we did see some supply issues in New York, Westchester and some of those areas sometime back, but they seem to have – they are resolved now. We are not seeing any supply issues now. We are able to get gas very readily and then, moving down the east coast, it becomes even more – as you go down the east coast, you get cheap than – not $0.10 and turn off the gas for every thousand miles. And so, you get to Florida, where gas is very affordable. And I think I said before, that’s why we are being successful in Florida with our service center down there now, because electric rates aren’t as high as New York, but gas is very cheap. And so, the spark spread is very favorable.

And then, moving across the country to California, we are already in our California marketing efforts and what’s happening with some of the environmental restrictions that are coming on play in California?

Yes. Sure. I am aware of those. California does a have a bit more of a sentiment towards natural gas. Those communities that have banning natural gas, that doesn’t worry me too much. That’s little communities where I don’t think that have cogen in any ways. California, what – where I am really focused on in California. And also, Mike, as you know they have some punitive tariffs there for cogeneration. If you are using a fossil fuel, even though I am 90% efficient on helping the world, just like said it was, reducing greenhouse gas emissions, they still make it a difficult for us through economically to run through standby charges, non-bypassable charges, et cetera. They way you get around, and so it’s really, really promising economics, Mike, it’s just that they are hindered by those things. The way you get around and the way I am trying to get around that is by focusing on our chiller products in California, because the chiller is not going to be subject to those punitive tariffs. But they are still saving 150 KW off your meter versus the electric chiller. Same thing with the Teco Power. Mike, you remember, we reintroduced that last year. This is our refrigeration product. Tecofrost. Thank you, Bob. The wineries up and down the coast typically have a circulated ammonia to do their processing and this is a great way for them to cut their electric bills simply by replacing their compressor system with our Tecofrost natural gas compressor system. And again, you are not subject to it – you are not subject to the people that that shame you for using natural gas, because you are not cogen, you are an industry, and most importantly, you are really getting the benefit of all the electric savings from the grid tariff. So that’s our plan for California out there. It’s really focused on our chillers. Of course, we are going to chat upon more cogen stuff. But I think you are going to find chillers and this one I think before you are asking the next question, Mike, is an important part of my focus on chiller sales and this is a good thing is, they are done mostly through the manufacturers’ representatives. When you go to buy a Daikin chiller, you don’t call Daikin, you call your local rep. And so, the same applies with our product. So, where we have a pretty established chiller rest network, I think I mentioned a little bit in our shareholder letter what the size of that is. And that as I expand our chiller markets and as I expand, for example, California or the West Coast or even up in Canada, I am identifying reps that they help sell. And that’s the way to do it. We have added some reps. I think you’ll see us adding some more reps and that’s going to be the way that we sell more and more so on the west coast and even some on the east coast.

And then, one final question. Given what happened in Texas, are we pursuing opportunities in Texas, because it’s flushed with natural gas. They have a electric generation issue down there.

Yes. Sure. And in Texas, there – it indeed falls into the category of – I am really emphasizing the chillers down there, because, the Scotch Brite isn’t great down there, but now they’ve- by that resiliency piece. Right that was a difference. But then, you could not have a spark spread and you got no market, now you cannot have a spark spread, but potentially have a market, because you’ve got this resiliency thing going for you. So, indeed, we have – we’ve got connections down there. You know, Vilter, our partner – our manufacturing partner for the Tecofrost is located that way of a location there. So, we are able to work through those folks. They have their own sales reps, as well. So, we can get a pretty good feel for what’s on the ground there in Texas. So, yes that the long answer to your question is yes. But all of this resiliency piece is kind of been engrained in people in Texas much like Hurricane Sandy did in New York. I think we are going to see more opportunity there.

And then, finally, I’d like to commend you, I think the shareholder letter that you put out is extraordinarily comprehensive and I am looking forward to you delivering on all of the components of the letter and the challenges that you have thrown out. I think this is a huge improvement in informing the shareholders on what’s going on with the company and appreciate it very much.

Yes. Sure. Thanks, Mike and we are all very enthusiastic, everyone in this company, not just the people in this room, but from top to bottom, all of our staff and employees are engaged in our company goals and we are looking forward to accomplishing them.

0Appreciate it. Thanks

Thank you, Mike.

[Operator Instructions] Thank you. There appears to be no additional questions. I’ll turn it back to management for any closing remarks.

Well, thank you, all for your time listening to this call and again I invite shareholders to go to our website and give our letter a read and per se, we’ll talk in the next call.

Thank you. This conclude today's conference. All parties may disconnect. Have a good day.