Tecogen Inc (TGEN) 2020 Q4 法說會逐字稿

Greetings, and welcome to the Tecogen Year-End 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

Joining us today are CEO, Benjamin Locke; President and COO, Robert Panora; and Jack Whiting, General Counsel and Secretary.

It's now my pleasure to turn the call over to Jack Whiting, General Counsel and Secretary. Please go ahead, sir.

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 2 weeks until March 25, 2021. A copy of the press release regarding our 2020 earnings is available in the Investors Section of our website as well.

I would like to direct your attention to our safe harbor statement included in the earnings press release and presentation. Various remarks that we 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 subsequent date 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 2020 earnings and in the Investors section of our website.

I'll 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 and the year. I will then go into the detailed financial results for the fourth quarter and full year 2020 before turning the call over to Bob for a review of our emissions commercialization efforts. I will then have some final comments before opening the call for questions.

So turning to Slide 5, I'd like to provide a short overview of Tecogen. Tecogen is in the business of selling and maintaining clean and efficient energy systems that reduce greenhouse gas emissions, provide significant operational savings and provide resiliency to grid outages. We are a leader in distributed generation technology due to our longevity and extensive technical expertise. Our air conditioning and cooling products have the highest efficiency of any other equivalently sized system. Our proprietary emissions technology ensures the cleanest emissions possible, meeting 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 facilities and definitely until grid power is restored. Tecogen has deployed hundreds of these systems that can operate as microgrids, independent of grid operation, recently being ranked #3 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 mode to maintain power during grid outages.

And lastly, our Ultera emissions technology is recognized as the best solution for reducing CO, NOx and hydrocarbon emissions across a wide range of engine platforms and sizes. Bob will go into a bit more detail about our arrangement with Origin Engines later in the call, but they are a U.S. engine manufacturer with significant presence and recognition in industrial engine markets. And we are already making good progress, identifying initial customers for an Ultera-equipped near-0 emission Origin Engines.

Turning to Slide 6 and before going into the details of the numbers, I would like to give some top-level commentary on the fourth quarter and full year results. Suffice to say the challenges posed by the COVID-19 pandemic were significant for many businesses. We are fortunate that we were able to sustain our operations throughout, but the impact was certainly felt across all our business segments.

Product sales were down for the quarter and full year as well as installation activity and energy production revenues. Significantly, our service contracts and parts portion of service revenues continued to grow each quarter, up 4% from the fourth quarter in 2019 and up almost 3% year-over-year. As COVID restrictions are slowly lifted, we expect some rebound in our energy production assets, although some customers such as hotels and athletic facilities will take longer to resume operations. In fact, we had to recognize an impairment due to the closure of 2 large hotel facilities during the year. I will mention this impairment in the associated bad debt write-off again when I review our financials.

Importantly, for the year, despite our lower revenues, we were able to generate $1.4 million of cash from operations as opposed to cash used by operations of $4.5 million in 2019. This is directly due to our concerted efforts to improve on our collections and overall cash management and does not include the cash received from the first PPP loan. We ended the year with a cash balance of $1.49 million, something that we've been able to build on over the past few months.

I also want to note that our efforts to improve business practices across the board during the pandemic slowdown yielded improvements that directly resulted in significant, and importantly, sustainable reductions to our operating expenses. Our OpEx was down 10% year-over-year, and excluding onetime items that I will discuss in a moment, down 23% from the fourth quarter of 2019. And with regard to the Paycheck Protection Program, or PPP, our first loan was forgiven in January of 2021, and our second loan draw was received in February of 2021.

Lastly, our backlog is beginning to slowly increase again, up to $9.3 million, the majority of which is product sales.

With those top-level takeaways in mind, I will now turn to Slide 7 for a more detailed look at the fourth quarter and full year financials. Fourth quarter revenues came in at $5.7 million, a 35% decrease from the fourth quarter of 2019. This was primarily due to a drop in product revenues due to customer delays and decreases in the installation portion of our service segment. As I mentioned earlier, it is encouraging to see our maintenance contract and parts segment continue to grow despite lingering COVID closures of some hotel and fitness center customers. And although a much smaller portion of our overall revenues, energy production was significantly down due to COVID-19-related closures, with the 2 previously mentioned hotel customers ceasing operations altogether and therefore requiring us to write-down those assets.

