Tecogen Inc

OTC:TGEN

Earnings Call Transcript

[Operator]

Greetings, and welcome to the Tecogen Q1 2025 Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to your host, Jack Whiting, General Counsel. Please go ahead, Jack.

[John Whiting, executive]

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 first quarter 2025 earnings and the presentation provided this morning are available in the Investors section of our website as well.

I would like to direct your attention to our safe harbor statement included in our earnings press release and presentation. Various remarks that we may make about the company's expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provision 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 listed in the company's most recent annual and quarterly reports on Form 10-K and Form 10-Q under the caption risk factors filed with the SEC and available in the 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 representing our views as of any date.

During this call, we will refer to certain financial measures not prepared in accordance with generally accepted filing 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 first quarter 2025 earnings and on our website.

I will now turn the call over to Abinand Rangesh, Tecogen's CEO, will provide an overview of first quarter 2025 activity and results; and Roger Deschenes, Tecogen's CAO, who will provide additional information regarding first quarter 2025 financial results. Abinand?

[Abinand Rangesh, executive]

Thank you, Jack.

Welcome to Tecogen's Q1 2025 earnings presentation. So far this year, we've seen some exciting developments at Tecogen. Before Roger gives us a rundown of the financials, I want to provide a few key updates. Our uplisting and the benefits this brings to shareholders, how the data center strategy is going and what the new tariff environment means for Tecogen. In addition to the strategic moves, we also saw improved financial numbers across the board. Our revenue for the quarter increased 17.6% to $7.3 million, slightly ahead of our forecast. Our adjusted EBITDA loss narrowed from $900,000 to $381,000. Our gross profit margin also increased from 41.6% to 44.3%. The adjusted EBITDA loss would have been even lower, likely less than $200,000, but we needed to incur some additional operating expenses essential to position us to ramp up for the anticipated data center orders. This resulted in increased R&D expenses, recruiter fees for strategic hires and professional fees for the uplist.

As many of you have seen, we have successfully uplisted from the OTCQX to the NYSE American Stock Exchange. This is a huge milestone for us. The uplisting enables more shareholders to easily purchase our stock and can already be seen by the increased daily trading volume. One of the questions I regularly get from shareholders is why the company hasn't seen more growth in the past despite having great technology. I believe there was 1 missing ingredient. That was finding a market where the dollar per project is large. This means that even if it takes longer and there are more complex sales cycles, the time invested can still provide a good return.

The data center market provides this missing ingredient. However, executing the strategy requires employees at every level of the company to deliver. Some of this is dependent on providing the right incentives, and I believe having a stock that is growing and having stock options that are liquid is critical in that regard. The uplist to the NYSE American achieved this.

Before I provide an update on how the data center strategy is going, I want to recap the problem facing AI data centers and why our solution offers such a compelling benefit. As the power density of AI chips has increased, the need for cooling has also increased. The cooling system for a data center needs to be designed for the worst case scenario. For example, when it's 120 degrees Fahrenheit outside and all the AI chips are operating at full capacity. This means that a 300-megawatt data center might need to allocate up to 100 megawatts of their available power to the cooling system, even if they use the cooling system for only parts of the year. Since you never know when you'll need the full cooling capacity, once this power is allocated, it can't be used for other more useful loads, like AI chips and computing.

Given that computing is the primary revenue source for our data center, every bit of additional power that can be used for the chips directly impacts a data center's bottom line. Currently, most data centers use an electrical cooling system. By switching to our high-efficiency advanced natural gas chillers, data centers can increase the amount of power they have available by 30% or more.

If you could unlock, for example, 100 megawatts or more in a larger data center, this could be substantial. To put this in context, this is equivalent to the combined power used by more than 200 high-rise buildings in Manhattan. Best of all, our solution can even be retrofitted to an existing data center. As hyperscalers attempt to find the fastest way to roll out AI data centers, unlocking power in an existing data center may provide ways to future-proof the data center as chips become more powerful or need to -- or available capacity needs to increase quickly.

How does our Tecochill compare versus the alternatives? Compared to the nearest other gas cooling technology called an absorption chiller, Tecochill consumes half the amount of gas for the same amount of cooling providing. Tecochill has also been proven in many critical cooling applications, including hospitals, ice rinks and cannabis-growing facilities. Most absorption chillers are manufactured overseas. This means that in the current tariff environment, absorption chillers are likely subject to significant tariffs.

