Tecogen, Inc. (OTC:TGEN) Q2 2024 Earnings Conference Call August 8, 2024 9:30 AM ET
Company Participants
Jack Whiting – General Counsel, Secretary
Abinand Rangesh – CEO
Roger Deschenes – Chief Accounting Officer & Treasurer
Conference Call Participants
Alexander Blanton – Clear Harbor Asset Management
Operator
Thank you for standing by, and welcome to the Tecogen Second Quarter 2024 Conference Call. [Operator Instructions].
I’d now like to turn the call over to Mr. Jack Whiting, General Counsel and Secretary. You may begin.
Jack Whiting
Good morning. This is Jack Whiting, General Counsel and Secretary of Tecogen. This call is being recorded and will be archived on our website at tecogen.com. The press release regarding our second quarter 2024 earnings and the presentation provided this morning are available in the Investors section of our website.
I’d like to direct your attention to our Safe Harbor statement included in our earnings press release and presentation. Various remarks that we make about the company’s expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by forward-looking statements as a result of various factors, including those discussed in the company’s most recent annual and quarterly reports on Form 10-K and 10-Q under the caption Risk Factors filed with the Securities and Exchange Commission and available on Investors section of our website under the heading SEC Filings. While we may elect to update forward-looking statements, we specifically disclaim any obligation to do so, so you should not rely on any forward-looking statements as representing our views as of any future date.
During this call, we will refer to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is provided in the press release regarding our second-quarter 2024 earnings and on our website.
I will now turn the call over to Abinand Rangesh, Tecogen’s CEO, who will provide an overview of second-quarter 2024 activity and results; and Roger Deschenes, Tecogen’s CAO, who will provide additional information regarding second-quarter 2024 financial results.
Abinand Rangesh
Thank you, Jack, and welcome to Tecogen second-quarter 2024 results. I would like to talk briefly about some new areas that we are developing. And then I will hand over to Roger to go over the results, and then I will summarize.
Over the last 15 months, we faced many challenges as a company. We’ve had to move our factory and spend $675,000 to build test cells. Anti-fossil fuel regulation in New York City, Boston, and many high-rate areas has meant that we’ve had to find new markets for our products. However, today, I am feeling extremely optimistic about the future.
We’ve made significant headway on operations and product improvement, which we will discuss later. I also believe many of the orders we’ve been fighting for will close by the end of Q3. When I summarize at the end of this presentation, I will recap the last 1.5 years why we had no revenue for — no product revenue for Q2 and why we made the strategic choices that we did.
I believe that there’s a once-in-a-lifetime opportunity coming. Like the railroad booms, the oil boom, the PC, and social media revolution, the new boom is coming. Data centers are going to fundamentally change the energy landscape and catapult the growth of certain companies. Today, I’m going to show you why I believe Tecogen is going to be one of them.
We’ve been working on data center projects for the past six months. I didn’t want to talk about this before since the projects were too early a stage. When everyone thinks of data centers, they think of the massive facility that Amazon and Google are building. Initially, I thought that our products were going to be too small for this market.
I asked one of our engineering and project development partners why he was recommending our products for data centers. Why are you specifying Tecogen’s equipment? Why aren’t you specifying a large engine from Caterpillar or GE? What alternatives does the customer have? He walked me through the economics and the timeline that these customers are looking for.
Now that we have made progress on multiple projects, I’d like to tell you about the needs of this market, why our solution is better than the alternative, and when we should expect to see orders from this segment.
There are three sites of data centers. Hyperscale is what kept all the press. Most data centers, though, are smaller. Most are colocation data centers. Here, multiple companies rent a portion of a bigger data center. Then there are the enterprise data centers where a bank or a law firm has their own dedicated data center.
In the past, data centers were built in the lowest utility rate areas and were primarily used for data storage. Today, with AI and distributed computing, the power draw is immense, and liquid cooling is essential.
If you’re Google, Meta, or Amazon, you can afford to build your own power plant or negotiate directly with utilities for favorable power contracts. Others are less short of power. Utilities are no longer able to provide all the power a data center needs. Power plants aren’t being built fast enough.
Utilities are also behind on upgrading infrastructure. The biggest need for solutions is in the colocation and enterprise tiers. If you need 8 megawatts of power, in many regions, the utility will tell you that you’ll get 5 and you’ll have to source the remaining power yourself. This has become such a constraint that space is no longer being rented in some data centers by square foot. It is being rented by required power for each tenant.
If you’re building a colocation or enterprise data center, what are your options if you don’t have enough power? You could buy a backup diesel generator or a natural gas generator. Most generators, though, are only designed for 500 hours or so of annual operation. You may or may not have the appropriate service support for the uptime you’ll need.
