Greetings. Welcome to the Tecogen Year-End 2023 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the conference over to Jack Whiting, General Counsel and Secretary. Thank you. You may begin.

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 fourth quarter and year-end 2023 earnings and presentation provided this morning are available in the Investors section of our website. 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 provisions 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 discussed in the Company's most recent annual and quarterly reports on Forms 10-K and 10-Q under the caption Risk Factors filed 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, we specifically disclaim any obligation to do so. So you should not rely on any forward-looking statements as representing our views as of any future date. During this call, we will refer to certain financial measures not prepared in accordance with Generally Accepted Accounting 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 fourth quarter and year-end 2023 earnings and on our website. I'll now turn the call over to Abinand Rangesh, Tecogen's CEO, who will provide an overview of the fourth quarter and year-end 2023 activity and results; and Roger Deschenes, Tecogen's CAO, who will provide additional information regarding fourth quarter and year-end financial results.

Thank you, Jack. Welcome to Tecogen's fiscal year 2023 earnings call. I'd like to start by giving investors an update on changes to the business landscape and market, what has worked with our strategy and what we need to do differently to reach profitability. As we've mentioned before, we need to move factory at the end of Q1 and early Q2. I will also talk briefly about this and how this will affect operations. Roger will then take us through the financial numbers, and then I will wrap up with our 2024 plan. As many of our long-term shareholders know, one of the predominant markets has been large multifamily residential buildings in New York City. These projects typically have one or two-unit cogeneration systems per building. We are facing significant headwinds in this market. We have seen multiple projects canceled after contractor selection over the last six months. However, we also have a big opportunity ahead of us that can give us significant tailwind. Increased electrification efforts, data centers consuming exponentially more power and aging utility infrastructure leading to electrical capacity constraints nationwide. It is limiting customers' ability to expand the time of day charges are becoming punitive, and there are only a few options that allow customers to address the problem. As a result, we are seeing more multiple unit cogeneration and chiller projects than ever before. In the case of our chillers, the customer completely avoids the need to connect to the utility grid. In the case of our electrical cogeneration product, the ease of interconnect with our modular inverter-based system is a huge benefit. These electrical capacity constraints are nationwide. So I believe we are just starting to see the beginning of this trend. There is also an opportunity to generate additional revenue from utility demand response…

Thank you, Abinand, and good morning, everybody. I'll begin with a review of the fourth quarter results. Our total revenues for the fourth quarter were $5.9 million, which compares to $4.5 million in the fourth quarter of 2022. This represents an increase of 30%, which is due primarily to increased products and services revenue. Our net loss for the fourth quarter of 2023 was $1.9 million or $0.07 a share compared to $1.4 million or $0.06 a share in the fourth quarter of 2022. The increased net loss is primarily due to $1.1 million in provisions recognized in the current period for bad debt from old installation receivables and for obsolete inventory. Both our products and services gross profit margin were impacted by the $403,000 obsolete inventory provision, which reduced our overall Q4 2023 margin by 6.8%. Excluding the charge that was recorded, our overall Q4 2023 gross margin would have been 46.7%. We'll discuss margin in more detail in the segment review. Operating expenses increased 10.2% to $4.2 million in the fourth quarter 2023 from $3.8 million in the fourth quarter of 2022, due primarily to the higher debt – bad debt provision of $744,000 that was recorded on older install receivables from the NYSERDA rebate program, which we determined that we would not achieve the milestones within the program termination date due to customer-induced delays. We are, however, continuing to pursue recovery of these rebates and will seek an extension of time with NYSERDA to complete the milestones. Excluding this bad debt provision that we booked in the fourth quarter, our operating expenses would have actually decreased 9.4%. Moving over to the full-year 2023 results. Our full-year 2023 revenue was $25.1 million, which is flat when you compare it to the 2022 results. The fiscal 2023 net loss…

