Hello and welcome to the Tecogen Year-End 2022 Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Jack Whiting, General Counsel and Secretary. Please go ahead, sir.

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 fourth quarter and year-end 2022 earnings and the presentation provided this morning are also available in the Investors section on 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 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 SEC 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 fourth quarter 2022 and year-end earnings and in the Investors section of our website. I'll now turn the call over to Abinand Rangesh.

Good morning, everyone. This is Abinand Rangesh, the CEO of Tecogen. I also have with me Bob Panora, our Chief Operating Officer, and President of the company and Roger Deschenes, who is our Chief Accounting Officer. Before we begin, I'd like to first thank Ben Locke for his valuable contributions to Tecogen. I have now been CEO for just over 1.5 months. The management team and I have spent this time talking to customers and partners and analyze the business in detail. After we report results, I will be covering my vision for Tecogen, the markets for our products, the product positioning compared to the competition, the go to market strategy and the details of how we plan turn the business around. I also have some pretty exciting news to cover today as we just recently signed a material agreement for a significant number of service contracts. So I will talk more about that at a later section of the presentation. Before we go into the numbers, as a quick recap, we have three revenue segments: Our product 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 with a small component of installation activity. 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. At this point, I would like to introduce Roger Deschenes, our Chief Accounting Officer to go over the financial results for Q4 on the full-year 2022. And Roger has been with Tecogen since 2020 and is an instrumental part of our finance team. Over to you, Roger.

Thank you, Abinand, and good morning to everybody. Fourth quarter was a disappointing quarter where we saw a reduction in revenue of 37%, which resulted in a net loss of $0.06 per share and a net loss of just over $1.4 million. Our operational expenses were 13.7% higher quarter-to-quarter or approximately $450,000, this increase was primarily due to the impairment of long lived assets, an increase in the reserve for bad debt, the litigation provision and increased R&D costs associated with the development of our air cooled chiller. Our product margin was 32% for the quarter, the decrease was primarily due to the mix of products sold in the fourth quarter and higher material cost. Our overall gross margin increased to 53%, which is due to a higher proportion of revenue coming from our service activities. We'll talk more about margins in our segment review. For the full-year 2022, revenue increased 2.5%. Our product revenue increased by almost $1 million, compared to fiscal year 2021. Overall margins were 3% lower than fiscal year 2021 and the increase in operating expenses of 4.8% or approximately $600,000, which we might add was below the rate of inflation resulted in a net loss of $2.4 million for the year. We are beginning to see material costs stabilize and with the price increases instituted in the second-half of 2022, we are expecting an increase in our gross profit margin for product sales in 2023. Moving on to adjusted EBITDA and the EBITDA calculations. For the quarter, the EBITDA was a loss of $1.3 million and the adjusted EBITDA was a loss of $1.1 million in the fourth quarter. The 2021 EBITDA and adjusted EBITDA numbers were favorably impacted by the employee retention credit. For the full-year, the EBITDA loss was $2 million and adjusted…

Thank you, Roger. Before I talk about my vision and strategy, I know some of you are concerned about cash, as well as where we are on backlog. So our year-end backlog was $6.6 million, but has now increased to $7.5 million. We're also seeing orders in the pipeline actually increased, which again, I'll show you in more detail a little further down in the presentation. The backlog right now mostly comprises of multi-family residential and controlled environment agriculture. There are also a mix of other segments within this backlog. We also have no debt at this point and our current cash position is higher than it was at year-end and is continuing to improve. There are more plans that we have to actually improve the cash position, which I will cover in more detail shortly. Our primary mission is to provide customers with energy savings and resiliency with a cleaner environmental footprint. In many of the markets we operate in, we provide a means for customers to cut greenhouse gas footprint by up to 50%, while simultaneously reducing energy costs by more than 50%. I briefly want cover the value propositions that we offer to end customers as this is the basis on which we're building our strategy going forward. The first is power generation and resiliency. This is provided by our electrical cogeneration products where we provide energy savings and in some cases backup power in the event of a blackout. We use a natural gas engine to generate electricity and then use that engine heat to produce hot water in the building. We are twice as efficient as an equivalent fossil fuel power plant as we are able to use the heat. So we have a much lower greenhouse gas footprint. The second is our clean cooling…

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Sameer Joshi from H.C. Wainwright. Your line is now live.

