Third Quarter 2022 Conference Call
November 11, 2022
Jack Whiting – General Counsel & Secretary
Benjamin Locke – Chief Executive Officer
Abinand Rangesh – Chief Financial Officer
Bill Church – Tgra Capital
Alex Blanton – Clear Harbor Asset Management
Michael Zuk – Oppenheimer & Co.
Good morning and welcome to the Tecogen Third Quarter 2022 Conference Call.
At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press “*”, “0” on your telephone keypad.
Please note this conference is being recorded.
I will now turn the conference over to our host, Jack Whiting, General Counsel and Secretary. Thank you, you may begin.
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 third quarter 2022 earnings and the presentation provided this morning are also available in the Investors section on our website, as well.
I’d like to direct your attention to the Safe Harbor statement included in earnings press release and presentation. Various remarks that we make about the company’s future 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 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 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 2022 earnings and in the Investors section of our website.
I’ll now turn the call over to Benjamin Locke.
Thank you, Jack. So, as the agenda on Slide 4 indicates, we’ll start with a brief company overview, followed by a detailed review of our third quarter 2’2 results. We will then discuss the key takeaways from the earnings and turn the call over to the operator for questions.
As a reminder, this presentation will be available for download in the presentation section of our Investor page on our website.
Turning to Slide 5, I’d like to provide a short overview of Tecogen’s core businesses. Tecogen sells and maintains clean and efficient energy systems that provide resiliency and energy savings to customers, while reducing greenhouse gas emissions for a cleaner environmental footprint.
Our solutions help industries and facilities reach their environmental goals for carbon reduction, while also providing resiliency to grid outages.
Tecogen has deployed thousands of these systems, and we have a steady recurring revenue stream through our 11 service centers that provide long-term operations and maintenance services for Tecogen cogeneration and chiller systems.
Turning to Slide 6. Our distributed generation systems can operate as microgrids for power generation and grid resiliency, as shown on the left here. These features are increasingly important as the grid becomes increasingly burdened, congested, and costly.
In addition to our distributed generation system, Tecogen offers clean cooling solutions for commercial and industrial facilities. Our chillers, shown in the middle of this slide, provide customers with lower operating costs and a reduced greenhouse gas footprint, compared to traditional cooling solutions.
We’ve had particular success with our clean cooling products for use in controlled environment agriculture. These indoor grow operations use a tremendous amount of power to maintain precise growth conditions.
Our chillers, substantially, reduce the amount of electric capacity needed to operate the facility, while simultaneously providing cooling and heat for facility heating and dehumidification. Our success in the controlled environment agriculture market has led us to expand our business development effort to extend the scope of our participation in CEA facilities in the food production sector. I will talk more about this separate later in the call.
Before I turn the call over to Abinand for a review of our third quarter numbers, I’d like to remind investors of our three main revenue streams, shown here on Slide 7. Our product revenue consists of sales of cogeneration units, microgrid systems, chillers and associated equipment to a range of markets and customers.
Our service revenues primarily consist of our contracted operations and maintenance services with a small component of installation services.
Our energy production revenue stream is from energy sales, including sales of electricity and thermal energy produced by our equipment on site at customers’ facilities.
With that, I’d like to turn the call over to Abinand to review our numbers in more detail, and then I’ll have some additional comments on the takeaways from the quarter and comments about our expectations for the rest of 2022. Abinand.
Thank you, Ben. Q3 revenue was $6.6 million, compared to $5 million during the same period in 2021. This 31.9% increase was mostly due to the increase in product revenue, but all segments showed growth. I will discuss the revenue by segment in more detail in a later slide.
Our cash balance at the end of the quarter was $2.9 million, which was slightly higher than at the end of Q2 ’22. Gross margin decreased to 44% from 47%, compared to ’21, due to the higher cost of materials.
Some of the orders that shipped in Q3 had higher margins because of the price increases instituted earlier in the year. We plan to be making further adjustments to price, over the upcoming quarters.
Operational expenses were 4.3% lower, compared to Q3 2021 at $3.11 million. This was partially due to a reduction in bad debt reserves, and the R&D expenses were higher due to costs associated with the development of the hybrid air cooled chiller.
