Tecogen Inc. (PNK:TGEN) Q3 2023 Earnings Call Transcript
Tecogen Inc. (PNK:TGEN) Q3 2023 Earnings Call Transcript November 10, 2023
Operator: Greetings, and welcome to Tecogen's Third Quarter 2023 Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I'll turn the conference over to Jack Whiting, General Counsel and Secretary. Mr. Whiting, you may now 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. The press release regarding our third quarter 2023 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 date subsequent to today. During this call, we will refer to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in the press release regarding our third-quarter 2023 earnings in the Investors section of our website. I'll now turn the call over to Abinand Rangesh, Tecogen's CEO, who will provide a review of the third quarter activity and results; and Roger Deschenes, Tecogen's CAO, who will provide additional information regarding Q3 financial results.
Abinand?
Abinand Rangesh: Thank you, Jack. Welcome to Tecogen's third quarter 2023 earnings call. In the last couple of calls, I laid out our objectives and plan. I'll start by giving an update on where we are with regards to meeting these objectives. Roger will then take us through the financials and then I will wrap up with our next steps. Revenue was up every quarter this year. The adjusted EBITDA loss has also narrowed. In fact, if service margins were where they were last year, we would have shown a net profit. Inventory is also down compared to Q2, although we still have work to do to reduce this further. Service margin is down predominantly because a number of systems were put into service around the same time and certain components such as engines and exhaust heat exchangers have had to be replaced all at the same time, significantly increasing expenses associated with service.
This is expected to recover by Q2 next year. To strengthen our balance sheet, we established a $1.5 million credit facility with two of our board members. We received favorable terms on the credit facility and it gives us additional working capital and cash needed for our factory move next year. Our present cash position is now over $1.1 million. We have drawn $500,000 into the credit facility. Our cash position is lower than anticipated due to delays in collecting customer deposits. In this high interest rate, conservative lending environment, customer financing is taking longer. We expect to collect more of these deposits over the upcoming months. Our backlog is slightly lower than at the end of Q2. I'll discuss our marketing efforts and the sales pipeline in the next slide.
We believe that there are substantial orders that are in the pipeline, so we expect the backlog to increase again shortly. The backlog is still predominantly indoor agriculture, with a small mix of education and residential. The last item, I want to mention is that our Board has approved management to prepare the paperwork for a shareholder approval, for a reverse split with a view to uplist on a national listed exchange. We will likely hold a special meeting of the shareholders in early 2024 to discuss the various reverse split options and have the shareholders vote on the matter. The Board will then consider the various parameters, including the share price at the time, public float, and shareholder viewpoints before deciding to undertake a reverse split and an uplift.
Our marketing efforts have been focused on segments where we have a clear competitive advantage. Our objective is to find developers who can integrate our products into customer projects. The two key approaches we have taken are informational articles and targeted trade publications. These include Vertical Farm Daily, ice rink magazines, industrial process cooling magazines, et cetera. The aim is to educate end customers and attract developers to integrate our products into their projects. The second approach we've taken is a direct outreach to contractors and design build farms that specialize in niches such as food and beverage plants. Our overall sales pipeline for the 10 months to date is 16% higher than last year; by year-end, we expect it will be 20% higher.
Although some key markets have a significant anti-gas sentiment, we believe that in some of the market niches we are targeting, we have a sufficient advantage that we should see conversion of the pipeline into sales. I'd like to do a quick recap of our products and our business before we continue to the financials. We have three value propositions for end customers. The first is power generation and resiliency. This is electrical co-generation for energy savings, and in some cases for backup power in the event of a blackout. We use a natural gas engine to generate electricity and use the engine heat to produce hot water for the building. We are twice as efficient as an equivalent fossil fuel power plant, as we are able to use the heat and have a much lower greenhouse gas footprint.
The second is our clean cooling products. These products generate chilled water and hot water simultaneously and applications that require climate control such as health care, controlled environment, agriculture, et cetera. We are the cheapest source of producing cooling and humidity control. Typically, the highest cooling load occurs in summer times when natural gas prices are lowest, so we also offer customers substantial energy savings. In addition to energy savings, our chillers require very little electricity to operate, so are ideal for applications where utilities are unable to supply sufficient power. As with electrical co-generation, our greenhouse gas footprint is cleaner than an equivalent electric chiller and boiler combination since most fossil fuel power plants are not utilizing the waste heat.
Our electrical co-generation and clean cooling products benefit from up to a 40% investment tax credit that reduces the payback substantially. Our third value proposition to customers is our long-term service and asset management services. Our service centers provide end-to-end maintenance and allow customers to maximize their energy savings. Our typical maintenance contracts run for longer than 10 years and sometimes provide ancillary services to maintain balance of the plant. This is an area that our strategy will focus heavily on. We plan to increase the range of services that we offer and increase the number of sites we service. We have three revenue segments; our products revenue consists of sales of co-generation units, microgrid systems and chillers, the range of markets and customers.
