Tecogen Inc (TGEN) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Tecogen First Quarter 2021 Earnings Call. (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 2 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'd 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 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. 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'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, 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 sized system. Our proprietary Ultera emissions technology ensures the cleanest emission is 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 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 #3 by Wood Mackenzie in terms of number of operational microgrids in 2019.

We are well positioned as our country and the rest of the world looks towards a low-carbon and good 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 a 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 in 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 showed the results of our concerted efforts to contain expenses down 21% for the first -- from the first quarter of 2020. Our net income was $1.8 million as a result of the forgiveness of our PP loan -- 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'd 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 engineer 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 a 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 InVerde in Toronto come online later this year.

As I mentioned, our energy production fleet was significantly impacted by COVID closures, with several hotels in 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 margins in this segment, up to 40% compared to 35% in Q1 of 2020. The 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 from the quarter as we look towards 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 stable, 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 draw loan later this year. Importantly, we generated $400,000 of cash from operations this quarter. Our improved margin 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 outline of our plan to reach profitability. The plan is focused on growth in each of our core business segments. For our products 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 their engines for sale to a range of stationary and mobile applications. We are also finishing up work on developing a new proprietary catalyst for Ultera that could have 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've 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 describe this vision and path to profitability in more detail. We put a press release out this morning with the link to the letter, and the link is also shown here. You can also access this on our website in the News and 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.

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 at backlog or time or pipeline going forward?

Yes. Yes. Yes, the cogen was light this quarter. I wouldn't read too much into that. We're going to have quarters where cogen's heavy and chillers are light 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 abnormal ratio of cogen and the chillers this quarter, it could be reverse the next quarter. There's no -- the cogeneration stuff is still going strong.

That's what I talk about a lot with this order pipeline, Sameer, there's sort of an established process for the equipment being specified and engineered and then procured and all that thing. And that takes time, and we see that. That's how our backlog gets formed. And it's that process that really slowed in 2020, we had some momentum going in the COVID because we had those -- 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 2 product streams going forward.

Understood. Got it. And then on the service revenues, we understand you're moving away from installation services and supplying smaller like parts or products that may be used in the installation. In terms of gross service margin dollars, is this coming out net positive for you? 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 might remember, Sameer, we kind of had to take these on. It was part and parcel of that New York incentive is that the cogeneration manufacturer do the installation and take responsibility for it. So those mostly ended now. And they ended up being low-margin things, hiring rigors 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 our -- we're always going to be doing some construction, Sameer. But I just want to be careful that we don't get stuck into these bigger jobs and then end up being a drain on our margins. Even though they increase our revenues, if they're 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 were finishing work on the catalysts and working on the new catalyst? Or maybe I misheard that.

Yes. That's right. That's right. And again, we didn't give too much detail on it this call. Although there's a bit of detail on that, the work we're doing on that in the shareholder letter, when you get a chance to look at that. But yes, this is a -- and I'll speak and I'll let Bob clarify if he needs to. But this is -- the catalyst that we're currently using is a commercially available catalyst for Ultera. But this new catalyst that we're developing will be proprietary, and it has some very specific qualities to it that are helpful, but I won't go into technical details of.

But the important thing is this will be the best catalyst for Ultera, and this will have our IP behind it, whereas the existing Ultera systems, we have IP in the process, of course, but the catalyst itself is not proprietary. So we're working with the third-party unit -- I can say the name, Southwest Research, and they've been working on it, and we expect them to -- their work to be finished this summer. And I imagine we'll do some testing on it. And hopefully, in our next Ultera update, we'll be able to give you some so good news on that front.

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

Yes. I can clarify that a little bit. This is Bob Panora. The -- with the Southwest Research staff, who has super experts on catalyst, recognized is that the particular temperatures that we're operating in, in that second stage, allow somebody who's more sophisticated to say, "Hey, you should use maybe some different materials, some different approaches and that you would improve the performance. So what does that mean?" That means you can make the catalyst smaller, right? And they also -- they're early at test with small, little miniature sized catalyst on a test bench. Indicated that the temperatures we can operate over could be a much wider range.