Thank you, Roger. We have three phases to putting Tecogen on a pathway to financial health. The first is existing operations. Over the last year, we have increased our service revenue by assuming service contracts. We have also been working on establishing new sales channel relationships. When we look closely at our sales process, we discovered that most of our sales were made by convincing building owners about the efficiency benefits of our system. Traditionally, in HVAC industries, manufacturers' reps sell to engineers who then specify equipment into projects. However, in our case, we need to ally ourselves with project developers in key markets such as indoor agriculture that can make the economic benefit argument directly to building owners. Over the last year, we established relationships with some key project developers, some of whom are already selling complementary technologies such as modular chiller plants. We are in the middle of pivoting from being dependent on the New York City multifamily market to a broader nationwide market. So far, this has increased the size of our sales pipeline and we are being specified on multiple larger projects. The second phase is to position us to take advantage of utility capacity constraints. As more renewable energy is added to the utility grid, many electrical utilities struggle to provide sufficient power during peak times. The added cost to upgrade electrical distribution systems, in many cases, is prohibitive. So utilities provide lucrative payments for curtailing power during peak times. Using our established service relationships, we plan to take excess capacity from our cogeneration systems and enroll this into the utility demand response programs. To help us do this, we recently launched a self-learning intelligence system to control our cogeneration and chiller fleet. This has some wide-ranging capabilities that I'll talk about shortly. The last…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Alexander Blanton with Clear Harbor Asset Management. Please proceed with your questions.

Good morning.

Good morning, Alex.

My first question is you mentioned at the beginning of the call, headwinds in New York City and cancellations of contracts. What is the reason for that?

So I believe a large portion of that is driven by New York City becoming very, very anti-gas. And in particular, some of the city housing agencies becoming very anti-gas. We used to see a combination of projects, both from co-op and condos directly, as well as a lot of low-income housing projects which were specified by engineers, but then the projects were then funded by New York City HUD. And right now, cogeneration is no longer seen by the city as a viable way to reduce greenhouse gas emissions despite the fact that there are significant greenhouse gas emissions. And as a result, those cogeneration sections are being canceled from projects that were developed and actually, in some cases, have gone out to bid contractors had been selected.

Well, given that you can reduce the greenhouse gas emissions substantially or almost completely, is New York City anti-science? What is the reason that they're doing this?

Yes. So this is something that – it's hard to tell, but I think there is – what is happening in the background is we are working with other CHP lobbying groups to make this case. I believe there will be exemptions made, especially under Local Law 97 for cogeneration products because right now, there really isn't that many alternatives and we're seeing huge increases in cost of power in New York City. So I think this sentiment may shift. But at this point, unfortunately, we are seeing projects getting canceled as a result. I mean, that was – we had a lot of these in our pipeline. They were well along the way and some of these got canceled right at the Q3 – end of Q3, early Q4.

Are the cancellations driven by local political considerations? The city government ordered the buildings to cancel the contract?

So it is being driven, in some cases, by the local political considerations by New York City. Because these projects, a lot of these were paid, the funding comes from the city itself. So they are essentially pulling the plug on any funding for cogeneration built into building redevelopments and improvements.

Are there city regulations established to prohibit the use of gas for this purpose?

At this point...

Or is it just the funding?

It's really in this case – so there is some regulation with regards to prohibiting gas in city buildings. There's multiple different...

City buildings or privately owned?

So there any – so there's two pieces that New York City has passed with the local law. One is a – for city buildings, there's an earlier date in which any renovation cannot include an addition, I think, of new gas. And then for non-city buildings, again, a renovation over a certain size, limits what you can do with gas. So there's more to it than that, but this is really driven by the funding itself.

Okay. Well, we can talk more offline about that. You're moving the factory to where? Is there – has there been an announcement of this by the company?

Yes. So we did include it both last year in our 10 – like all our 10-K. I have mentioned that in previous calls, we are moving up – just 20 minutes up the road to Billerica. So it's – our lease in our current facility is expiring at the end of March. And we – the new location is better set up for our operations. It's – the factory is better laid out, allows us to do better chiller production and will allow us to reduce our rent.

Okay. Fine. And finally, the adjusted EPS without these charges for the fourth quarter, what was it?

What it'd be? I'd have to get back to you on that one, Alex. Right off the top of my head, I don't know. But hang on, I can probably do it, because on the adjusted EBITDA, it was $505,000.

Right. But I was looking for EPS. Okay. Thank you.

Yes. Yes – if you do it? Yes, yes. It's going to be around $0.03.

$0.03. Okay. Thank you. But it's $0.03 loss, I mean.

Yes. $0.03 loss, yes.

Okay. Thank you.

Thank you. [Operator Instructions] Our next questions come from the line of [Michael Zuk]. Please proceed with your questions.

