Tecogen Inc. (TGEN) Earnings Call Transcript & Summary

Hello, and welcome to the Tecogen Company Status under Coronavirus Health Restrictions Conference Call. [Operator Instruction]. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host Benjamin Locke, CEO. Please go ahead.

Good morning. I'd like to first read our safe harbor statement. This presentation and accompanying documents contain forward-looking statements, which may describe strategies, goals, outlooks or other nonhistorical matters or projected revenues, income, returns or other financial matters, that may include the words such as belief, expect, anticipate, intend, plan, anticipate, project, target, potential will, should, could, likely or may and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date at which they were made, and we undertake no obligation to update or revise any forward-looking statements. In addition to these factors described in our annual report on Form 10-K and our quarterly reports on 10-Q under risk factors, among the factors that could cause actual results to differ materially from the past and projected future results are the following: fluctuations in demand for our products and services; completing technological developments; issues relating to research and development; the availability of intent less rebates, tax rebates relating to our products and services; changes in the regulatory environment relating to our products and services; integration of acquired business operations and the ability to obtain financing on favorable terms to fund existing operations anticipated growth. In addition to GAAP financial measures in this presentation, this discussion includes certain non-GAAP financial measures, including adjusted EBITDA, which excludes certain expenses described in the presentation. We use adjusted EBITDA as an internal measure of business operating performance and believe that the presentation of non-GAAP financial measures provides a meaningful perspective of the underlying operating performance of our current business and enables investors to better understand and evaluate our historical and prospective operating performance by eliminating items that vary from period-to-period without correlation to our core operating performance and highlights trends in our business that may not otherwise be apparent while relying solely on GAAP financial measures. With that, I'd like to start. Good morning, again, to everybody. Thank you for joining us on the call today, what is truly a concerning time for all of us. I hope that each of you are in a place of relative safety and security as we here at Tecogen are also adapting to this unprecedented situation. I'd like to give an update on our overall company status, followed by some updates from Bob on our emissions technology program. I'll then take a few questions. First, before I go into any details on how we are maintaining our business continuity, I want to emphasize that the safety of our employees is my primary concern. As an essential service provider in the energy production category, we are continuing our business operations with the continued safety of our employees and adherences to local and state restrictions on movement, our top priority. In our Waltham facility, our sales, engineering and select administrative functions are operating remotely, while our manufacturing team continues to function. With the building largely empty due to many employees working remotely, we are able to contain the facility to only those needed to maintain daily operations. We have expanded our cleaning services for the facility each day and have established protocols for sanitization upon entering and exiting the building. Our service centers also continue to operate normally as part of our essential services designation. With some exceptions, most of the sites we surveyed value the equipment in their building, maintaining operations, sends concerns, real or not about outages are heightened. We have instructed our individual service centers to similarly adopt strict controls on sanitization and controlled customer interactions, consistent with social-distancing protocols. In terms of our operations, we are doing our best to maintain normality across all functional areas. So far, our suppliers have maintained deliveries and we have not encountered any significant part shortages or delays that would prohibit us from fulfilling our current backlog, which I'll talk more about in a moment. And as I said, our manufacturing team continues to operate and did a terrific job meeting our shipping schedules over the past few weeks. With just a few exceptions, we met our expected shipments for the first quarter and are now working diligently on the next wave of Q2 shipments, which are primarily InVerdes for the Toronto project. Our engineering team is still operational, albeit remotely, as is our sales team. We are all getting used to this new work environment and trying to make the best of the situation. Fortunately, many of the industries and people, our sales and engineering team interact with on a daily basis are similarly working remotely. We are taking advantage of the opportunity to have more virtual meetings and webinars as we try to maintain our respective business operations. With regard to our turnkey installation projects, we have seen some stoppages that have adversely affected our ability to fulfill the project in the expected time lines, but we feel the cash flows associated with these stoppages are currently manageable. And as I mentioned before, our service centers are continuing to operate, and therefore, our energy production assets also continue to operate, both of which continue to generate good margin revenues for the company. Moving to sales. I think the order we announced this morning is important on several levels. First, it shows that business continues to get done in the HVAC industry, which is also designated as an essential service. And while most of you are familiar with our water-cooled Tecochill product line, which typically dominates industrial cooling facilities, our air source unit is very functional and cost-effective for small rooftop AC needs, particularly with natural gas prices so low in many areas. It's also noteworthy that this sale is to a cannabis grower in Florida, who is expanding their grow operation. Florida is increasingly becoming a leader in cannabis cultivation industry in terms of ease of permitting, construction and financial flexibility associated with the industry. With the vote on recreational use expected later this year, we anticipate more cultivation facilities will emerge in Florida that will similarly take advantage of the tremendous economic advantages of natural gas cooling with Tecochill. As I mentioned earlier, we have reviewed our backlog in light of this situation, and are pleased that it currently stands at $12.5 million, consisting of $10 million of product sales, which is very important. As I mentioned in past few calls, we have scaled back our turnkey sales to only encompass smaller, more manageable turnkey construction projects. And while some of these projects may have delays due to the coronavirus, our product backlog is very strong and sufficient to ensure our manufacturing team can stay busy. Moving to our financials. Our balance sheet is currently in good shape, and it will be further supplemented by the expected payments for the units shipped in the first quarter. We are in discussion with our line of credit provider on how to keep our balance sheet strong as we continue operations through the second quarter. We are aware of the various programs outlined in the Families First Act and subsequently in the CARES Act. It will diligently and quickly pursue any relevant benefits that could help us continue to operate during this time. With that, I'd like to turn the call over to Bob, who has some encouraging words on our Ultera emissions program in collaboration with Mitsubishi. Bob?

