Tecogen (NASDAQ:TGEN) Management Interview


Tecogen, Inc
CEO: John Hatsopoulos
Pres: Bob Panora


WSA:  Good day from Wall Street, this is Juan Costello, Senior Analyst with the Wall Street Analyzer. Joining us today are John Hatsopoulos, the CEO for Tecogen Incorporated along with the Company’s President Bob Panora.  The company trades on NASDAQ, ticker symbol is TGEN.  Thanks for joining us today there guys.

John Hatsopoulos:  Thank you Juan; thank you for calling us.

Bob Panora:  Thank you Juan.

WSA:   So can you start off by giving us a history and overview of the company?

John Hatsopoulos:  Sure.  What this company does is–it has equipment that produces electricity, hot water, and air conditioning using natural gas.  And as a matter of fact to the best of my knowledge we are the only company in the country that has chilled-water air conditioning using natural gas instead of electricity.  We’ve been doing a lot of work on emissions and we have gotten patents in the United States for our equipment to eliminate the bulk, almost 90-some percent of emissions of CO and NOx.  And Bob do you want to say a couple of words about what we do?

Bob Panora:  Yes, in regards to emissions, we have a proprietary technology that we patented that is very effective in cleaning of the emissions from spark ignited engines, even natural gas, and recently through a joint venture, we began researching the effectiveness of the technology on vehicles powered by gasoline.  And we’ve had very good success in the lab and we’re well along in that program, and we can add more later if you have questions.  Go ahead John.

John Hatsopoulos:  Okay.  So we spent a lot of money in the past few years in patents, in lawyers, in technology to develop all these things, but finally it appears that we are there.  In the fourth quarter of last year and the first quarter of this year our revenues increased dramatically.  As a matter of fact the first quarter that we reported–we haven’t yet reported the second quarter yet–our increase in revenues was almost 35%, 34.9 to be exact.  And our gross margins increased by almost 26% and the company is finally profitable.  Not huge profits because we still have a lot of homework to do both on R&D and in patent development worldwide, but we’re now making money.  Our backlog keeps increasing, last I had looked and Bob should correct me…Our backlog had gone up to something like $17 million.

Bob Panora:  Yeah, that’s what I recall.

John Hatsopoulos:  Yeah, again, it changes from quarter to quarter or even week from week.  But our backlog was about 17 million versus three years ago when our backlog was something like in the single digits like seven or eight or nine million.  What’s intriguing here is that all of our backlog is delivered in a very short period of time.  It’s something that might take three months, six months or nine months but not everything will take years to deliver, which guarantees that our revenues will continue to grow over the next few years.  Now, we’ve also had another major event that took us a little over a year, which also cost us a lot of money in legal fees.

And this is the merger of American Distributed Generation, ADG into Tecogen and we finally closed this transaction in the last few weeks.  And it took us well over a year to try and do this merger.  This is very important for us because it not only allows us to pick and choose whatever customers ADG wants to sell energy to, but also it allows the savings of management of the two companies both in filings with the SEC, in audits, and technology management.  So we look forward over the next few years to have a dramatic increase in both revenues and profitability.

WSA:  You recently entered into the biogas CHP market and also have some orders for your TECOCHILL product in the cannabis growing industry. Can you round out some of your current news and talk about some of the sectors that you’re targeting?

John Hatsopoulos:  Yeah, Bob.

Bob Panora:  Yeah, I’m more familiar with the cannabis, I’m just kidding, but the cannabis indoor agriculture market it isn’t just cannabis it’s leafy greens and all that.  We’ve had a number of sales in that market and the situation is that those types of growing facilities have a tremendous electric load due to all the lighting and so forth and the plants have to be kept cool.  And typically that much electrical availability to cool may not be available in the buildings that they’ve (our costumers) been buying out to convert [their products] to the cannabis or leafy greens or whatever.

And so it’s a great opportunity for us with our gas cooling and fits perfectly since you would have natural gas at the site and that would be more than ample for our equipment and you can save a lot of money.  So we sold into the cannabis industry I believe in Canada, California maybe, Massachusetts, and Colorado those are four states that we’ve hit so far.  And we’re seeing a very good reception in that indoor agriculture market in general, which we have a unique product for that market.

John Hatsopoulos:  Again though let me repeat the numbers of the first quarter, which is the only public quarter that we have.  Our gross profit was almost $3 million and I’m rounding up the numbers here versus 1.7 for the first quarter of 2016, which is better than a 69% increase year-to- year.  And we hope that this kind of improvement will continue for at least a near term and hopefully the long-term.