Our gross margin for the quarter came in at 41%, which is an improvement over the fourth quarter of 2019. And as I mentioned earlier, excluding onetime bad debt provisions, we reduced our operating expenses to just under $2.9 million for the quarter. This is a significant improvement from the fourth quarter of 2019. And while OpEx will always vary somewhat quarter-to-quarter, we expect overall OpEx for 2021 to be in the $12 million range, since many of the reductions in OpEx we attained in the third and fourth quarters of 2020 are sustainable through 2021.

Our net loss for the quarter came in at $4.1 million, but much of this is due to the noncash goodwill impairment we recognized related to the write-down of the facilities and our energy product fleet that closed. On an adjusted EBITDA basis, the loss was $929,000. I will return to the adjusted EBITDA number in just a moment.

Turning to the full year result on Slide 8. Revenues for the full year 2020 were $28.3 million compared to $33.4 million in 2019. Similar to the fourth quarter, overall service segment revenues were down year-over-year, but maintenance service and parts portion continued growth year-over-year of 3%. Energy production revenues for the year were down for the same reasons I outlined previously.

Gross margin for the year improved slightly to 38%. And as I mentioned earlier, our operating expenses for the year, excluding the bad debt provision, were down 10% year-over-year. The result was a net loss for the year of $6.2 million compared to a loss of $4.7 million in 2019. In both years, goodwill impairment was a significant portion of the net loss. And lastly, adjusted EBITDA for the year came in at negative $2.2 million.

Slide 9 shows some more detail on our fourth quarter adjusted EBITDA calculation, whereby we add back in noncash adjustments. Again, the fourth quarter adjusted EBITDA number was adversely impacted, not just from lower sales, but from a onetime charge relating to bad debt due to customers failing on their obligations. Slide 10 shows the same detail on the full year adjusted EBITDA. I would like to point out that our interest expenses are lower for the year as we closed out the Webster line of credit in 2020.

With that, I'd like to turn the call over to Bob to discuss our progress with Origin Engines and our overall Ultera emissions technology development. Bob?

Thanks, Ben, and good morning. Let me begin with Origin. As we announced in November, we have completed an agreement with Origin Engines to commercialize the Ultera after-treatment system for their industrial product line.

Origin is a domestic Tier 1 manufacturer that currently produces about 60 engines per day, which converts to about 15,000 on an annualized basis. And as our CHP engine supplier for the last 5 years, we've gotten to know them well. I would characterize them as an innovative, fast-growing supplier. And their industrial engines are robust, and the management has a strong awareness of the growing value of low emissions to their customers.

The agreement covers engines from 80 to 280 horsepower, the bottom limit being set to retain our ability to continue with MCFA. The fuels covered the agreement are not restricted, but we expect them to be primarily natural gas and propane. Importantly, multiple markets are covered, including oil and gas production, forklifts, power generation and distributed energy systems.

I want to point out that Diesel Progress magazine got wind of the agreement and wrote a nice article in the February edition about it. It can be found on our LinkedIn web page dated February 4.

Now regarding our outlook for Ultera. First off, we will be shipping our 2 800-horsepower kits to the SoCal water district shortly. These will be used on 2 Caterpillar natural gas engines, and we believe additional orders may follow. I want to emphasize that the Origin program, on the other hand, has a very positive outlook. It's written -- it's a written agreement, a first for Ultera, with an aggressive schedule for implementation. Moreover, it has a strong potential to expand Ultera to other markets, as I mentioned, but also the other forklift manufacturers, including, I would say, MCFA.

Lastly, regarding our catalyst development program. We are expanding this work with a third-party research group relative to an improved material for the Ultera process. The new formulation, which is made possible by the reduced temperatures in the Ultera catalyst system, will improve Ultera's performance at a potentially reduced cost, a subcontractor, SwRI, which is formerly the Southwest Research Institute, will be supplying us a full-size catalyst for evaluation in our engine test laboratory. We believe the formulation to be patentable. It could potentially be a tangible component that could become a Tecogen product for the company.

And that's all I have on that. If -- I want to switch back to Ben. Go ahead.