Compared to the conventional alternative, which is an electric chiller, not only do our chillers free up significant amounts of available power, our solutions operating costs can be 50% lower than the electric chiller. Even if a customer decides to build their own power generation on site, the installed cost per kilowatt is 50% lower if they use Tecochill versus building on-site power generation. Therefore, compared to all the alternatives, Tecochill offers some very compelling benefits. In addition to our InVerde partnership, our own marketing and networking efforts are starting to result in interest for much larger projects. We have now quoted multiple larger projects, much larger than ever before.

Having been on some of the sales calls, every 1 of the prospect of customers has immediately grasped the compelling benefit. The main challenge we're presently facing, if convincing customers to do something different from business as usual. This is common in the adoption of new technologies, even though we have ample proof points from critical cooling applications in other industries. We're presently working with prospective customers on approaches to mitigate any perceived risk, including redundancy and choosing the right projects where power constraints are more acute.

Given that some of these projects might require significant ramp-up of our supply chain, we are asking customers for letters of intent so we can start working with our suppliers to ensure we can hit delivery times required. The Vertiv relationship is also making great progress. A project [indiscernible] from Vertiv has been assigned to manage the Tecochill launch through Vertiv's new product introduction process. This includes generation of marketing material and sales training. We have already seen sales leads from the Vertiv team but you see further activity in the upcoming months as the new product introduction process proceeds.

Therefore, I'm very optimistic that the Vertiv relationship will be successful. I know many shareholders are wondering how exposed Tecogen is to tariffs. We are predominantly a domestic manufacturer. We have contacted all our major vendors and don't anticipate any meaningful impact as a result of tariffs. This is particularly true for the DTx chillers, which are likely to be our product most used by data centers. The most impacted components are circuit boards and electronics, which make up a small percentage of our overall costs. The only meaningful components likely affected are permanent magnet generators used in our inverters, mainly due to export controls from China. We have sufficient inventory presently to handle anticipated orders in 2025, while we obtain the relevant permissions. I believe the tariffs may give us a competitive advantage.

As already discussed, other gas cooling technologies are facing big tariffs. Our systems were already ahead of the competition due to our increased efficiencies. Now with tariffs, absorption chillers are at a further disadvantage. The tariffs may also have knock-on effects on long lead time equipment like electrical switchgear. Our ability to alleviate power constraints quickly and being a domestic manufacturer is likely to be more of an advantage than ever.

Backlog and cash. The backlog is presently at $10.8 million, including the $2 million Las Vegas prepaid service contract. We expect $2 million of nondata center projects to enter the backlog in the next couple of months. As mentioned earlier, we are quoting some very large chiller projects, but the timing of these closing is uncertain. Combined with Virtev's marketing, I'm very confident we will be successful in securing some of these larger orders. Therefore, I would caution shareholders not to expect linear increases in backlog since a single data center order will fundamentally change our backlog number.

Our current cash position is $3 million following material purchases to increase product revenue and roll out engine improvements through the service fee. Our engine improvements are resulting in 50% longer intervals between oil changes but require cash investments to complete. Our balance sheet is also stronger today since we have no maturing short-term debt. This means our cash allocation can go towards increasing revenue and capacity.

I'll now hand over to Roger to take us through the financials.

[Roger Deschenes, executive]

Thank you, Abinand. Good morning, everybody. Tecogen is organized under 3 operating revenue segments. Our products revenue consists of sales of cogeneration units, microgrid systems and chillers to a 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 the sales of electricity and thermal energy produced by our equipment on-site customer facility.

Moving over to Slide 12. I'll review the first quarter results. Our total revenues were $7.3 million in the first quarter of 2025, which compares to $6.2 million in the first quarter of 2024, and this represents an increase of just under 18%. For the quarter, our net loss decreased to $660,000, which compares to $1.1 million in the first quarter of 2024, and the decrease in the loss is due to the increased product revenue and improved gross margin in the Products segment.

Our gross profit increased 25% and operating expenses increased 5.2% quarter-over-quarter. The gross margin for the first quarter rose by 3% to 44% from 41% in 2024. We'll review gross margins further in the segment performance discussion. For the first quarter of 2025, our operating expenses, as Abinand mentioned previously, or increase, and this is due to higher recruitment fees as we staff up the production function, some increased payroll costs and professional fees incurred for the uplist and also for increased hiring in our R&D staff.