The operating loss was $214,000, and the net loss was $257,000, or $0.01 per share. The higher net income in Q3 ’21 was due to the employee retention credit and the forgiveness of the Paycheck Protection loan.
EBITDA. EBITDA loss was $141,000 and adjusted EBITDA loss was $74,000. In Q3 ’21, EBITDA income was $1.5 million, and adjusted EBITDA was a loss of $197,000. Q3 ’21 was favorably impacted by the employee retention credit.
Performance by segment. Products revenue increased by 71%. In particular, the chiller revenue increased 329%. Our product margin decreased from 45% to 35% in Q3 ’22, due to the increased cost of materials, partially offset by price increases.
Service revenue increased 9%, compared to Q3 ’21, due to the increased number of service contract and price increases, associated with those contracts. Our service margin increased to 52% from 48%.
Energy production revenue increased by 6%. Energy production margin increased to 50%, compared to 47% quarter-to-quarter. The overall gross margin was 44%.
I will now hand the call back to Ben to talk about the earnings takeaway.
Thanks, Abinand. So, turning to Slide 11, I’ll discuss what I feel are the important takeaways from the quarter. I think the biggest takeaway, of course, is the revenue growth, up 32% over Q3 of 2021. This was driven by increases in product sales with an even mix of cogeneration and chiller product.
As you’ve seen through the press releases throughout the quarter, we continue to make progress in key market segments, such as controlled environment agriculture, multiunit residential buildings in large schools or other municipal buildings.
Some of these sales are directly attributable to new sales partnerships established earlier this year. In particular, we were pleased to receive a multiunit order from our large ESCO. This is the first order from this ESCO, and we are expecting additional orders, as the relationship builds.
Next, we are starting to get more definition on the new investment tax credit for both, our cogeneration and chiller systems. The new ITC is worth up to 40% because our products satisfy the domestic content requirements and may be transferable to third parties.
Importantly, the new ITC has a direct pay alternative for nonprofits in municipalities. We, like many others in the clean energy industry, are awaiting the final details from the IRS and how the ITC can be monetized by our customers. We expect this guidance, next month.
Another important takeaway occurred after the quarter ended, but the collaboration with the Gas Technology Institute, announced Tuesday, will help bring our hybrid drive AC chiller through testing in anticipation of commercial launch, later in 2023.
We expect to continue our ongoing effort to work with various gas companies to establish pilot demonstrations for the hybrid drive, after the GTI testing is complete. I hope to have more announcements in this regard in the coming months.
And lastly, we ended the quarter with a backlog of $6.9 million of product and product backlog, as of yesterday, was $9.35 million. And as you can see in the chart, it’s a good mix of our core markets, such as CEA and multiunit residential.
As a reminder, we do not include our recurring service and energy production revenues in our backlog calculation.
Turning to slide 12, I’d like to provide a bit of color on our business development efforts in the controlled environment agriculture space. As we had mentioned earlier in the year, one of our focus areas is the controlled environment agriculture where we have already sold over 13,000 tons of cooling to cannabis facilities and are planning on expanding our offering to food crop facilities.
The energy intensity of each type of CEA facility varies, depending on the required level of climate control. In all cases, there is a tremendous energy use for grow lights and, in many cases, there is both the cooling and dehumidification load.
Our solution offers up to 50% reduction in utility energy expenses, especially in cases where there is a large need for cooling and dehumidification.
The exhaust generated can also be used to boost plant growth, by upwards of 30%. We have already equipped–we already have equipment in multiple food crop facilities and are starting to specify sites to utilize the CO2.
Turning to slide 13. To further our CEA ambitions, we established a new business unit. We are creating a new brand known as NetZero Greens for CEA grown produce, and we are working on identifying where we can add value.
We anticipate developing a simple to install modular package for growers to handle their energy needs with the lowest carbon footprint for facility sizes from a single container, upwards of a multi-acre controlled environment agriculture farm.
The focus will be on having the lowest energy intensity and carbon footprint, while also being able to alleviate great capacity constraints or, in some cases, operate off-grid entirely.