Thanks, Bob. So turning to Slide 13. I'd like to make some final comments regarding the outlook for the company. 2020 was a difficult year, as I just reviewed, but it also gave us an opportunity to focus on making improvements to our business activities across the board that puts us in a good position to achieve profitability in 2021.

Those improvements are most evident in our reductions in OpEx, with our goal to maintain an annualized OpEx of under $12 million for 2021. Our cash position at the end of 2020 was $1.49 million and has improved since then with the additional PPP funds and overall improved cash management.

The resiliency aspect of our product offerings are becoming increasingly sought as grid disruption events such as Texas last month and the California wildfires earlier this year expose the tremendous health and safety risk of prolonged grid outages.

The greenhouse gas benefits of all of our products are similarly being recognized, especially as cities and states put carbon emission reduction goals and, in some cases, penalties if those goals are not met.

And lastly, we feel that our agreement with Origin Engines is the best opportunity to get Ultera commercialized in many key industrial markets, with the eventual goal of having Ultera fitted on fleet transportation vehicles.

With that, I'd like to turn the call over to the operator for questions.

(Operator Instructions) Our first question today is coming from Alex Blanton from Clear Harbor Asset Management.

Can you hear me?

Yes, I can hear you fine, Alex. This is Ben.

Okay. First, I wanted to ask you about the -- on the lift truck situation. There was an engineer in charge of your venture with them that was stuck in Japan because of the pandemic, and it was -- the whole thing was held up for the past year, because he couldn't get back because of travel restrictions. Could you update us on that? Is he free to travel now? And can that venture be going forward as envisioned?

I did contact them a few weeks ago just to get an update for today, and it has not been lifted. They are still not willing to travel. And I'll just say that they're a big, big company and they move slowly, Alex. It's just the way it is. But I would say, Alex, that the -- our approach with Origin Engines, the forklift markets as MCFA's competitors as well is the more tangible approach where we're getting more receptivity. I didn't -- really did not want the state of our forklifts to be on the slowness of this one particular company in Japan. And so -- but we're able to make progress now with Origin despite the slowness and the restrictions of MCFA, which is now MOA.

When you say there's a license agreement, does that mean you're not selling equipment to them? Or you're just getting a royalty? Is that right? How...

That's what the Origin agreement describes, yes.

Okay. So how do you vision turning this into real money?

So the agreement has several milestones, Alex, for volumes of units that they will be retrofitting, and therefore, eligible for the licensing fee. They're pretty aggressive milestones. We don't want them -- Origin to just sit on this with their fingers crossed for 3 years. They are very real milestones in the first few years of that agreement that dictate what type of development and sales they need to have that warrant us to give them this license.

Yes. And one more point, Alex, is that if you caught it at the end of the presentation, the reason why -- one of the reasons why I'm so high on this catalyst development program is that the formulation of a catalyst that we have a patent on, if that -- and it works as well as we expect, that would give us something, as I said, tangible that we could conceivably have as a Tecogen product, which would change the picture a lot, I think.

Okay. When you say fleet transportation vehicles, what does that mean? What do you mean by that? That was your last comment that you...

Yes. That was me, Alex. So we've -- I've articulated the goal of getting Ultera on vehicles, on automotive applications. And as you know, we had our efforts a few years ago to get into the automotive manufacturers, and that's an extremely difficult business to get into. Getting them to acknowledge that there's even a problem, of course, at the time, was a challenge enough. And so since then, I've articulated the vision of Ultera for vehicle applications to be in type of a truck retrofit type model.

You might have seen Amazon's order of natural gas equipped trucks to that type of model IC where there's conversions happen all the time for fleet vehicles from diesel to natural gas, et cetera. And what I envision is having Ultera being part of that conversion as well. So you could get a fleet of vehicles for Amazon or for UPS or something that not only were converted to efficient natural gas, but also had our Ultera emissions -- near-0 emissions onto it. Now that's the goal.

And how do you get there? And you don't just get there overnight. Working with Origin is the first step towards getting there. And again, this is what the industrial engine is not with fleet engines. But the more we get Ultera out there, Alex, and the more people recognize it, I think we're going to start to have the ability to have conversations now with fleet owners. I'm not saying with Amazon, but it could be a fleet owner that just has a small fleet of vans that they want to convert, and importantly, working with the industries that do that, the industries that do these fleet conversions.