Hi. Good morning. It's only been a couple of weeks since my last update, but there have been a few developments, which I can report. In the last call, last month, we discussed our plans to begin the process of engine certification testing to the near-zero California CARB standard. Mitsubishi Caterpillar MCFA had obtained a quote from a qualified test laboratory, the Southwest Research Institute, to perform dynamometer tests on our engine, matching the model on our prototype truck. The plan was to have Southwest subject to the test engine to the certification cycle. Yet the retuning was equally effective in the cycle as when applied to the prototype truck, then we could be highly confident of a successful near-zero certification, when the Ultera components were added later. What's new to report is that the Propane Education & Research Council, PERC, the trade association that funded the work originally has confirmed that they will fund the Southwest Research effort, which is very good -- very positive news. Also, MCFA was attempting to secure a test lot with Southwest in May. However, the Japanese engineer that has provided the tuning expertise urged us to postpone the effort until he can safely travel from Japan to the U.S. to oversee the tests and make any adjustments as needed. We all agreed that postponement was the best course. We will reschedule when the travel restrictions are lifted. Since the call, we have also been contacted by the California Water District regarding their order for the 2, 800-horsepower Ultera kits. They provided an updated time line, which has also -- which has the PO scheduled to August, which is just a few months later than we expected. So that concludes my update, and I'll return the discussion back to Ben.

Thanks, Bob. So in conclusion, I hope this update eases concerns of investors over the company's overall continuity and viability during this difficult time. We fundamentally are continuing operations with manufacturing, sales, engineering, service and energy production, all continuing for the foreseeable future. Our balance sheet is strong enough to maintain the company through the coming months, and we are encouraged to see product orders and backlog continuing to grow despite the situation. And most importantly, we believe we have created a safe environment for our employees to continue working each day. Something that is so very important as none of the industries are forced to close. Thank you for your interest and concern in Tecogen, and I hope you all safely navigate this crisis. With that, I'll take just a few questions.

[Operator Instruction] Our first question today is coming from Amit Dayal from H.C. Wainwright.

Hope you guys are staying safe. Thank you for this update. It really helps to give us some visibility as to what is going on at this time within the company. Just wanted to touch on the backlog. It looks like the backlog is holding up. At the end of the year, I believe the backlog was around $22.4 million. It's dropped to $12.5 million. I'm assuming shipments have taken place over the course of the first quarter. Have you guys added any new backlog to this? Or any color on that would be appreciated.

Yes. The backlog, it gives and it takes. We decided towards -- today with this RT chiller. And then we delivered a whole bunch of units just the last few days, to be honest with you. And so it ebbs and it flows, and at this particular time, where we get a lot of units actually shipped, it tends to dip a little bit, but again, I think we'll see those numbers go up. I'm very happy that the products backlog is where it is. I don't get as concerned that the turnkey backlog is dropping because I kind of knew that some of these larger turnkey projects that might be $7 million of installation. I'll take the equipment sale and turn over the low-margin installation to someone else. So I'm not too concerned about the installation backlog going down. I think that 10.2 million number is going to grow as the quarter starts moving on. Again, we shipped a lot of stuff up in just the past few weeks. So that accounts for a lot of the drop.

Understood. And so with the quarter, although we -- could you give us any indication whether 1Q '20 was sequentially stronger than 4Q '19?

I don't want to go that far yet, Amit. I mean the trucks are still -- I can still see their taillights leaving the building for the field equipment leaving. And I think we need to assess everything that went out and all the costs associated with it. So just too soon to tell about the quarter performance.

Understood. And from a cash flow perspective, it looks like you are pretty comfortable. With the next sort of second quarter and third quarter being a little bit more uncertain, are you comfortable with how you are situated to manage this period?

Yes. I was very confident on our last earnings call about how the year is going to turn out. And I'm still cautiously optimistic that the factors that are going to support our business through the year are going to come back to normality in the next few months. So I'm still -- all the drivers and the optimism that I had for 2020 are still there. It's just a question of when this kind of temporary slowdown is going to ease up and allow us to get back on track. But I think importantly, the most important thing, as you probably know, Amit, is it was today and then surviving the week and then surviving the month and then making sure we have a plan for the coming months. And we're having this call now because we had some time in a week or so to get ourselves together, and understand again the legislation that's out there and the benefits that could be made available to us as well as making sure that the units ship to know that we're in pretty good shape now for the next few months, and we don't have to consider anything drastic. I think we're all very fortunate here that we're not one of these industries that literally shut down overnight. So I think we're in good shape for the coming months, and I'm hoping that once the world returns to somewhat normality, a lot of the optimism and orders we're expecting will start coming right back in again.