Hey, guys. Thanks for taking my questions. Abinand, congratulations on the new position and good luck. My first question is just a clarification on the definition of pipeline. Are these amounts that you have bid on or you are -- there is a potential partner and you are in conversation before putting a bid? Can you just explain what that is?

Yes. So firstly, thank you, Sameer, and that's a very, very good question. So typically, we have various stages in our sales system. So what happens is when we have seen a project, we have received utility bills and or we have quoted a project, then it goes into our pipeline. And we estimate the number of units that we will need and then we basically price that accordingly. So that's really what this number is. So this means that we've talked to the customer, we have usually provided a quote to the customer. And of course, there is a conversion ratio between this and what turns out at the end sale. So this is why we don't report this normally, but given that we're in a position now where we are making some changes to our sales network. I wanted to be able to give investors an idea that look, the size of the overall pipeline, compared to where we were before is increasing. So that's really what I'm defining as the pipeline. Does that answer your question or do you need to get…

Yes, yes. No, no, I think it does. And we look forward to that data going forward. In terms of the [Technical Difficulty] or like a time cycle of a project once we receive an order and actual installation. Is there any difference between the -- I know it can be six to 18 months, but is there any difference between the chillers and cogen? And what do you expect that timeline to be for the air cooled systems?

So typically, this is where it gets a little more nuance. So when you have a project that's based on a return on investment, those projects typically can run anywhere between 12 to 18 months from quoting a customer, going back and forth, getting the projects specified, to getting an order and for it to make it into our backlog to shipment. So those kind of projects can have a pretty long time scale. But what ends up happening if we get also projects where there's a capacity constraint, so we have a project for example where a customer wants to go live, they need cooling and then they find that the utility is unable to give them enough power for the cooling. Those projects can move in the six month to 12 month timescale. So those things can move pretty fast. And so those ones are ones that you may not necessarily -- they might come out of, you know, you didn't even know that it was there and then it'll suddenly come through and it'll turn into an order. So those ones are a little harder to predict in terms of lifecycle, but there's more -- the advantage with those kind of projects is they end up being quite large, at least for us, because they might end up being like a 4 kilo project just because for a customer to need sufficient power and not be able to get it from the utility, it has to be a large enough delta that a solution like ours makes a meaningful difference. So in that sense, that can swing the needle quite a lot. With regards to the air cooled chiller, part of our plan right now is to really build up the backlog for this chiller, so that we have almost a lot of 2024 production sold by this year. Whether that's possible or not, that remains to be seen. But right now, some of the competing electrical chillers are having 50 plus lead, you know, of week lead times. So as long as we can beat that number and get some of these existing, the first few sites out there, we believe that the backlog will scale up over the course of this year. Again, this is something that we just have to see over the course of the year how sales go for this product and actually getting it in there. In terms of the pipeline for that product, we've already been reaching out to customers. We've had significant conversations. We don't have anything in the backlog yet with that product, but as soon as we do, I'll definitely be issuing press release with regards to that?

Yes. So on page 22, the increase in February and March we see is mostly from the air cooled chiller, I'm guessing?

Not -- actually no, it’s only a small portion of the air cooled chiller. There's actually across the board. This is across the board, we've seen a lot of different items that are in there. So this is both -- yes, so this is across the board, it’s reinvigorating a lot of our partners and some newer ones as well.

Good to see this. I just have a few questions on the actual results. You did touch on inventory being high. Was that mainly because of some expected shipments that were not -- that did not materialize or was it more a work in progress? Like how should we look at the buildup in the inventory?

