Tecogen Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Greetings, and welcome to the Tecogen Year End 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Joining us today are our 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.

[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 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.

[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 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 of 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 facilities indefinitely until grid power is restored. Tecogen has deployed hundreds of these systems that can operate as microgrids, independent of grid operation, recently being ranked number three in terms of operational microgrids in 2019.

[Robert Panora:]

Thanks, Ben. Good morning. Let me begin with Origin. As we announced in November, we have completed an agreement with Origin Engines to commercialize the Ultera Aftertreatment 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. As our CHP engine supplier for the last five years, we've gotten to know them well, I would characterize them as innovative fast growing supplier and their industrial engines are robust, and then 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 in 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 go into the agreement and wrote a nice article in the February edition about it. It can be found on our LinkedIn webpage dated February 4th. Now regarding our outlook for Ultera, but first-off we will be shipping our two 800 horsepower kits to the South Cal water district shortly. These will be used on to Caterpillar natural gas engines, and we believe additional audits may follow. I want to emphasize that the Origin program on the other hand has a very positive outlook. It's written to written agreement first for Ultera with an aggressive schedule for limitation. Moreover, it has a strong potential to expand Ultera to other markets as I mentioned, but also to 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 reduce temperatures in the Ultera catalyst system will improve Ultera's performance and potentially reduce costs. A subcontractor rather SwRI, which was formerly the Southwest Research Institute will be supplying as a full-sized 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.

[Benjamin Locke:]

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 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 Engine 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:]

Thank you. Our first question today is coming from Alex Blanton from Clear Harbor Asset Management. Your line is now live.

[Alex Blanton:]

Hi, good morning. Can you hear me?

[Benjamin Locke:]

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

[Alex Blanton:]

Okay. First, I wanted to ask you about the on the lift-truck situation; there was an engineer in charge of your adventure 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?

[Benjamin Locke:]

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 big, big company and they move slowly out, which is it's just the way it is. But I would – I would say Alex, that the – our approach with Origin Engines is to forklift markets as MCFAs competitors as well is a more tangible approach where we're getting more receptivity. I didn't – really did not want the fate 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 MLA.

[Alex Blanton:]

Got it. When you say there's a license agreement, is that mean you're not selling equipment to them or you're just getting a royalty, is that right?

[Benjamin Locke:]

That's what the Origin agreement describes, yes.

[Alex Blanton:]

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

[Benjamin Locke:]

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 forward into this set on this with their fingers crossed for three years. There 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 want U.S. to give them this license.

[Robert Panora:]

One more point, Alex, is that if you caught it at the end of the presentation, one of the reason why I am so high on this catalyst development program is that the formulation of a catalyst that we have patent on is 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 lot, I think.

[Alex Blanton:]

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

[Benjamin Locke:]

Yeah. That was me, Alex. So we've articulated the goal of getting Ultera on vehicles and automotive applications. And as you know, we had our efforts a few years ago to get in 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 challenged enough? And so – since then, I've articulated the vision about Ultera for vehicle applications to be in type of a truck, a retrofit type model. You might've seen Amazon's order of natural gas equipped the trucks to that type of a model, I see where there's conversions happen all the time for fleet vehicles from diesel to natural gas, et cetera. And what I envisioned 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 zero 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 what 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 ants 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 world and that's what I meant by that final statement, Alex, is that where you're pretty excited about origin for industrial engines, but I still want to get to work my strategy on industrial fleet renovations for Ultera.

[Alex Blanton:]

Are you talking with Oshkosh? Either they have a contract to do the new post office trucks running on faster.

[Benjamin Locke:]

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 are – 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 – we called it forklift trucks. So we are thinking about how to reach out to those folks, and I don't want to say anything more than that.

[Alex Blanton:]

Listen, I know some people there, should I call them?

[Benjamin Locke:]

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

[Alex Blanton:]

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.

[Benjamin Locke:]

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, they get themselves understanding of it. And hopefully that would generate interest.

[Alex Blanton:]

That's on the PERC website.

[Benjamin Locke:]

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

[Jack Whiting:]

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

[Alex Blanton:]

That would be great. Thank you.

[Benjamin Locke:]

Yes, sure.

[Alex Blanton:]

Shift gears for a minute and then I'll get off. You said you were at ranked number three in Microgrid, number three in what?

[Benjamin Locke:]

Operational Microgrid. So that number of sites,

[Alex Blanton:]

Number of sites, okay.