Our services 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 at customer facilities. I'll now hand over to Roger to summarize our financial results.
A commercial air conditioning unit mounted atop a residential roof in a suburban neighbourhood.
Roger Deschenes: Thank you Abinand, and good morning. I'll begin with a review of our Q3 2023 results. Our top-line revenue was $7.1 million in the most recently concluded quarter, which compared to $6.6 million in the similar quarter of 2022, which represented an increase of 7.5% and this is due primarily to increased services revenue. Our net loss for the third quarter of 2023 was $482,000 or $0.02 per share, which compares to a net loss of $257,000 or $0.01 per share for the third quarter of 2022. Gross profit remained flat despite higher revenue, and this is due to the decrease in the services margin. Our operating expenses increased 6% to $3.3 million from $3.1 million and this is due primarily to incremental costs resulting from the Aegis acquisition, which is primarily payroll and related benefits, business insurance, depreciation, and amortization which in total, increased the operating expenses by approximately $190,000.
Moving over to the adjusted EBITDA reconciliation, for the third quarter of 2023, the EBITDA loss was $307,000 and the adjusted EBITDA loss was $182,000. As mentioned earlier, the depreciation and amortization expense increased in the nine months ended September 30, 2023. And this is due to the addition of several vehicles and the amortization of the customer contract intangible asset, which were recognized as part of the Aegis acquisition. These additions to our assets increased depreciation and amortization expense by approximately $62,000 in the third quarter of 2023. Moving next to the performance by segment, overall products margin increased to 43.2% in the third quarter of 2023 from 3.5% in the third quarter of 2022. We have seen some recovery in products margin due to the price increases that were instituted early in 2023 and the product mix shift during the quarter.
Services revenue increased 25% quarter-over-quarter. As this existing contract revenue increased 5% and the balance of the increase was from the recently acquired Aegis service contract, services margin was lower quarter-over-quarter by approximately 13%. This was driven primarily by increased service costs associated with engine and exhaust heat exchanger replacements. As Abinand discussed earlier and we just discussed in last quarter's call, we have a number of systems that went into service at approximately the same time, which are now requiring the replacement of these expensive components. Which when they're completed, will result in increased runtime hours and revenue going forward. We expect margin to recover by the second quarter of 2024.
Our energy production revenue remained flat quarter-over-quarter and the margin decreased slightly by 1%. I'll now hand the call over to Abinand to discuss margin improvement efforts and summarize.
Abinand Rangesh: Thank you, Roger. As mentioned last quarter, our approach to increasing margin is going to come from multiple avenues. With regards to product margin, we have seen some improvements already hit, but we need to go further to keep ahead of material cost increases due to the long project development cycles. We will be increasing prices for some of our products in 2024. We are in the process of analyzing which parts can be common across our product lines to minimize inventory variation and also improve our purchasing power. We're also looking at places where we can reduce complexity of our products. With regards to service margin, we have raised prices on contract renewals and we'll continue to do so. Utility rates have increased substantially in many of the regions we operate in and we believe we can raise our service prices commensurate with utility rate increases.
We are also quoting billable work for customers to service items that are required for our equipment to interface with the building. For example, billable work to service pumps and heat exchangers, this will not only increase runtime but benefit the customer savings, and additionally, have an added source of high-margin revenue for the company. We are working on increasing service intervals by increasing oil reservoir, so engines can run longer between preventative maintenance intervals. This will allow us to have more revenue per technician. We're also continuing to look for ways to extend the life of critical components like cylinder heads and exhaust heat exchangers. In particular, we're looking for ways to eliminate chances of premature failures for such components.
We're continuing to improve our runtime algorithms to reduce wear and tear so that engines can run longer between service intervals. I'd like to summarize by saying that we're continuing to focus on freeing up cash and stabilizing the business. We're continuing to work on the revenue on the backlog. As you've seen from the marketing, our pipeline is now larger than it was before. Now, we just need to work on converting this pipeline into purchase orders and deposits. We're also working with various finance companies to help make it easier for customers to purchase our products. Lastly, we're focusing on increasing margin for both services and our products. I'm pleased to see that revenue has grown again this quarter. We have also put into place non-dilutive financing to strengthen our balance sheet.
There continue to be challenges ahead of us, but I believe that we are addressing these one step at a time and we'll see steady increases in the health of the business over time. In fact, four Board members have bought over 189,000 shares in the last quarter alone, showing that there's a strong belief in the future prospects of Tecogen. I'll now open the floor to questions.
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