So that's in the works, and that's what I meant by that final statement, Alex, is that we're pretty excited about Origin for industrial engines, but I still want to work my strategy on the industrial fleet renovations for Ultera.

Are you talking with Oshkosh? They have a contract to do the new Post Office trucks running on gas.

Yes, I did hear that -- I read about that. No, we haven't yet, because we're not -- well, we don't have a direct line. But we're actively thinking about who we can contact, and I would include -- we were talking about it. We didn't use the company name in our discussion, but we called it the Post Office truck. So we are thinking about how to reach out to those folks. And I don't want to say anything more than that.

Listen, I know some people there. Should I call them?

Absolutely. If you want to call us after the phone call and discuss it, we'd be happy to.

And I would say...

I followed the company. I don't follow closely now, but I did at one time. So I think I still know some of the people there.

Yes. And I would say, Alex, and I would say to all of our listeners as well that the presentation that Bob recently gave to the PERC group, which is also referenced on our earnings release and on our website as well, has an excellent overview of the Ultera technology. And I would encourage anyone, if you have someone that wants to know more about it, to watch that presentation to get themselves understanding of it. And hopefully, that would generate interest.

It's on the PERC website?

Yes, that's on the PERC website under their technology series, I believe.

We can send you the link, make it easy for you.

Yes.

That would be great. Shift gears for a minute, and then I'll get off. You said you were ranked #3 in microgrid, #3 in what?

Operational microgrids. So if you -- that's a number of sites.

Number of sites, okay.

Not overall capacity.

Okay. Any plans to go back to NASDAQ now that your stock is up a bit?

Yes. Well, we don't have any current plans to do so. I mean things change, and that may change, but right now, we don't have any plans.

Why would that be? Does it cost money to do that?

It's just our plan for right now is to maintain on the OTC. And if something changes and we have some change of thought, we'll consider it, but that's where we are.

A couple of more nursing homes. It strikes me that the ability to generate emergency power would be very important as we've seen in Texas this year.

Yes, it sure is, Alex. And I'll comment on that, and then I'm going to ask the operator to go on to the next call and if you want to get back on after it. I just want to give some more people a chance to ask some questions. But you're absolutely right about...

One more comment. You should archive this call for more than 2 weeks. It doesn't really cost anything to it.

I don't know.

Point taken.

Point taken. I'm not sure.

Nursing homes.

Yes, yes, yes, nursing homes. Again, that has been a focus of ours for some time. It's got to be at the right scale. It can't be a little 40-bed nursing home that you may see here or there are not a fit. You've heard me talk before about beds, Alex. And everything, kind of in my mind, transforms the bed -- hospital beds, multiunit residential beds, because that implies the scale of our units. And so we need nursing homes in those facilities to at least be 100 or maybe a little bit more beds for it to be viable. And that trims it down a little bit. But then it comes down to working and finding the right ones that work. And we have a few of them in our ADG portfolio. We have many customers in there. The resiliency piece is certainly important.

And what I was trying to say in that slide is that Texas historically has not had a very good spark spread. The electric rates are very inexpensive in Texas until they weren't. And so they spiked enormously. And I think they're going to come back down in Texas, because ultimately, they have very low cost of generation if everything is working, and the weather is okay. But I think what this did for Texas and well not just nursing homes, but any multiunit residential, et cetera, is it really scared them about the prospect of long-term grid outages. And you saw what happened there.

And I think that resiliency focus is going to get people to look past perhaps a longer ROI for our systems. So if I would come into a nursing home with a 6- or 7-year ROI, because electric rates are very low, that might not get prioritized. But after this, it might because of the resiliency aspect. So anyways, I want to encourage more calls. So please, operator, if you can have any more calls, we'd be happy to take them.

(Operator Instructions) Our next question is coming from Michael Zuk from Oppenheimer.

A question. Tell us about the 2 impaired hotel operations. Does that mean they're totally shut down? Will there be a chance of them rebranding and reopening? Or what's the status on them?

I think they're well and closed down. The expectation is that they're good buildings and they're viable buildings. And as the economy returns, I'm confident, I'm not certain, because I had to write them down, but I'm confident that eventually, maybe they'll get repurchased. And if they do get repurchased by someone else, then maybe they can get the systems back up and running again. But for now, they're closed. And there's nothing I can do about it, except inform them that they've -- that our agreement was in place and then write them down. The hotels really took it on the chin, I'm sure, as you know, during the pandemic.