[Benjamin Locke:]

Not overall capacity.

[Alex Blanton:]

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

[Benjamin Locke:]

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?

[Alex Blanton:]

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

[Benjamin Locke:]

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

[Alex Blanton:]

Okay. A couple of more nursing homes, it strikes me that the ability to generate emergency power would be very important as was seen in Texas this year.

[Benjamin Locke:]

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

[Alex Blanton:]

One more comment…

[Benjamin Locke:]

Okay, sure. Go ahead.

[Alex Blanton:]

You should archive this call for more than two weeks, doesn't really cost anything to have it.

[Robert Panora:]

I don't know.

[Benjamin Locke:]

Point taken. Point taken.

[Robert Panora:]

Yes, point taken. I am not sure.

[Alex Blanton:]

Okay.

[Benjamin Locke:]

Okay, thanks, Alex. We'll see it.

[Alex Blanton:]

Nursing homes?

[Benjamin Locke:]

Yes, nursing homes, again that has been a focus of ours for some time. It's got to be the right scale. It can't be a little 40 bed nursing homes that you may see here, they are not a fit. You've heard me talk before about beds, Alex, and everything kind of in my mind transforms the beds, 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 as 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 costs of generation if everything is working and the weather is okay. But I think what this did for Texas and not just nursing homes, but any multi-unit residential, et cetera, as it really scarred 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 the six or seven 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 are happy to take them.

[Operator:]

Our next question is coming from Michael Zuk from Oppenheimer. Your line is now alive.

[Michael Zuk:]

Good morning, Ben and Bob.

[Benjamin Locke:]

Good morning.

[Michael Zuk:]

A question, tell us about the two impaired hotel operations. Does that mean they're totally shutdown? Will there be a chance for them rebranding, the reopening or what's the status on them?

[Benjamin Locke:]

I think they are well, in closed down. The expectation is that 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 that maybe I 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. Hotels really took it on the chin, Alex; I'm sure as you know during the pandemic.

[Michael Zuk:]

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

[Benjamin Locke:]

Yes, sure. That's progressing. It got slowed, of course, by COVID everything got slowed down by COVID. But those units just for the listeners reminders, there is 26 units in different buildings up there that are getting commissions 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 utilities involved in it having 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 parts division, not installation, I am sorry, service maintenance.

[Michael Zuk:]

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

[Benjamin Locke:]

Yes. Florida is happening mostly because of our chillers. Our chillers as 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 in – I guess, sales agents maybe is the right word, but for example, gas companies. We've engaged in a relationship with the 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 the gas company in Florida as well. We've got an arrangement. And these are informal arrangements, Alex. We kind of jointly look for projects that they hunting and we’re hunting, because they're always looking to add onto the gas supply and more recently they're not, Mike. They're looking to just not have negative – not have reduction in gas supply. Their market sometimes is losing out. So we're working with these sales agents of the gas companies, again, we're getting right back to Florida in 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 the by-product of the fracking prices – 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, they're starting to be more opportunity as propane prices come down.

[Michael Zuk:]

And then one technical question for Bob, how do our Ultera technologies integrate with hydrogen?

[Robert Panora:]

I think as far as what's being talked about in the hydrogen world is that there will 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.

[Benjamin Locke:]

Yes, Mike, I actually spent some time looking into this because I was – I very much wanted to know what the expectation and the fullness of time would be for hydrogen and the pipeline. And there is – much like ethanol, there's a limit, how much – you can put some ethanol in gas, but you get too much, 20% of the lawn mowers and boats start blowing up. So similar with the pipeline. There is going to be some maximum amount of hydrogen that can be put in without any significant disruption. And that amount, I think, ten is 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 may be harden some joints and get it. The main thing, Alex, is that the appliance is on the other end of it, got a run on it, everything on the other end of that pipeline, no matter how much hydrogen they put into it, they got to run and 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, not publicized on hydrogen and the ability of hydrogen to work with our engine. And I think Bob is correct that we don't anticipate any problems with that going forward.

[Michael Zuk:]

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

[Benjamin Locke:]

Okay.

[Robert Panora:]

Thanks Mike.

[Benjamin Locke:]

Thanks Mike.

[Operator:]

Thank you. We reached the end of our question-and-answer session. I could turn the floor back over to management for any further or closing comments.

[Benjamin Locke:]

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.

[Operator:]

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.