Moving over to EBITDA and adjusted EBITDA. For the first quarter of 2025, EBITDA loss was $441,000 and adjusted EBITDA loss was $381,000, and this compares to an EBITDA loss of $921,000 and the adjusted EBITDA loss of $898,000 in the first quarter of 2024.

Moving on to performance by segment. Products revenue increased 70% quarter-over-quarter to $2.4 million in Q1 2025 from $1.5 million in the first quarter of 2024. And this is due to increases in chiller and cogeneration shipments. The products gross margin increased to 41% quarter-over-quarter from 30% in the first quarter of 2024. Services revenue increased 6% quarter-over-quarter to $4.2 million in the first quarter of 2025 from $4 million in -- similar period in 2024.

The gross margin -- gross profit margin was slightly lower at 47%, and this is due to increased labor and maturity cost that we incurred as we continue to roll out engine improvements on our InVerde product. Energy production revenue decreased by 27% quarter-over-quarter to just under $0.5 million in the first quarter of 2025 from $680,000 in the first quarter of 2024. And this is largely due to the expiration of a few of our contracts.

The gross margin increased 7% to 38% in the first quarter of 2025, and this compares to 31% in 2024, and this is due to lower fuel costs. Our overall gross profit margin increased 2% quarter-over-quarter due to improved product -- due to improvements in our Products Services segment margin.

This concludes our review of the first quarter 2025 financials. Now I'll turn the call back over to Abinand.

[Abinand Rangesh, executive]

Thank you, Roger. As I mentioned at the start, one of the key missing ingredients to making Tecogen successful has been having bigger projects and an expanding market. The macroeconomic drivers are now in our [indiscernible]. Our market positioning of [indiscernible] is being validated by favorable feedback from prospective customers. Once we get over the short-term hurdle of securing the first few larger data center projects, I'm confident we will see rapid growth.

I believe the probabilities of success are now in our favor because our technology has been proven in other markets, and we have the credibility of partnering with a world leader like Vertiv in the data center segment. I'll now take any questions.

[Operator]

[Operator Instructions]

Our first question today is coming from Alexander Blanton from Clear Harbor Asset Management.

[Alexander Blanton, analyst]

I'd like to ask about the backlog first. Over what period is that to be delivered?

[Abinand Rangesh, executive]

So we are hoping to be able to deliver that over the next 9 to 12 months. That's currently the forecast. It really depends on what else comes in, in the backlog, if we're trying to ramp up faster, but I'd expect between the next 9 to 12 months.

[Alexander Blanton, analyst]

Now I want to ask about the hiring. In what parts of the company you're doing that? You had an increase in recruitment fees. And I think that's the first time I've heard about that in a long time. You're hiring in sales or in manufacturing?

[Abinand Rangesh, executive]

So there are a couple of critical areas, I think, that are going to be really crucial to be able to ramp up. So 1 of the areas you might have seen, we hired was a manufacturing manager. The other 1 to support the manufacturing manager was also the supply chain manager, especially in this kind of tariff environment, but also as we look to -- if we get a large data center order, the single first bottleneck is going to be getting our suppliers to ramp up. And some of that is going to -- we're doing that work right now to really start working with our suppliers to say, look, what's it going to take? Because the key components on a chiller, for example, are built by very large vessel suppliers. So their capacity is less of an issue. It's really how do we work with them ahead of time to make sure that they ramp up to hit delivery time.

So part of doing that and making sure that we can control our costs well as we felt the critical portion was also having a supply chain manager. The other area that we're seeing some recruitment cost associated is also on the service side of the business. I believe that there -- to get close to -- to get to profitability really, we're going to have to get the service margin up by another 5% or 6%. And some of that is going to come with actually increasing the service revenue to go with it. And that really is getting the right kind of technicians with the right experience.

So some of that getting the some recruiters involved to get some strategic hires in that space, I think, is also going to be critical to get our profitability side of things up. So that's really where we've been hiring. And we've also hired an engineer or two, again, to support the R&D efforts associated with data center projects because data centers operate in very different chilled water conditions that other industries operate in. So part of what we're doing right now is also making sure that the data centers, like all the conditions that a data center would operate in, we are able to show test data, potential data for our customers that our chiller can do that. And that requires some test time -- the test and having engineers that can actually run that.