Good morning everybody. A couple of technical questions, I guess, to our Chief Financial Officer. I noticed that we had a state tax liability that virtually doubled in 2023. We didn't earn any money. How come we're – state taxes are doubling?

Yes, that has to do with the State of New York, and it's really a franchise-based tax. So it's not so much based on your profitability, but it's based on your asset base in the state. And they actually raised the rate significantly in 2023.

Well, it seems like it's an impediment to do business in New York. What can I say? Also, on the balance sheet under the liabilities section, there is a current acquisition liability of $845,000 and an unfavorable contract liability of the current year of $176,000. Are those amounts payable this year? Is that a cash item?

For the Tecogen speaker line, could you please check if you self-muted yourself?

Hello? Can you hear me now? Hello?

We could hear you, Michael. I just can't hear the speaker line right now. Are you self-muted?

I shouldn't be, and I'm not on speakerphone.

Michael, can you hear me?

I can hear you. Can you hear me?

Yes, I can hear you. I think we're good.

Okay.

Can you hear me now? This is Roger, Michael.

We are good. We can hear both lines.

Okay, on the liabilities and stockholder equity line, there's an acquisition liability current and an unfavorable contract liability current. Are those cash items due this year?

Okay. So the first one, the acquisition liability current, Mike, that has to do with – as I was mentioning, when we acquired the Aegis contracts, we reviewed the fleet of engines and noted that there were some delays and actually some engines that weren't operating. So under the accounting rules, we're permitted to record a liability as of the date of acquisition. So in some cases – so the – in terms of the cash flow on that, there will be some money spent this year for those to replace some of those engines. It won't – it's not $845,000. It's probably more on the line of about $250,000. And then the unfavorable contract liability, that has to do with the acquisition of – or the merger with ADG back in 2017. And at that time, calculation was done, you're looking at the contracts and there was a termination that the expected profit from the contract wasn't up to what we had expected it to be. So again, under the purchase accounting rules, you're permitted to record a liability at that time. This liability, Michael, is really just a – it's a non-cash charge. I mean, it's a non-cash benefit actually because we debit the liability and we credit our amortization expense. So there's no cash being issued to relieve that liability.

And so then under the long-term liabilities, there's the same entry except it's much larger numbers. Are those amortized over a period of years? Or how does that work?

Okay. So then the other – I'm sorry, the other aspect of the acquisition liabilities I didn't discuss also has to do with – we recorded a contingent liability. So the payment for the Aegis acquisition is being paid over a period of seven years and it's based on revenue times a percentage, depending upon whatever revenue levels are achieved. So at the time of acquisition, we record the anticipated, call it, a royalty, that will be paid over seven years, using a discounted cash flow model and record what we anticipate to pay in one year's time as a current liability and then anything past the one year to the seven-year period, we recorded that as a long-term liability. So the acquisition liabilities over time will be paid in cash. And the unfavorable contract liabilities, again, are just a non-cash – the liability will be reduced in a non-cash method.

But Mike, you're aware, the percentage that we pay Aegis on the revenue is between – it starts at like 5%. And then at the seven-year point, it goes up to 10% of revenue. But we are escalating the contracts every year. And therefore, the margin coming from those contracts should not decrease. What you're really doing is just paying for the acquisition as a percentage. It's basically a commission, right? That's all you're doing.

Okay. And then there's a couple of other, I think, interesting items. It shows that we have an unrealized loss on investment securities. What investment securities do we have? And how come they're at a loss?

So this was EuroSite shares that Tecogen has owned for many years, so we have the mark-to-market. So we have 1.8 million shares of EuroSite Power, and it fluctuates and we have the mark-to-market.

So the bottom line is, why do we still own it? I mean, it seems like it's a drag on us.

So I think this is one where we will, at some point, sell it. It's a pretty tricky one, the way it's held right now. Some of those shares need to be registered and then sold. So we will sell it at some point. It just hasn't – at this point, the business really has to focus on getting our cash flow in order, getting this move done, getting ourselves – getting our cost under control first. And then I think we'll start optimizing these other aspects. But I feel like these are – like the business has to stay very, very focused on getting these items resolved first.

And then with regard to the inventory write-down, how did we get saddled, if you will, with "obsolete inventory?" Are they parts? Are they engines? What are they? Or what...