So that would make the control easier and perhaps have -- that's obviously an advantage instance. You can downsize the heat exchange or component as well. So it's something I think is very important because it could reduce the cost of the 2 main components significantly. And anyway, that's about all I want to say about it, but it's -- that's why we're doing it. And it's proprietary.

Yes. No. Just 1 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. You know our goal here, Sameer, is to reach profitability and then once that happens, things could change. We could bring on some more salespeople, for example, make some more investments. But I think the run rate you're seeing right now, at least for the rest of the year is probably pretty predictable.

(Operator Instructions). Our next question comes from Alex Blanton with Clear Harbor Asset Management.

That's not Clean Harbor, it's Clear Harbor. C-L-E-A-R. Yes. Well, 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 truck project with Caterpillar Mitsubishi you had the main head of that was 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 you, 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, a much more likely way for Ultera to arrive in a MCFA, they're going to call it MLA now, Bob, right? They changed their name from MCFA. But in the more likely way for Ultera to get in their fork truck is through Origin Engine because Caterpillar -- Mitsubishi MLA, Crown. Many of these fork truck manufacturers are customers or potential customers for Origin.

And so -- and I think Origin could very well be in touch with MLA right now discussing it. But the more practical way for a fork truck manufacturer to get their hands on our technologies 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're developing -- developing the engines for the fork truck market. They've been an industrial engine supplier currently. And so they're 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're doing this because I think they have strong queues from the industry that they're looking for other sources of these engines, which is long story, but there has some supply problems with who they're dealing with now. So I think the cues are that they're 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 program. They were a partner in this Propane Research Council program that we were part of, too. And there's still an active part of PERC, and we still talk to them. It's just their urgency to get something done directly with us isn't there. And our urgency to get something done directly with them isn't quite there as much anymore because we've got Origin now to accomplish this commercialization path. So there could be another outcome where they -- we work with them again, Alex, I wouldn't rule that out entirely. It's just at this particular point in time, this is the path we're going. And they're going to do their own thing.

It's actually more of a normal business arrangement where somebody like MCFA or MLA right now. They would want to buy an engine that was completely soup to nuts as a kit, completely certified and not have to even know much more than that about the engine. 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, in other size ranges as well. I think Origin may be interested. I mean, not Origin, MCFA, MLA may be interested. I don't know why they wouldn't be. Because the people they seem -- the salespeople seem very pro this system, pro in this low-emissions product.

And in fact, just with 1 more thing on that, Alex, is the milestone for both projects was essentially the same, the milestone with MLA and the milestone now with Origin is to get this thing certified. Get it working and certified. So that's what's important to us, right? Because you show that it works and show that you can start now being sold.

Now the new Biden administration has the goal of cutting greenhouse gas emissions more than half by 2030, something like that. And looking to convert the automobile industry to electric cars by 2035. But what is the possibility for you of equipping fleets of trucks that might be hybrid and might use fossil fuel or whatever to with this Ultera technology. Have you been looking into that? I mean not with trucks. Delivery trucks, things like that, UPS trucks, post office trucks, things like that?

Yes. I think we actually -- we have envisioned that and that -- I think as I've said maybe in previous calls, getting this to an automotive OEM would be very, very difficult in years and years and years and years, if you're ever going to get there. Whereas getting into the retrofit market is an ideal approach for this Ultera. Again, the analogy being the delivery vans that Amazon got they had converted to natural gas for better efficiency. We could have just as well been 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 there's just steps to get there. And there's partners involved that we'd have to work with. So that potential is there, Alex, certainly. We're just not quite there yet, and that would require a little bit of more business development, which I think will happen, and Origin is the first step.

To me, Amazon would be a great target because they're so geared to new stuff and new technology?

Yes, yes. Bazos didn't return my e-mail. So but you're right, you're very much right. And I think one of our efforts here is -- with Origin is going -- 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.

There are a few more questions lined behind you there, Alex.

There are more questions? I'll get off and let -- we've got another half hour, I guess. But the transcripts for this call where is 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'll be there. An hour after this call, they should be there.

How long will it be there?

Couple of weeks.

Only a couple of weeks to. So I can't find the transcript of the last call. Is that right? Like the December call?

Did you download it right after the call?

No, no. I was just looking for the transcript of your prior call, the one in for the fourth quarter it's gone.