Bob Panora:  So the overall picture is that our conventional customer base of hotels, nursing homes, hospitals, apartments, condos and that sort of thing is growing nicely.  And what we’re seeing, that’s new, is our expansion into new markets such as indoor agriculture and gas-powered cooling.  And that’s brought about by the low price of natural gas versus electricity and our products play well into that dynamic.

John Hatsopoulos:  And I’m going to put you on hold for one second.  I want to ask Bob if it’s legal with our partners to mention something to you and he is in charge of it so hold on.

WSA:  Okay.

John Hatsopoulos:  Go ahead Bob, we’ll tell you the other venture that we’re involved in.

Bob Panora:  Yeah, if I may, Juan.  I mentioned earlier that the technology that really puts Tecogen at an advantage in our conventional business is that we can make our natural gas engines run at extremely low emission levels with our technology.  And we offer that feature in all of our conventional products.  However, some time ago the Volkswagen scandal highlighted that the vehicle market has problems. It’s not perfect out there, there are issues with diesel engines but also gasoline engines if you’ve read the reporting.  They perform well in tests in the laboratory but the vehicles don’t do as well in real world driving and so forth.  So the testing procedure really understates the emissions from all vehicles really, not just diesel.

Subsequently we were approached by some investors in Europe and we’ve formed a joint venture with them and we raised $13 million for research into that area.  Now, we have done almost over a year of testing in several types of vehicles, gasoline in all cases, and we proved the chemistry in our natural gas experience works very well also in gasoline and in removing not only CO, NOx but also hydrocarbons, which is another benefit that we didn’t demonstrate on the natural gas [side] because it doesn’t have that issue.  On the gasoline [side] it was really almost 90% removal of the emissions from a vehicle in and above what a normal vehicle would emit, so very dramatic.  Same with CO almost 90% reduction and very significant reductions in NOx as well.

So in the year of research that we’ve done, we’ve also found other benefits that we have many patent applications in, probably 4 or 5, which are very significant.  And at this point we are both outreaching to the automotive industry and we’ve had some discussions that I can’t talk about and we’ve also been able to move into the next phase, which has some additional testing that I think will really tie the technology up in a very good way.  Tecogen on its own also received a grant from the Propane Education and Research Council called PERC and for the propane industry gave us the grant to work on fork trucks.  And as you know fork trucks run, many of them, on propane and their emissions are certainly good enough for outdoors–but indoors maybe not so good.

And that’s an area where our technology can really shine.  And so we were able to get to talk to two fork truck manufactures–both very interested.  We selected one of them, a major company you would know the name probably, we can’t discuss it, but they donated a fork truck and on giving us technical engineering guidance and how to integrate our device into their fork truck on a national model that they sent us.  They donated a fork truck for us to do the work on.  And we’re in the middle of that program.

We’ve tested the fork truck and baseline emissions as it would have been built in the factory and that we’re putting our device into it.  So we haven’t got that attested report yet.  So two major programs, one in vehicles and one in the fork truck industry.

John Hatsopoulos:  For the forklift truck inside a building, the only other solution other than our is to use batteries.  And obviously the batteries after a short period of time lose their power, so either you have to recharge them or replace them and it’s a very expensive proposition.  So if we can solve the gas problem and again correct me Bob, if I’m saying something wrong, we can solve the problem that can be a huge opportunity for us and for our trials.

Bob Panora:  That’s right and people prefer, not everybody, but I think a lot of operators of fork truck fleets like [to use] gas. If they can get the emissions down indoors, they would really like that because they can go a full shift without a problem and don’t have to stop and change the batteries, which are maybe more expensive to use. But I think you understand Juan.  So go ahead Juan, do you have more questions?

WSA:  So, what did the American DG merger bring to the table?

John Hatsopoulos:  Well, what it does is number one, it adds profits because we eliminate a lot of paperwork and also we eliminate the management of the facilities by Tecogen, which we still could have done otherwise without the merger.  But then Tecogen would have to charge ADG and ADG was losing an awful lot of money.  Number two, capital. ADG was running out of money and as a matter of fact was almost down to their last million dollars.  And Tecogen will help them with capital to improve their financial position.  So, the combination of efficiency, technology and capital is going to be positive on the long-term.  It’s not going to be a dramatic increase in anyway but since ADG has been a customer of Tecogen in buying equipment, that really helps us a lot.

Bob Panora:  Yeah, we feel that their assets are [synergistic]. And performance can be improved if they’re given the TLC and the expertise of Tecogen.  So they’re already profitable sites on a cash flow basis, they definitely make money and do they improve upon that and had I think about 6 million in revenues is what they bring to the table and at easing gross margins.  So similar to the gross margin the Tecogen has so it’s not a cyclical business. The change is quarter to quarter. It’s much more steady, so it’s almost like our service business, which is $8 million a year constant and grows like 5, 6% a year.  I think this is a similar business that’s very steady quarter-to-quarter and gives us a nice base to work from.