Emissions compliance for continuous operation is also tricky. Solar and wind won’t work at night, but the data center needs power 24/7. You could build your own 3-megawatt turbine power plant, but that might take you 36 months or more to come online.
Also, for an engine or turbine greater than 1 megawatt, lead times for certain components like electrical panels and switchgear are more than 24 months out. As more data centers are located closer to populated areas, neighboring buildings, noise restrictions, leading regulatory, and permitting also has additional time.
How does all this affect Tecogen? If you have a data center that needs 1 megawatt to 3 megawatts of power, we have two solutions that will solve your problem. The first solution is our DTx engine-driven chillers. These can take all of the cooling load off electricity and move it to natural gas. They can be running on-site in six months or less. Five to six units can be packaged in a container with all the connections for quick install on site.
They can even be run with dry coolers to reduce on-site water usage from cooling towers. For an 8-megawatt data center, this will immediately free up 1 to 2 megawatts, which might allow a customer to open on time or add additional tenants. Chiller modules can also be added as the data center expands.
The second solution is to use our inverter to generate power. We use a proprietary 480-volt inverter-based system. It avoids many of the switchgear requirements as it has built-in electrical protection. We can also use electrical panels that are readily available.
As multiple inverters can be daily chained together into a microgrid, you also have redundancy. If you use the large engine from GE or Caterpillar, you would need 13.2-kilovolt or higher voltage switchgear [indiscernible]. As mentioned, such switchgear lead times sometimes can exceed 24 months. You would also need specialist electrical contractors adding cost and complexity.
Today, data centers are being built near cities and other buildings. Getting approval to put an on-site power plant near other buildings is not easy. We have hundreds of systems in residential buildings. Our units are quiet and our patented Ultera system allows us to meet emission standards everywhere. As the data center expands, more inverters can be added to the microgrid.
Lastly, if a customer wants a zero carbon option, we work with a carbon capture company to extract and store all the CO2 from the exhaust. We are presently working on three data centers in the Northeast and Mid-Atlantic. I hope to announce the first purchase orders later this year. We have also signed up distributors that specialize in data centers.
Right now, Tecogen is valued at barely 1 times revenue in the service business. There are many start-ups right now that are raising money at premium valuations that try and solve the power problem for data centers. Data centers can accelerate their construction timeline by 12 months or more with our chillers and . They have the flexibility to add capacity later as our equipment is modular. Last of all, our equipment will continue to save money on energy expenses going forward.
Technology is only one piece of the solution, however. Data centers need 24/7 support and not everyone can do that. We already have experience with off-grid power, process cooling, and other applications that need high uptime. I believe that if we can demonstrate our solution with the projects we’re working on now, this could be a great opportunity for Tecogen long term.
Backlog and cash. The backlog is presently just shy of $6 million. This is up by $1.1 million from when we reported in Q1. We also have another $5 million to $7 million of prospective orders where the customer has told us to expect a purchase order sometime before the end of September.
We had positive cash flow from operations in H1. However, we had to spend $600,000 in factory fit-out and move. So we finished with a cash position of $841,000.
Today, we have $1.1 million in cash. The movement that some customers were still sending payments to our old address, and this was adding 15 to 30 days to our cash collection cycle. So we decided to draw another $500,000 into our line of credit in July.
As a quick recap, we have three revenue segments. Our product revenue consists of sales of cogeneration units, microgrid systems, and chillers to a range of markets and customers. Our service revenue primarily consists of our contracted operations and maintenance services. Our energy production revenue stream is from energy sales, including sales of electricity and thermal energy produced by our equipment on-site customer facilities.
I’m now going to hand over to Roger to go over the financial numbers.
Roger Deschenes
Thank you, Abinand, and good morning, everybody. I’ll begin with reviewing the second-quarter 2024 results. Our revenues for the quarter were $4.7 million compared to $6.7 million in the second quarter of 2023, a decrease of 30%, which is due to the lack of production capacity. As you may be aware, we moved our manufacturing operations and administrative offices in April of this year.
Due to the move and the resulting decrease in product revenues, our net loss for the second quarter increased to $1.54 million compared to $780,000 in the second quarter of 2023. The net loss was $0.06 per share in the current period compared to $0.03 per share during the previous year. We’ll review revenue and margin further in the segment review. Operating expenses decreased 1.7% quarter over quarter despite incurring additional rent in April, moving expenses incurred of approximately $100,000 in costs incurred for the air-cooled chiller testing which occurred during the quarter.
Moving to EBITDA and the adjusted EBITDA calculations. For the second quarter, our EBITDA loss was $1.4 million, and the adjusted EBITDA loss was $1.3 million, which compares to an EBITDA loss of $583,000 and the adjusted EBITDA loss of $592,000 in the comparable period in 2023.