Yes. So that's a very, very good question. So the first one is right. There were some shipments that were built based on receiving certain orders that either got delayed or did not materialize. So there was a buildup of finished goods that was basically built the forecast and didn't necessarily happen, but we will sell those, it’s not a problem on those. Then there was also a buildup, an overall buildup of inventory that resulted from just having to maintain a higher safety stock last year, because we were seeing so many supply chain issues that we had a higher safety stock level. And then the last thing of course is just inflation itself, right? You're going to see an increase in inventory values just because of the value of the material that's being bought going up. So it's a mix of all those things. But we definitely think that the number can be lower going forward.

Got it. So in that context, the price increases that have been implemented and may be implemented in the future. How should they reflect in the gross margins going forward? Meaning you're already marking this inventory up marking to market prices and we are seeing? How does that impact your margins going forward?

So one thing just on the margin, Q4 the margin was particularly low just, because of the product mix that was shipped. It was one of those it was a product, one of our cogeneration products that we had essentially fixed pricing for a certain period of time with a customer. And that resulted in a, sort of, lower than normal margin. We -- the other products are going to see a much -- you're going to start seeing recovery towards where the margins were in 2021 over the course of this year. The inventory I'm going to just ask Roger to address a little bit in terms of how we value inventory.

Sure. So, Abinand, as we do at the end of each year, we take a look at our inventory in terms of the usage of our parts in such over a period of four years. And so as we in terms of mark to market, we'll look at that four-year period and see if there's any usage or no usage. And based on the level of usage of inventory and the level of inventory we have in hand, we will book either an obsolescence or a excess reserve for that inventory.

Understood. Thanks for that color. And then just a few questions on the strategy going forward in terms of increasing the sales channel partners. How are you -- like have you identified these partners? Are these partners that you have worked in the past? And are engaging into a more formal relationship going forward? How should we visualize this?

So there's a handful of partners that we have worked with in the past that are likely to be very, very good. That can be scaled up substantially like how much business they're doing with us right now. Can be scaled up substantially. Some of one partner in particular is the one that we actually bought the -- or we acquired these service contracts from. So they already have a sales team in place, they can do installation activities. So they have the knowledge to be able to do it. We have a couple of other partners and other geographies that we have been working with, but had not -- we needed to really look at that relationship and see why we weren't seeing as much business or why the pipeline was relative really small. And that's where we focused our efforts on had a look at -- how would work from their side of the relationship, what we could be doing differently to allow them to sell better and have been making those changes. So we have two or three partners that are existing. And then we have a few prospective partners that we're, sort of, quoting right now, but that's going to be a little longer term. But it made more sense to start with the ones that we already had some relationship with that had the potential to do a lot more with us and then change what we needed to do to basically get them to increase the activity that they were doing for us.

Got it. And then just last question from me. For the same purpose of reaching more -- getting increasing sales basically. Does your existing service network the contracts that you already have could that be used as a sales channel for adjacent sales or up sales?

Exactly. And that's exactly part of the strategy here. So the way I see the sales -- I mean, sorry, the service network is that, it does two things: one, it allows us to cover a larger portion of the fixed cost, right, because that's a big portion that we need to cover. Because the more we cover, because with capital goods, the sales cycle is long. It fluctuates, it could be -- you could see big swings one way or the other. So the more you've covered the baseline with recurring revenue, the less risk there is from swings and product revenue. Although with an increase in the number of partners selling out there, in theory, the backlog will be large enough that you shouldn't have an issue with always covering all of your costs. But that just takes a little bit of time to get there. So in the meanwhile, yes, the first piece of the service side is to increase the amount of fixed cost that's covered. The second piece of the service network is what else can we be doing with the service network to one make it grow faster and number two, identify opportunities that we could either be selling product or increasing the service capabilities that we do on-site. What I'm being told by various customers is that there are areas that we could be helping them on, on the service side. And then there are energy asset managers that are saying that maybe we can do a little more for them on using our service network. So there's other areas that the service network can pick up. And then the other piece that we are working on is how do we get essentially the service network that's seeing all these buildings? Are there other opportunities for upselling product as well? So those are areas that we -- one of the key things there is we don't want to put all of these measures in at the same time. We want to do a few of this see how the results go and then correct accordingly and then gradually rollout more of these features.