Yes. So there's a few different things over there. There's a portion of it that comes from some of our chillers that we were servicing until recently, but there's chillers from the 1980s that had our large 1,000-ton chillers from years and years ago. So those chillers finally have been replaced, so we don't need those parts anymore. And then there are certain components that were related to Ilios and those aspects. Again, we have not sold anything in that range for a while. And then there's a few different pieces. Again, we look back four years to see what parts have been used because, of course, the service business, we support products for many, many years. So we sometimes do have components that have very low turnover, but at the same time are still being used. But in some cases, when we look back, we just find things that are not being used. And those were – that's really what it was. And honestly, we felt like this is something, at some point, has no – this did not have a value to the business anymore, and we weren't going to be able to convert this into cash to anything reasonable. So we chose to take the write-off at this point.

And then with regard to the bad debt provision, is there any process by which we can attempt to recover some of the bad debt? I mean, can we just go out and pick up the chillers or whatever the units are and refurbish them and sell them to somebody else?

So in this case, they were really NYSERDA rebates that the company had discounted the value of the project by the rebate amount and it required the customer to do certain things. And the customer did not do those certain things. And unfortunately, it means that the rebate becomes at risk. In some cases, the customer actually even removed the units. So we are going to take – we're going to use legal means to take collection efforts, and I believe we'll recover a portion of this money. Again, the amount that will be recovered, it's uncertain. The cost to recover it, there's going to be a portion associated with that. So again, we can keep – we can say that we can leave it on our books, but again, it didn't, at this point, seem like it was getting harder and very unlikely to collect these portions. So we chose again to write it off at this point and – but we're not going to – we are going to continue collection efforts to collect as much of that money as we can.

And when you say these were rebate items, does that mean that units were installed and then some governmental entity was going to give a rebate to the end user and the end user didn't give the rebate back to us? Is that the way it works?

So in this case, Tecogen was actually discounting the value of the project by that anticipated end rebate amount. So these project – yes. And hence...

Yes. In the future, we shouldn't do that.

Correct.

I mean, just get the rebate – get the full upfront price and then if the rebate comes, you can negotiate accordingly.

I totally agree with you on that one.

And then finally, you said that we are now emphasizing a – we're looking at a national market rather than local geographic markets. And when you say we're looking at a national market, what exactly does that mean? Are we having distributors? Or are we talking to engineering firms? What are we doing to widen our national market effort?

So there's a couple of things we've done. We've really gone into this more by looking at market segments first because there are certain segments that we have an advantage on, right? So there are – as you already know, we have a pretty significant advantage on indoor agriculture. We have a, we believe, a significant advantage in things like certain types of process cooling. We also have an advantage wherever a customer is doing cooling and dehumidification. So there's a few different things we're doing. One is that we are actually attending trade shows really targeted at these segments. We are also working with some project developers that really specialize in these segments. They have relationships with end users. They have relationships with process facilities. We're also working with gas companies, where we can, in places like Florida, where, again, it's a relatively gas-friendly market to identify customers that could potentially switch to a gas cooling or a cogeneration technology. We are also looking – like making – advertising in, again, these kind of process-type application magazine, specialist trade publications, writing articles to educate customers. We're lastly, in the process of updating our website to also make it much more market driven so that we get customers looking for, let's say, a chiller for a brewery, so they are searching for that on the Internet, we'll be one of the websites that show up. So we're working on all of that. It's – the way to go after that market really is by market segment relevant. And then, of course, we do work with engineers. We do a lot of lunch and learns. We try and educate them on the benefits of our technologies, especially some of the engineering firms that operate in multiple states. We try to get to as many of the regional offices as we can because, again, we believe that there's going to be customers, especially the ones that have power constraint issues that we need to get in front of them because those ones don't really have that many choices. But some of that also comes from these market segments, but the broader areas, it is coming from some of the engineering community and some of the consultants that work in this space.

And then a personnel question. Do we have engineers that specialize like in cooling? Do we have engineers that perhaps specialize in indoor agriculture? Or do we have engineers that specialize in the cogeneration area? Or do we have generalists that apply their knowledge across those different segments?

So we do have – there's a little bit of overlap on the two – on the engineering team. There's a couple of our team there, especially on the sales team, that have a more in-depth knowledge on certain markets versus others. They've – our key sales team have sold both cogeneration and chillers, they're worse enough, but there's definitely some over market specialization on a couple of the members there. And then again, we also work with some of the project developers to really understand what their needs are. And as we do that, we also improve our knowledge of what it takes to support that market.