Sure. I understand that. Tell us about the Canadian operations and what's going on up there.

Yes, sure. That's progressing. It got slowed, of course, by COVID. Everything got slowed down by COVID. But those units, just -- the listeners reminder, there's 26 units in different buildings up there that are getting commissioned right now. They're going through commissioning. And the goal is, I just had an update on this from our team up there, is to have them all running by the end of the second quarter. And that goal is not just being driven by me, because I want to get them running, but that's the overall customers and the utilities involved in it have an incentive to get them up and running quickly.

So our team is commissioning them at a rate of a few per week over the next few weeks and months. And I think by the end of the second quarter, they'll be running, which, of course, as I mentioned, will be another nice little boost to our service installation and parts division, not installation, I'm sorry, service maintenance.

And then final question, what's going on in Florida, if anything?

Yes. Florida is happening mostly because of our chillers. Our chillers is what the spark spread really allows down there. And I'm not sure how much you've been following these indoor grow facilities, but they're really popping up in Florida. A couple of our potential customers are down there. A couple of our existing customers are down there. So I think we're going to see more activity out of Florida for sure, certainly in the chillers. The cogen takes a little bit more of a spark spread to make it work, but I think our chillers are doing well. And I would also say that we're being very active kind of soliciting partners and, I guess, sales agents maybe is the right word.

But for example, gas companies, we've engaged in a relationship with a Canadian gas company, specifically in the Alberta area, and they have a motivation to sell more gas. I have a motivation to sell gas engine-driven equipment. It's a match made in heaven. So we have that. We've got an arrangement with a gas company in Florida as well. We've got an arrangement. And these are informal arrangements, Alex (sic) [Mike], where we kind of jointly look for projects. They're out hunting and we're out hunting, because they're always looking to add on the gas supply.

And more recently than not, Mike, they look into this not have negative -- not have reduction in gas supply. The market sometimes is losing out. So we're working with the sales agents at the gas companies, again, getting right back to Florida, and that area in particular, to try to find opportunities for us.

And not just with natural gas, I should say, with propane as well. Propane is becoming increasingly less expensive. I think it's the byproduct of the fracking process, Bob, right, that's driving the reduction in propane prices. So even in areas that don't have pipeline outreach, again, if you think about the Florida and the Keys, et cetera, there's starting to be more opportunity as propane prices come down.

And then one technical question for Bob. How do our Ultera technologies integrate with hydrogen?

I think as far as what's being talked about in the hydrogen world is that there'll be an injection of hydrogen into the pipelines that would be, say, 10% or a number like that. It's not going to be 100% hydrogen. But if it's 10%, I think it will work just fine. The products of combustion that we're after-treating won't have any significant difference that would change the chemistry.

Yes, Mike, I actually spent some time looking into this, because it was -- very much wanted to know what the expectation in the fullness of time would be for hydrogen in the pipeline. And there is -- much like ethanol, there's a limit. How much -- you can put some of ethanol in gas, but you get too much, 20%, the lawnmowers and boats start blowing up. So similar with the pipeline. There's going to be some maximum amount of hydrogen that can be put in without any significant disruption. And that amount, I think, 10% is probably at the top end of it. I think it's probably going to be more initially like 5% and then maybe building up to 10%, as you maybe harden some joints and get it.

The main thing, Alex, is that appliances on the other end of it got to run on it. Everything on the other end of that pipeline, no matter how much hydrogen they put into it, they've got to run without damaging the pipeline. And from all estimates, I'm saying 10% is probably the top end, even 15%. We've done some work already, Alex (sic) [Mike] not publicized on hydrogen and the ability of hydrogen to work with our engine. I think Bob is correct that we don't anticipate any problems with that going forward.

Well, that's good to know. Anyway, I'm looking forward to a very productive year and keep up the good work.

We've reached end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you, operator. Well, I want to thank all of our investors for joining us on the call today. We had some tough year last year, a lot of businesses did, but I think we positioned ourselves in really good shape for 2021 in terms of getting our operation lean and getting our balance sheet cleaned up. So I look forward to talking with investors on our next earnings call. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.