Q4 2023 Tecogen Inc Earnings Call

Participants

John Whiting; General Counsel and Secretary; Tecogen Inc

Abinand Rangesh; Chief Executive Officer; Tecogen Inc

Roger Deschenes; Chief Accounting Officer; Tecogen Inc

Alexander Blanton; Analyst; Clear Harbor Asset Management, LLC

Michael Zuk

Presentation

Operator

Greetings. Welcome to the TI co-gen year end 2023 conference call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the conference over to Jack Whiting, General Counsel and Secretary. Thank you. You may begin.

John Whiting

Morning. This is Jack Whiting, General Counsel and Secretary of Tecogen call is being recorded and will be of will be archived on our website at Tecogen.com. The press release regarding our fourth quarter and year end 2023 earnings and the presentation provided this morning are available on the Investors section of our website.
I'd like to direct your attention to our Safe Harbor statement included in our earnings press release and presentation Various remarks that we make about the Company's expectations, plans and prospects constitute forward-looking statements for purposes 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 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 we 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 will now turn the call over to our nonreg HTGCEO. who will provide an overview of fourth quarter and year end 2023 activity and results. And Roger to Shannon, Tecogen CAO, who will provide additional information regarding fourth quarter and year end financial results.

Abinand Rangesh

Thank you, Jack, and 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 does work with our strategy and what we need to do differently to reach profit 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 building for 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 customer's ability to expand the time of day chargers 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 co-generation 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 co-generation product, ease of interconnect with our modular indirect 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's also an opportunity to generate additional revenue from utility demand response programs because of these electrical capacity constrain. I'll talk a bit more about this later in the presentation. We've looked at the business carefully and feel that there is a pathway to having our recurring revenue stream cover the majority of our fixed costs, product revenue can significantly fluctuate quarter to quarter due to the long project development cycles. We need away to be cash flow positive and profitable irrespective of product revenue fluctuations. We increased the number of service contracts last year. As a result, we saw a 20% increase year on year in service revenue. We also took on another 48 service contracts earlier this year, 16 of those that are operating presently in the balance coming online over the next two quarters. We're currently working on more deals for service contracts that will significantly increase our service revenue and cash flow. We also made much-needed investments last year to replace engines and heat exchangers. This reduced our service margin for the first three quarters but we saw a recovery to greater than 50% in Q4. We also generated some cash in the fourth quarter as we make further improvements to our service fleet by increasing service intervals, we expect to see margin expansion from present levels.
On the other side of the equation, we need to cut operating costs. At present. We are focused on completing our factory move, we expect to see reduced rent after the move. We also expect to make other operational cost reductions to move us closer to profitability. We are specified on multiple large projects has mentioned before, we've had to pivot the business to nationwide projects, especially those that have electrical constraints. These are multiunit projects, and we expect to close a significant portion of these later in the year. As already mentioned, we need to move factory and reduce operating expenses. We expect OpEx reductions in Q2 and Q3. We have also started to work with customers to sign them up for Demand Response up programs. At the moment, there appears to be significant interest in this offering. This will provide high-margin revenue and utilize any excess co-generation capacity that is available in our service fleet. I will provide updates as we sign up customers. We are also working on securing more energy contracts in conjunction with development and finance partners, backlog and cash. The backlog is presently at $5.25 million. We have additional purchase orders from orders we announced last August, but these are cannabis projects and there's been continued financing delays. So we have removed these from our backlog. As mentioned, we also have some great projects in the pipeline, one of which is a large chiller project we are exclusively specified for this is not yet in the backlog. We hope to close this by June or July.
Cash position was 1.35 million at the end of Q4. And as presently at $1.5 million, we drew 500,000 into the credit line provided by the Board members. We expect to draw another 500,000 into this line for the factory move and fit out the timing of when we secured our recent 12 unit order and when our larger dealer orders likely to close is going to limit what we can produce in both Q1 and Q2, but we expect to be back to full capacity by Q3.
Our revenue segments, we have three revenue segments. Our product revenue consists of sales of co-generation units, microgrid systems and chillers to a range of markets and customers. Our services revenue primarily consists of our contracted operations and maintenance services. Our energy production revenue stream from energy sales, including sales of electricity and thermal energy produced by our equipment on-site at customer facilities.
I'll now hand over to Roger to go over the financial numbers.