Next question is coming from Alexander Blanton from Clear Harbor Asset Management.

Yes. Just a note to the moderator, are you close to the microphone? I can barely hear you in comparison with the rest of the people on this call.

Well, I can hear you, Alex, that's the main thing. I hope you're okay, Alex.

I'm fine.

Good.

I can't hear the moderator. That's the problem.

Okay. Well, we can fix that.

Now I have about 3 questions. You said that the majority of your sales are in this quarter, I mean, the second quarter will be through Toronto?

A lot of those InVerdes are for Toronto. But we have a lot of InVerdes that are going elsewhere, too. I mean we've got a tremendous amount of InVerdes that we're building, some of which are going to Toronto, some of which are going to other sites, too. So when I say the majority are InVerdes, I should have said the majority are InVerdes, not the majority are going to Toronto.

I see. Okay. And you mentioned that you just shipped out a lot of things. When do you report the sales? I mean just because you shipped it doesn't mean that it goes into the sales that you report, when do you report those sales of the things that you just shipped out? Will it be the first quarter or the second quarter?

Yes. Everything that ships out building is shipped in sales for that quarter. So if somebody -- something left our factory floor here on March 31st at 5:00 p.m., it's in Q1 shipment sales. So it is all in the first quarter. Everything that left the building is going to be in the first quarter.

Okay. So it doesn't have to be delivered or installed or anything like that?

Yes. It's when the customer takes possession of it.

Yes. I'm asking that because another company I follow, Caterpillar, they don't report to sales of things that they export until they arrive in the foreign port. So there's a lag there. And I just wanted to...

Yes. There is a [ FOV FO ] in its considerations, but yes.

Okay. Now Bob, would you repeat what you said about the funding of the Southwest? I didn't quite get all of that.

Yes. So I just -- if you want me just to read the paragraph that I just spoke to, I'm happy to do that.

Yes, yes.

What's new to report is that the Propane Education & Research Council, which is PERC, the trade association...

Propane Education & Research Council, okay.

Yes. They're a trade organization, represents all the folks who have propane sales companies in United States. No, that's who they are. In any case, the confirm -- they confirmed that they will fund the Southwest research effort, which is, of course, very positive news. So does that -- do you want me to continue beyond that?

How much is that?

I don't want to reveal that yet because I don't know that I'm -- I don't want to reveal that because I have to...

It has PERC's business in its -- it's our partners business, too. So I don't think we would do them justice to give that number out.

Yes. I am not sure.

Okay. So how long will this take and what's the purpose of it?

Yes. So the testing that we have planned is something like a week. It's not a big deal. So the -- yes, it's not like months and months. They'll do it in a week when they get the slot.

When they get the slot, when would that be?

We don't know right now. As I said, we were aiming at a May time slot that Southwest had available. However -- but it's not going to be May. Here's why is that the Japanese engineer from Japan, he was all set to come out for that May slot. He was working towards that day, like that we all were, but then the travel restrictions were -- came about. So he can't travel to the United States.

Why is there a Japanese engineer involved?

Because it's a Japanese engine. It's a Japanese engine. It's not made by Caterpillar. It's not made by any -- it's not made by a U.S. corporation. It's a Mitsubishi affiliate. It's a huge company, as you know. Yes.

Yes. I know, but they don't have any operations in the U.S. that they can provide an engineer to take a charge of this.

He's a very specialized engineer. He writes the code that operates the engine. He writes the software. So he can...

The engine whisperer.

Yes, yes. So that's a very specialized skill. So when the throttles are moving and all these things are happening in the engine, it's controlled by software, that's a modern car. And this guy is the specialist for this engine model. So that's the story there.

Okay. So this could be months? Months.

It must be, it could be.

I think it's got the same uncertainties as many other things in terms of travel restrictions and what's going on with the COVID virus, Alex?

Yes.

Yes, you can't get him tested and clear to come in?

I'm sure there's other priorities before us. And I think...

Yes. Well, and I think it only acquires a test and an airline seat?

What's your next question, Alex?

Yes, yes. We can't ask him to travel if his company has got a problem itself.

All right. Okay, okay. So do you anticipate approximately the same kind of orders going forward in the current conditions that you might have had without it? Are there -- is there -- it seems to me there might be some problems getting orders, getting feasibility studies done and things like that.

Maybe, Alex, we'll see. I mean, certainly, different geographies are -- have different reactions. New York is in a very tightened situation right now. We're aware of that, but in other parts of the country, people are trying to continue to do business. As I mentioned, HVAC is an essential service. People still need heating and cooling, particularly for assisted livings and hospitals, et cetera. So to the extent that part of our backlog is involved in that, I expect those things to continue. Now exactly how much our order flow might get interrupted because of how long this goes, it's very hard to say. But again, I think we're fortunate that, fundamentally, our core industry, our core industry being the HVAC industry is continuing to operate and is not completely shut down as are some of these other industries.

I think what's going to happen is they're going to shut down the whole country, but that might make it go away faster ultimately.

Thank you. Ladies and gentlemen, we reached end of our question-and-answer session. That also does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.