Tecogen Inc.
Q1 2021 Earnings Call Transcript

Published: 14 May 2021

[Operator:]

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. 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.

[Jack Whiting:]

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.

[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.

[Operator:]

Our first question comes from Sameer Joshi with ‎H.C. Wainwright. Please state your question.

[Sameer Joshi:]

Thanks. Thanks for taking my questions.

[Benjamin Locke:]

Hi, Sameer. Sure.

[Sameer Joshi:]

How are you doing?

[Benjamin Locke:]

Good. Good. Good.

[Sameer Joshi:]

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?

[Benjamin Locke:]

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.

[Sameer Joshi:]

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?

[Benjamin Locke:]

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.

[Sameer Joshi:]

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?

[Benjamin Locke:]

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.

[Sameer Joshi:]

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?

[Robert Panora:]

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.

[Sameer Joshi:]

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?

[Benjamin Locke:]

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.

[Sameer Joshi:]

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

[Benjamin Locke:]

Of course. Thank you, Sameer.

[Operator:]

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

[Alex Blanton:]

Hi.

[Benjamin Locke:]

Good morning.

[Robert Panora:]

Good morning, Alex.

[Alex Blanton:]

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

[Benjamin Locke:]

Got it.

[Alex Blanton:]

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?

[Benjamin Locke:]

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.

[Alex Blanton:]

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

[Benjamin Locke:]

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.

[Alex Blanton:]

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

[Benjamin Locke:]

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.

[Alex Blanton:]

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.

[Benjamin Locke:]

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.

[Alex Blanton:]

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.

[Benjamin Locke:]

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.

[Alex Blanton:]

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

[Benjamin Locke:]

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.

[Alex Blanton:]

Okay.

[Benjamin Locke:]

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

[Alex Blanton:]

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?

[Robert Panora:]

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

[Benjamin Locke:]

An hour after this call they should be there.

[Alex Blanton:]

How long will it be there?

[Robert Panora:]

Couple weeks.

[Alex Blanton:]

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

[Benjamin Locke:]

Did you downloaded it after the call.

[Alex Blanton:]

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

[Benjamin Locke:]

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

[Unidentified Company Representative:]

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.

[Alex Blanton:]

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

[Unidentified Company Representative:]

Okay. Great.

[Benjamin Locke:]

Okay. Thanks, Alex. Appreciated.

[Operator:]

Thank you. Our next question comes from Michael Zuk. Please go ahead with your question.

[Benjamin Locke:]

Hi, Mike. How are you?

[Michael Zuk:]

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

[Benjamin Locke:]

Good. Good.

[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-19, but historically, it’s been one of our larger markets.

[Benjamin Locke:]

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.

[Michael Zuk:]

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?

[Benjamin Locke:]

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.

[Michael Zuk:]

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?

[Benjamin Locke:]

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.

[Michael Zuk:]

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.

[Benjamin Locke:]

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.

[Michael Zuk:]

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.

[Benjamin Locke:]

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.

[Michael Zuk:]

0Appreciate it. Thanks

[Benjamin Locke:]

Thank you, Mike.

[Operator:]

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

[Benjamin Locke:]

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.

[Operator:]

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