Thanks for taking my questions, Abinand. Have a good one.

No problem. Thank you, Sameer. Thank you for your support as always.

Thank you. [Operator Instructions] Our next question today is coming from Michael Zupp, a Private Investor. Your line is now live.

Hello, good morning to you. I have two questions. First of all, with regard to the new air cooled chiller, is that electric powered or is natural gas powered?

So it's actually both. So it's a hybrid chiller, so it actually can take in power from either the electrical grid or the engine. And the way it's set up to operate is that in the event you could basically blend both power sources. If you have a hot water load, it's probably best to use the natural gas engine, because that's typically your lowest cost of operation and lowest greenhouse gas footprint. And then in more areas where you don't have a hot water load, you may want to run on the electrical grid or on the engine depending on time of day. And then of course, there might be periods where you want to maintain the engine, you can still keep running on the electrical grid or vice versa where you might have a power outage and you might want to run on the engine. So that's kind of why it has multiple modes of operation. And so it’s -- and hopefully in a lot of these critical cooling applications where the back, the resiliency as well as the dual source thing plays a big factor. It could be a big driver for sales.

And then as a follow-up question, given the political situation in the New York area and in the New England States with regard to the fact that they don't like fossil fuels, they don't like natural gas, and understand New York City has a moratorium on natural gas hookups. How does that impact our ability to sell units that are gas powered?

So that is actually a great question. That was one of the first things I did was to go and talk to a lot of end customers to see how they felt about this product and our existing products. What we are seeing is actually that end owners are still quite pro-gas. It -- the engineering community has gone very much into electrification mode and to a certain extent this hybrid chiller received a lot of favorable attention from engineers, because they could see the benefits of doing both, they could still meet their electrification goals, while still having a way for operating on reducing the save -- it providing savings for end customers. And the other thing that we're seeing purely from the number of leads, number of projects we're not yet seeing a decline in the New York area from potential projects. A lot of this again is being driven by that owner direct approach. The other piece was I look more broadly at this to say, okay, what happens if this gets much, much worse, right? Let's, say that it gets electrification becomes a huge issue and then there's a time lag between perception versus the grid becoming unreliable enough that they have to use other sources, what happens event? And I sort of modeled what would happen if the basically lost 50% of our sales from the New York area. But looking at the broader market, there's still a substantial area in the U.S., where now utility rates have gone up enough that the economic savings are there. Right now with the investment tax credit, there's substantial opportunity elsewhere in the U.S. And again, there's a lot of places that we're seeing now that are having electrical capacity constraints, especially on cannabis projects where they would use our products. So it is a risk, but right now we're not seeing it and part of the way we're mitigating it is going around going to end owners directly, who seem to be favorable for this thing. On the gas moratorium really there was a temporary gas moratorium, but we're not seeing that right now in any of the projects in New York. There were certain areas that had a moratorium, but that has been lifted. So we haven't had issues with regards to that recently. And also majority of that gas hookup issues is really for new buildings, existing buildings have not had this -- they don't have to meet some of those requirements. So again, we're not seeing as much of a impact on that as you would think.

Then as another follow-up question, with the new chiller technology, does that open opportunities for some of our micro grid management systems?

So I see the new chiller as really a way to as a thermal microgrid. Yes, and it definitely allows you to manage a lot of different -- because the new chiller is not producing any electricity, right? So, but it is a way to manage time of day utility requirements. And basically take advantage of different utility rates at different times of day. But what I would like to do here is I'm going to ask Bob Panora to maybe add a couple of things on the various modes of operation and how we might, yes operate this up.