We’ll review the 2024 segment performance. Products revenue decreased 95% quarter over quarter. The products gross margin was negatively impacted due to warranty costs in unabsorbed direct labor. Our services revenue increased 4.4% quarter over quarter due to the acquired maintenance contracts. Gross profit margin remained — or services remain unchanged at 47% in the second quarter of 2024 compared to the 2023 period.
We have seen significant price increases for certain parts such as engine components and oil over the past 24 months, which have negatively impacted our gross margins. Therefore, effective on August 1, we increased our cogeneration service pricing to reflect these higher costs with the intent to improve our margins going forward.
To decrease service costs, we’ve been testing product improvements, which will increase service intervals. The impact of these product improvements are expected to be rolled out across the service fleet later this year. We anticipate these efforts will result in improved margins beginning in the fourth quarter of 2024.
Our energy production revenues increased 37.5% compared to the comparable period in 2023. This is due to the restart of an energy site, which had been dormant since 2020, and higher runovers across the fleet. Our gross margin also increased to 44% from 42% in the prior year.
I’ll turn the call back over to Abinand now.
Abinand Rangesh
Thank you, Roger. I know some of you may be wondering why we had no product revenue for the second quarter. The Q2 loss may also be a concern. I’d like to take a step back to walk through our strategic and operational choices and give some context on where the company is going.
When I took over last year, I knew that there were carbon regulations like Local Law 97 and BERDO that were going to make it harder to sell our products in the Northeast of New York. I also knew that we had to reduce our cash burn immediately or risk diluting investors with an equity raise. Lastly, I knew that we had to move factory and deploy significant capital over a short period of time while having production disruption.
Given those factors, the first thing we did was to try to grow recurring revenue to cover a larger portion of OpEx. Our assumption of a significant number of maintenance agreements did just that. I was expecting a gradual decline in product revenue in New York City and the Northeast driven by the anti-fossil fuel [indiscernible] but we saw a much sharper decline than expected.
We talk to customers, engineers, and even our competitors. Unfortunately, this decline does not appear to be temporary. In fact, we saw projects funded through city agencies get canceled after engineering and bidding. At this point, we had a couple of options: pivot to other technologies or find new markets.
We felt that there were still many areas nationwide that were good candidates for our products. And with the power constraints affecting utilities, we felt we could grow the product revenue above previous levels.
The business development efforts from the last 12 to 15 months is what I expect to see close to. Our backlog is presently at $6 million. We have an additional $5 million to $7 million of projects that we’ve had verbal commitments from customers, so they would be issuing POs within the next three months. We also hope to have the deposits from these projects around the same time scale.
Given the timing of product orders, the biggest risk during Q2 was cash flow. We had to deploy significant amounts of cash in a short period of time. If we decided to ship product during Q2, we would have had to buy material for building those orders. That could have put us in a deep cash crunch if the projected orders were delayed.
If we also hadn’t used our own labor to do some of the fit-out on the factory and we had shipped product, we would have needed an additional $1 million or more in cash. Right now, with our recurring cash flow and lower OpEx from the new location and other operational improvements, I believe we can remain cash flow positive until these orders come through.
We are now back to production this quarter and expect to have Q3 revenues between $5.7 million and $6.2 million. Assuming the product orders come through for the timing I outlined above, Q4 should be much stronger than Q3. I’m excited to continue to take advantage of the tailwinds in the data sector market, continue to grow the CEA market, and find more power-constrained customers that can use our products.
At this point, I’ll open the floor for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from the line of Alexander Blanton from Clear Harbor Asset Management.
Alexander Blanton
Hi. How are you? This is a great report. I think really a master class seems to me in how to overcome adversity, and I congratulate you.
Abinand Rangesh
Thank you, Alex. I appreciate you saying that.
Alexander Blanton
You should call up Harvard Business School and get them to do a case on this in a small business management area. I wanted to ask the three projects that you mentioned you expect to get orders finalized this quarter. What is the dollar volume involved there in the three?
Abinand Rangesh
So there’s two different pieces here, right — the three things and orders in the data center space. I don’t want to mention the dollar volume yet because it’s still — that one I have not mentioned before.
The $5 million to $7 million that I mentioned that we expect to get this quarter, that one — only one piece of that is the data center. The rest is actually other projects that we have got in power-constrained or areas that are friendly to gas.
Alexander Blanton
Well, the $5 million to $7 million, is that the order amount?
Abinand Rangesh
Yeah, that’s the — yeah, that’s the total. There’s about — there’s multiple projects out of that $5 million to $7 million. But yeah, that’s what we’re expecting. At the low end, probably 5%; at the high end, 7%, depending on which projects closed when.
Alexander Blanton
And these data center jobs, what is the size in dollar volume of an average one that you are targeting?