And then with regard to sales efforts on servicing, are we making an effort to apply servicing perhaps to areas where we haven't installed our own units? Can we service other people's units?

So that is definitely an expansion opportunity. But what we've done and actually, I'm glad you mentioned this, we've hired some sales people for the service side alone. And where there's an immediate need is actually just where our machines interface with the building itself. There's all the pumps, there's the heat exchangers, there's the controls. And then there's also the demand response side of things. So even addressing that will add a significant amount to our service revenue and more importantly, it will allow our machines to run more efficiently and increase run hours. And there, it's a relatively straightforward sale because the customer already knows about the machine, they know about the benefits and they're also understanding our – by actually putting a service salesperson in front of a customer, we also find out what the other customer pain points are. I think eventually, we might look to service other pieces of equipment, but just expanding the box, doing some of this as billable work is going to give us significant increases in sales.

Well, that sounds like a pretty good plan. If we have a chiller system in place, then our technicians are already on site. And what you're saying is that there is a possibility that we can add servicing of other components in that facility because we're already there. Am I approaching this correctly?

That's exactly right. And doing that, in some cases, can increase run hours by 10%, 15%, 20% just by improving how the system is set up. So that – it's a big win both for us as well as the customer. So yes, that's something that we're pushing.

Well, it sounds to me like we should be making a monumental effort in that segment because we're already on site, and it's just a matter then of increasing what we perform on that site?

Yes. So stay tuned on this. I will be providing more updates in this space. This is definitely a huge priority for me that we do increase that stream there.

Well, I want to thank everybody for their effort, and I look forward to improvement. It looks like the remainder of this quarter and next quarter are going to be transition quarters for us. And that really, we should be firing, if you will, on all cylinders in the third and the fourth quarter. Am I correct in assuming that?

That is spot on, yes. The way I look at these next two quarters, the – a lot of – there's going to be disruption on the product side. We're going to continue focusing on the service side of the business to really get the revenue up, the margin up over there. We are going to be focusing on securing more service contracts and some of this billable work. So the service side of the business, we're going to be – we're hopefully going to see no disruption on that. On the product side of the business, we're definitely going to see a disruption this quarter and next quarter. But Q3, we should be back on at full steam on all aspects of it. And then when we do the Q1 earnings presentation, I'll talk a little more about the operating cost side of things and what we're really trying to do because even a year ago, I don't believe we would have – we had enough recurring revenue stream to cover a large portion of our overhead. But I think now we're getting closer and closer to that point. And I think with a little more – with all these changes done, we're going to look at what the numbers look like and then start really looking at the OpEx and getting ourselves cash flow positive and profitable.

Well, fair enough. Thanks for all of the input.

Thank you, Mike. Thanks for being a supporter as always.

Thank you. Our next questions come from the line of Alexander Blanton with Clear Harbor Asset Management. Please proceed with your question.

Just a follow-up. You talked about the different markets outside the New York, nationwide. Could you characterize the last two orders that you announced publicly, could you tell us where those are and how they fit into that plan?

So one of the orders, the one for the hybrid chiller as well as the InVerde, that one was down in Florida. The 12-unit order was actually a mix of – it's a project developer that's operating all over the Northeast. It wasn't specifically one market. It was across – all the way going from Connecticut downwards. So it was – that was a lot of smaller orders that were – smaller projects that were linked together as one blanket order. But we definitely had projects last year that – some that were in Missouri. We're seeing projects now, Illinois, Nevada, that, again, we had never really looked at before. So we're starting to see a lot more of that.

These are potential orders you're talking about in these different...

Well, there was some last year. So there were some last year that shipped to Missouri. But now we have some potential orders to the second half of the year that are in different parts of the country as well. So some that are in Nevada, some that are out west in Oregon, some that are, yes, in Illinois, Texas, those kind of things, yes. So we're seeing projects all over the country right now.

I think that's very encouraging.

Yes. So I do believe that this – like we're really just going through the pivot right now. These things will – we'll start seeing these projects come to fruition.

Okay. Thank you.

Thank you. That does conclude our question-and-answer session for today. And with that, that concludes our teleconference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.