[Alexander Blanton, analyst]

One of the problems a small company has in dealing with large projects is you have to convince your customer that you can deliver on time. So I'm glad to see that you're building up, I'm sure that's something that Vertiv will want you to do too because if they're going to put your equipment into 1 of their data centers, they don't want a situation in which the installation of the cooling is holding things up, correct?

[Abinand Rangesh, executive]

Exactly. I mean I think that's part of the reason why in the short term, we're really focused on trying to remove any potential bottlenecks that we might have in our production. There are multiple ways we can do this, and we have a plan A, plan B, plan C thing here to really make sure that as things come in, we can ramp up. And that's also why we're really pushing early prospect of customers on getting us letters of intent. That kind of helps us go to our suppliers and start really putting that into place.

The other area that we have definitely discussed with Vertiv in our original agreement with Vertiv included was them helping us with the supply chain as well because everybody recognizes that we are a small company and to be able to scale up, it might require a partner like Vertiv to help us scale that.

[Alexander Blanton, analyst]

Well, that was my next question. To what extent are they helping you? I would think they would want to because your equipment gives them a competitive advantage in their business. There's a person assigned full time to work with you. Is that what I heard?

[Abinand Rangesh, executive]

So there's a project manager. He has some vertical obligations, but his -- 1 of his predominant roles is just Tecochill. And as part of that new product introduction process that Vertiv runs, they go through all the marketing material preparation training, like formal training for the sales team. And we've definitely done like pretraining for the sales team, but really getting all of those pieces together. And some of that also involves how does the supply delivery, all the different pieces that supports eventually this product being included as part of Vertiv's offering. So there's a whole package that happens in the background. And when that -- that's part of the reason why they've been working on that for the next -- for the last few months. We expect when they finish that full package, you'll start seeing public-facing marketing from Vertiv with our Tecochill.

[Alexander Blanton, analyst]

When do you think that might have?

[Abinand Rangesh, executive]

I would say in the next couple of months. They're pretty close to getting a lot of those [ Tecos ] done. I mean their sales team is still generating leads, and we are seeing leads from them. So they're definitely active. But I think part of seeing more success on it is going to be when they start marketing the product, putting out webinars and those kind of other marketing pieces out there.

[Alexander Blanton, analyst]

Well, your employees be working with them on sales presentations as a backup? Or are they going to be doing the whole thing?

[Abinand Rangesh, executive]

Yes. I think a bit of both. I think early stage, we expect to be supporting them quite a lot on the sales presentation. And the other thing that we are trying to do to make sure that this relationship is successful, and so we have projects from the other areas that Vertiv can bring in, in addition to the Tecochill, we try to bring them into projects as well. So both sides get a benefit on this relationship. But our employees are definitely early on going to help with the sales presentations. I think as the Vertiv sales team becomes more experienced on this, I'm sure they'll take the lead from there.

[Alexander Blanton, analyst]

And could you update us on the Connecticut data center job that you had? How is that going in also?

[Abinand Rangesh, executive]

Yes. So the Connecticut 1 is a relatively small -- it's a very small data center. It's really -- it's just a single InVerde. But again, it's a proof point that power is a real problem there. This is -- it's not an AI data center, it's purely cloud storage. So they might convert at a later date in which case they'll need a lot more power. But in the short term, their issue was just a lack of or their utility rates going up 20%, 30%. So they wanted a way to save money, and our InVerde was the right fit.

I mean they considered fuel cells, they considered other options, and they felt combine the installation cost as well as having service and other support in the area, our InVerde was the better fit there. With regards to Las Vegas, we are shipping chillers every -- a couple of chillers every quarter. We're also trying to meet the other orders that we have. This first quarter was particularly critical because some of the customers had to lock in the investment tax credit. So we have to make sure we got them at least part of the project in the first quarter. But more of the Las Vegas shipments will be delivered next quarter and a little bit in Q3.

[Operator]

[Operator Instructions]We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

[Abinand Rangesh, executive]

Thank you, everyone, for listening to our Q1 2025. I will keep people appraised as we have more developments either in the Vertiv data center industry. Thank you very much.

[Operator]

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.