Abinand Rangesh
So most of those projects are going to be per project around $2 million per project. And there are some bigger ones that are much larger, and then there are some smaller ones which might be under $1 million, which might then expand with additional capacity later.
The way I see the data center projects coming through, you might see them, for example, it might have a $2 million project, but it might happen in two chunks of $1 million. They might fit up. Because one of the advantages, as I mentioned, was our equipment of modular. So the way a lot of these data centers are operating right now, they’re taking existing data centers sometimes, and converting them from what would have been just data storage into AI or other high-power demand-type scenarios. So when they add additional tenants, they need to add either additional power capacity or additional cooling.
So they just had some of our equipment, and then when they add another tenant, they add on more chunk. So that’s, I believe, how it’s going to play out over the next six months or so. We’re going to see a lot of small data set of things that will then expand into bigger ones.
Alexander Blanton
Have you done any of these up until now?
Abinand Rangesh
So honestly, data centers, we’ve only ever done one small data center years ago. The main reason that we have never done data centers before was because they were just — they used to be in areas that have very, very low utility rates. And they had that — our economic savings advantages didn’t help in those cases. But now the driver is very different. The data center is now — it’s really driven by ability to get a solution deployed quickly and then the ability to do this in a modular fashion and also be able to handle some of these urban environments. So the requirement of data centers now is very different than it was even six months or a year ago.
Alexander Blanton
Okay. So what are these data centers doing right now if they’re not using your equipment?
Abinand Rangesh
So right now, a lot of them are just buying power from the grid. But because they’re changing what the data center is doing, they’re suddenly needing to add a lot more power capacity or additional cooling.
Alexander Blanton
I see. Okay. So this is the alternative — an alternative to buying power from the grid, which is getting more expensive.
Abinand Rangesh
It’s also the grid is not able to provide them the power. Because there’s two types of scenarios happening with data centers. One is an existing data center that is changing what they’re doing within the data center. They’re needing more and more power, and the grid isn’t able to provide it to them. And then their whole new data centers being built, again, that the grid is just not able to give them enough power.
Alexander Blanton
What’s the payback period for the data center and using your equipment versus buying power from the grid?
Abinand Rangesh
So based on what we’ve seen, in most of the projects right now, they’re looking at — to get even enough power from the grid, they’re looking at least one to two years to get that power. So the payback essentially is being able to open that data center almost a year early. And in most cases, it — they actually pay for themselves right now from what I’ve seen in under two years just because of how much money data centers make by being able to open early.
Alexander Blanton
Okay. But if — aside from that, what’s the saving using your equipment versus the grid?
Abinand Rangesh
It really depends on the location because they’re all over the place. We’re seeing stuff that have really low utility rates that might have very little economic savings. But we’re also seeing projects — Virginia, New York, Massachusetts, where the savings would have — if you were just purely doing it on savings, it would be pretty typical three to five years. But right now, that’s not where the economics are coming from. It’s the ability to actually get open on time.
Alexander Blanton
One more question. Do you have an estimate of the total available market from data centers?
Abinand Rangesh
Honestly, it’s a little early for us because — I mean, if you look at just pure dollars being deployed by the big entities, I mean, there are hundreds of billions of dollars right now being spent on building data centers. But how much of that we can target, I don’t know. Our goal is to — the next step within the next 12 months, right, is to restore product revenue beyond where we were before and get us profitable. And then I think at that point, once we’ve gotten a few, I think, we’ll be able to really assess how many data centers are able to use our equipment and how quickly it scales in that space. But I think hitting where we were before with just the combination of the data centers plus what we’re working on right now, I think, is totally doable.
Alexander Blanton
One more question. How are you doing the marketing to this market?
Abinand Rangesh
So there’s a few different channels we’re doing. One, as I mentioned, we’ve actually signed up some manufacturers’ reps who only do data centers. They only sell equipment to data centers they sell. In the past, they’re selling things like electrical cooling, but now that they need — they’re seeing these power constraints, they’re wanting to sell our solutions.
We are going to some of the data centers directly. Some of them are calling us actually directly because they’ve heard about our solutions, and they’re giving us a call. We’re also working through other companies that have relationships with the data center space that are selling either other equipment or they are a developer associated with data centers. So we’re taking multiple approaches there. And then, of course, we’re still continuing to do the online marketing, targeting data centers directly.
Alexander Blanton
And do you have capacity to meet this demand?
Abinand Rangesh
I think I’m hoping that we’ll get to the point where we have to expand capacity to meet the demand. But as of right now, I think we do for the next six months. Thank you, Alex, and thank you for the kind comments.
Operator
[Operator Instructions]. And there are no further questions. So this will conclude today’s question-and-answer period and also today’s conference call. We thank you for participating. You may now disconnect.
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