WSA: Right, and they also bring further experience to the management and technical team as well?

Bob Panora:  Certainly, well, they have some fine technical people that know metering and how to do all the billing and so on and so forth and how to build the demand and that brings something to table that’s important.  And they have, and some of their people are very qualified to install equipment and that helps our current business that we do installations and they’re located in the right place there in New York City area and they can be brought to be on our current installation business as well as any other new projects that come along.  So the people that we’ve got are very happy about that.

WSA:  Right, and in terms of New York you also had a recent partnership with WGL on another CHP project, which is a much larger one then the ones you guys have with the TTecogen agreement.

Bob Panora:  Right, so the Washington Gas group I think it’s a subsidiary or they’re part of the bigger gas companies certainly, but they have very good money available for doing qualified co-gen sites and we work through all the nuts and bolts of how to set up an agreement with them and it was a lot of work.  But now we have a framework template if you will, to do other projects with them.  And they’re good for us because they don’t have the highest expectation on rate of returns so they have a reasonable rate of return that would be met by a lot of sites. And they also have a tax benefit that we can take advantage of in calculating savings that’s very significant.  So they’re a good partner for us and we’re very happy how that worked out.  And we see them as a partner going forward for other projects that we certainly have the money.

John Hatsopoulos:  Near term they’re not going to be a fantastic transaction.  But a few years from now if interest rates go up or whatever that people would rather buy electricity rather than equipment, whether it’s going to happen two years from now or ten or two months from now I have no idea.

Bob Panaora: But yeah, so there is one more opportunity we have.  You also mentioned I don’t know did you mention TTcogen as well?

WSA:  Correct.

Bob Panora:  Yeah, so also another important collaboration we did was with a European company Tedom that’s very big over there in cogeneration.  And they have a product line that helps us a lot when we don’t have product namely a biogas product, and they also have a very small machine, 30 kilowatts that we can use to sites where our equipment is too big to be used.  And they also have a whole range of bigger equipment, much bigger than ours up to I think 4 megawatts, which would be 40 times the size of one of our standard product.  So the joint venture where we have with them is called TTcogen and we can now offer much bigger segment of the cogeneration market and also biofuel.  They’re also very expert on biofuel, and I believe all their products are dual fuel in the sense that they can run either on natural gas or biofuel.

WSA:  So, yeah, good to see that you guys are hitting on the milestones that we discussed in last year’s interview.  What are the key goals and milestones that you’re hoping to accomplish here over the next six to twelve months?

John Hatsopoulos:  Well, our goal is to continue to grow the company and especially with our technology on emissions, start applying it to other markets that we were not before other than cogeneration like forklift trucks, like improving the capabilities of generators that don’t have emissions problems.  So we think that the future is extremely bright for the company.  And now that we’re making money it makes our life a hell of a lot easier than when we were losing a lot of money trying to pay for all the lawyers and also technology that we developed.

Bob Panora:  Yeah.

WSA:  Certainly, so once again joining us today are John Hatsopoulos, CEO for Tecogen Incorporated as well as the Company’s President, Bob Panora.  The company trades on NASDAQ, ticker symbol TGEN currently trading at $3.33 a share, market cap is about 65 million.  And before we conclude here gentlemen to recap some of your key points, why do you believe investors should consider the company as a good investment opportunity today?

John Hatsopoulos:  Excuse me.  I don’t think I can do the math fast enough but we have 24 million shares outstanding and the stock is trading at $3.33 and its over 82 million of market cap.  You’re thinking pre merger, which would have been lower.

WSA:  Yeah, no problem, didn’t have time to crunch the numbers, but so yeah, can you elaborate on why you think the company represents a good investment opportunity?

John Hatsopoulos:  Well, it’s really interesting that the only technology that would compete with us or we compete with, is fuel cells, and fuel cells have market values not five times bigger but a hundred times bigger.  One of the companies that have similar emission technology or their goal is to have the similar emission technology raise capital in the billions, maybe one or two billion.  And here we are a little company with $80 million market cap with exactly what our fuel sale competitors are trying to get.  So we are the cheapest game in town.

WSA:  Well, we certainly look forward to continuing to track the company’s growth and report on your upcoming progress, and we like to thank you guys for taking the time to join us today and update our investor audience on TGEN.

John Hatsopoulos:  Oh, it’s a pleasure.

WSA:  It’s always good to have you guys on.

John Hatsopoulos:  Thanks.

Bob Panora:  Thank you Juan.

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