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

Alex, [Levi's Tristen]. So our transcripts are actually available on request. I have sent you an e-mail regarding that if you would like to respond. I can absolutely send you the transcripts. They are on the website from past years, but from 2020, they're available upon request as well as this call. The archived audio is available for 2 weeks. But if you want the written transcript, just let us know. We can send it.

(Operator Instructions). Our next question comes from Michael Zuk.

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

Sure. Yes, yes. And it still is. I mean, the spark spread in New York is still probably the strongest anywhere. In the country. And despite this move towards electrification and all the goals, et cetera, that might lead you believe that fossil fuel is 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 we're an efficiency measure. We help utilities reach their greenhouse gas goals by -- because we're 90% efficient, sometimes even higher. And then if there did become penalties for buildings in New York, if they don't reach their carbon reduction limits, then there's going to be a real monetary value to having the cogen in there because to cut your carbon that you're building by a significant amount. You can't put up solar, you might have already done your light bulbs, you need something with bang for the buck and cogen really provides a bang 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'm 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 strains in the summertime, that's it's difficult to conceive. So I'm 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 an 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?

Yes. We've not seen -- we did see some supply issues in New York, Westchester in some of those areas, some time back, but they seem to -- they're resolved now. We're not seeing any supply issues now, we're able to get gas very readily. And then moving down the East Coast, it becomes even more -- I mean, you go down the East Coast, you get [knocked] $0.10 of therm off the gas for every 1,000 miles. And so you get to Florida, where gas is very affordable. And I think I've said before, that's why we're being successful in Florida with our service center down there now is because electric rates aren't as high as New York, but gas is dirt cheap. And so the spark spread is very favorable.

And then moving across the country to California, where are we 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'm aware of those. California does have a bit more of a sentiment towards natural gas. Those communities that are banning natural gas. That doesn't worry me too much that the little communities where I don't think that have cogen in any ways. California, where I'm really focused on in California and also, Mike, as you know, they have some punitive tariffs there for cogeneration. If you're using a fossil fuel, even though I'm 90% efficient and helping the world, just like I said, I was, reducing greenhouse gas emissions, they still make it difficult for us economically to run, through standby charges, non bypassable charges, et cetera.

The way you get around -- and so it's really, really promising economics, Mike, it's just that they're hindered by those things. The way you get around that and the way I'm 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're still saving 150 KW off your meter versus the electric chiller. Same thing with the Tecopower. Mike, you remember, we reintroduced that last year. This is our refrigeration product.

Tecofrost.

Tecofrost, thank you, Bob. Winery is up and down the coast typically have a user -- circulated ammonia to do their processing. And this is a great way for them to cut their electric bill simply by replacing their compressor system with our Tecofrost natural gas compressor system. And again, you're not subject to the people that shame you for using natural gas because you're not cogen, you're an industry. And most importantly, you're really getting the benefit of all the electric savings from the grid tariff.

So that's our plan at California, it's really focused on our chillers. Of course, we're going to try to find more cogen stuff, but I think you're going to find chillers. And just one last thing before you ask your next question, Mike, an important part of my focus on chiller sales, and this is a good thing is they're done mostly through manufacturers representatives. And 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 products. So we're -- we have a pretty established chiller rep network. I think I mentioned a little bit in our shareholder letter, what the size of that is. And as I expand our chiller markets. And as I expand, for example, California or the West Coast or even up in Canada, I'm identifying reps that can 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, and they have an electric generation issue down there.

Yes. Sure. And Texas, it indeed, falls into the category of -- I'm really emphasizing the chillers down there because the spark spread isn't great down there. But now they've been scarred by that resiliency piece, right? That was a difference. You could not have a spark spread and you got no market. Now you can not have a spark spread, but potentially have a market because you've got this resiliency thing going through.

So indeed, we've got connections down there. Vilter, our partner, our manufacturing partner for the Tecofrost is located, they have a location there. So we're 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, the long answer to your question is yes. Now that this resiliency piece has kind of been ingrained in people in Texas, much like Hurricane Sandy did in New York, I think we're 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'm 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 I appreciate it very much.

Yes. Sure. Thanks, Mike. 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're looking forward to accomplishing them.

(Operator Instructions). 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 appreciate, we'll talk on the next call.

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