Hi, Mike. How are you doing? So I think even when we developed the air cooled chiller was that the benefit -- there's a great benefit of people can operate on either electric mode or gas mode. And there's time and day, but there's also long-term benefit. And the big fallacy about electrification is that the electric grid, you're replacing a 90% efficient water heater with a electric water heater that's basically powered by the grid, which is 30% to 40% efficient. And so what the people who are components of electrification are really saying is that 20-years from now, the grid is going to be much cleaner. Therefore, put in the electric equipment now that can be -- that could take advantage of that. Of course, the next 20-years, it's going to make things worse, because the grid isn't that clean. So the hybrid chiller can actually shift with time, so that five, 10, 20 years from now as the grid gets cleaner. It can shift its operation to be more electric and less gas. And so that gives the buyer now the feeling that, oh, I can manage this so that I'm a good citizen, I'm as clean as I can be. And for the next 10, 15 years, I'm much cleaner than the grid. And then further out in time, if the grid becomes cleaner, I can shift the operation. So it gives the ability of the owner to sort of play with that. But the other piece of it, of course, is that the market for chillers that can operate during an outage is becoming stronger and it's much more broad based around the country. Than just New England or New York, because what's happening in various places is the grid is becoming less reliable for various reasons and so forth. So having that capability of managing your source of your energy is good for time of day. Electric rates in many years of country go up dramatically during the day and you can operate on electricity at night. And the other thing is a long-term shift in the grid efficiency can be managed, so that you're always on the curve of doing the right thing. But you get the benefit of the gas right now and it actually is better than the grid. So does that answer your question, Mike? Do you understand the concept there?

Absolutely. One last question, given the unreliability of the grid and what's going on in California, are we emphasizing some product introductions or system introductions in California, because it's a huge potential market?

So we have been talking to a couple of utilities over there, in particular to see how we might do more in California, in particular with this air cooled business.

Yes. I mean, it seems that the reliability issue in California is really coming to the forefront. And it seems to me that there's an opportunity for us if we can offer reliable backup systems or even ordinary systems?

Exactly, and this is something that we're continuing to -- we're talking to utilities on. But in terms of the rollout for this product, the way we are approaching it is our first priority is some existing customers, who have a potential to either add additional cooling or to have replaced some of their older chillers with this chiller. Because the reason for that of course is that they know us. We have a good relationship with them. So we wanted to start with some of those. In addition, we wanted to have the first few -- essentially the first round of them need to be as close to a service center and closer to the factory as possible just again to really make sure the launch is successful. Then the second phase is really going after some of the -- working with some of the utilities to roll out on a broader level, because we believe that you might have seen last year we had a press release by GTI, which they're basically testing the chiller. And once their testing is done or they validate our testing, they’ll basically put their seal of approval and then the gas utilities can maybe help us find more projects to use this chiller. And that phase, we might really look at California as part of this. But that early stage, I think we still have a large enough pipeline of both existing potential projects, as well as other projects that are near to our East Coast service centers that we want to focus on just to really make sure that this product rolls out any early stage bugs that come up are taken care of before we roll product, especially to the West Coast of the country.

And then one final question, I know that we've had a indoor agricultural commitment in Canada? What's the status on going forward on expanding that opportunity?

So again, great question. So a couple of things on that space. We are in -- there's a couple of things in -- that are very close in the U.S. for food crops that we are like customers that we're going to be selling machines to. I will be making more announcements on that over the next few weeks, month, something like that. The second piece is we have identified a grower partner that we might be able to partner with on a broader relationship that we might have a bigger structure there. I'm not yet in a position to be able to expand on that relationship yet because we're still in discussions. But I hope to be able to talk further about exactly how that will work shortly. In this particular presentation, I didn't necessarily go into that space just, because I wanted to talk more about the core business. But this is still very much being worked on both from the customer standpoint, as well as how we might do more in that space.

Well, I just want to go on record, I found this was a very informative call and I'm looking forward to continuing updates. Thanks for your help.

Thank you so much, Mike, and thank you for your long-term support as Tecogen shareholder.

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

Well, thank you, Kevin, for that and thank you all for attending our conference call. Myself and the rest of the management team are available to speak at your convenience. Please reach out. You have my email address, it’s on the earnings release. Happy to talk further and discuss any of these details and the rest of the team here is also available. I have a very strong team supporting me here and I think over the next few quarters, I hope to really be able to share some of the improvements that we've made to the company and hopefully we'll be able to unlock the value for the shareholders. Thank you and good day.

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