Roger Deschenes

Thank you, Amit, 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, which is this represent 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 for mold 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 overall our overall Q4 23, 23 margin by 6.8%, excluding the charge that was recorded, our overall our 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 of 2023 from 3.8 million in the fourth quarter of 2022, due primarily primarily to the higher debt bad debt provision of $744,000 that was recorded on older install receivables from the iServer 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 we'll seek an extension of time with nice try 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 are up full year 2023 revenue was 25.1 billion, which is flat when you compare it to the 2022 results, see fiscal 2023 net loss was $4.6 million or $0.19 a share, which compares to a net loss of $2.4 million or $0.14 a share in the fiscal year 2022. The increase in the net loss is due to the lower gross margin and the increased provision for bad debt. Our overall gross margin in fiscal 2023 was 40.6%, a decrease of 3.7% from the fiscal 20 fiscal year 2022 gross margin, which stood at 44.3%. The current year, gross margin was negative, negatively impacted by the increased material and labor costs incurred to address engine replacements and for the and for the optically obsolete inventory provision that was recorded. Excluding the obsolete inventory charge, our 2023 overall gross margin would have been 42.2%. Operating expenses increased $1.2 million or 8.9% to $14.6 million in fiscal year 2023 from $13.4 million in 2022. This is due primarily to a $974,000 increase in the bad debt provision, which is resulting from a combination of the increased $744,000 bad debt provision that we recorded in the current year on the installment receivables. And you may recall that in 2022, we had a $300,000 bad debt recovery and which reduced our bad debt expense for that period. Further in 2023, we saw an increase in administration costs due to the maintenance contract acquisition, which impacted our insurance and vehicle expenses with regard to the EBITDA and adjusted EBITDA for the fourth quarter, the EBITDA loss was 1.7 million, and the adjusted the adjusted EBITDA loss was 527,000, which compares to an EBITDA loss of $1.3 million and an adjusted EBITDA loss of $1.1 million in the fourth quarter of 2022 as I previously previously discussed, the Q4 2023 results were negatively impacted by the installation of bad debt and obsolete inventory provisions that we report in this period.
For the half.
For the full year EBIT EBITDA, our EBITDA loss was $4 million in adjusted EBITDA loss was $2.6 million, which compares to an EBITDA loss of $2 million and an adjusted EBITDA loss of $1.7 million in FY 2022. The higher loss in the current year was driven by a lower gross profit margins due to the engine replacements and the one-time charges that we recorded against earnings. Appreciation and amortization expense increased in 2023 due to the addition of several vehicles and the amortization of the customer contract intangible asset recognized as part of the Aegis acquisition, our fiscal 2023 depreciation and amortization expense increased 139,000 from the 2022 levels.
Moving to the segment performance for the fourth quarter, our products revenue increased 77% quarter over quarter, and we saw increases in both our cogeneration and chiller products. Our products' gross margin decreased to 19.4% from 32.1% in the fourth quarter, and this is due to the obsolete inventory provision that we recorded. Excluding the provision, our products gross margin would have been 37.5%.
Services revenue increased 19% quarter over quarter due to the acquired maintenance contracts services gross profit decreased to 51.3% in the fourth quarter from 60.1% in the fourth quarter of 2022. And this is due primarily to the obsolete inventory provision and the higher material and labor costs. Excluding the inventory provision, our services gross margin in the fourth quarter of 2023 would have been 53.6%, which is more in line with our expectations.
Moving to the segment performance for the full year, product revenue decreased decreased 21% year over year. The chill revenue remained constant while the co-generation revenue decreased due to decreased demand. And As Dominic noted in an earlier observation that this is the co-generation market is being impacted by the tight gas sentiments. Product mix continues to vary year to year, but we expect to see demand for both co-generation and chiller products going forward to improve our products.
Gross margin decreased slightly to 33%, 33.1% in 20 fiscal 2023, which compares to 33.5% in fiscal year 2022. Excluding the inventory provision in the quarter. In 2023, our product gross margin would have been 36.7%, which is a slight improvement over the prior year. Our services revenue decreased. I'm sorry, in services revenue increased 20.4% year over year, which is due to the acquired maintenance contracts. And we also saw a 4.8% increase in existing contract revenue. For the full year 2023 gross margin decreased to 45.5% compared to 54.2% in 2022 and this is due to increased services, labor and material costs incurred to address the engine replacements and due also to the provision that was recorded for obsolete inventory.
I'll now hand over the call to Robert to review our 2024 plan.

Abinand Rangesh

Thank you, Roger. We have three phases to putting Tecogen on a pathway to financial health. First as 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 a truck industries, manufacturers' rep sell to engineers who then specify equipment into projects. However, in our case, we Allied 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 out what are some of whom are already selling complementary technologies such as modular chiller plants. We are in the middle of everything 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 waiting specified on multiple larger price. Second phase is to position us to take advantage of utility capacity constraints as more renewable energies 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 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 that has some wide-ranging capabilities that I'll talk about shortly.
The last phase is to use financing as a strategic tool to increase incremental sales using cooling as a service. If customers are able to upgrade their chiller plant using the savings from our product and ongoing maintenance was included, I believe this will act as a catalyst for growth. As I mentioned earlier, we recently launched ourself learning, intelligent control for cogeneration and chiller systems. This stuff three critical things. The first is that he learns of building seasonal load profile. So it maximizes run hours of equipment and also reduces the amount of energy that customers need to buy from the utility. So you can see by the chart on the left, you can see that the amount of power being bought from the utility has been minimized and the majority of the power and the building is coming from the VHBFS. by increasing run hours, it helps the customer increase savings and increases our service revenue.
The second is that it allows us to enroll systems and due to the demand response programs. When utilities are short of power, we can ramp up hundreds of machine simultaneously to behave like a virtual power plant and be paid by the utility the last primarily applies in the case of our hybrid chiller, we can arbitrage operating in electric versus gas, depending on time of day to optimize savings and greenhouse gas emissions. I'd now like to talk a little bit about cooling as a service, chillers and boilers have a finite life. So buildings have to replace boilers and chillers periodically, given that this is a large capital expense. In many cases, customers choose lower first cost alternatives and suffer the penalty of higher operating costs and higher greenhouse gas in this model. The customer uses the energy savings from our equipment to pay for the capital recovery of the upgrade. Maintenance can also be included as part of the monthly payment for the customer has a convenient way to own and operate a chiller plant. We are working with financing partners presently to secure projects under this model. As projects are signed, I will keep investors updated. We expect this model to convert more of our pipeline where first cost acts as a barrier to sale.
I'd like to summarize to say that we are continuing to increase our recurring revenue stream this is critical to reaching profitability. We are going to make operating cost reductions over the next two quarters. We are specified on multiple larger projects. So we expect to see product revenue raise in the second half of the year.
As some of these other developments come to fruition, I will keep investors updated via press releases or if needed, a on-pack follow on earning call.
At this point, I'll open the floor to any.

Question and Answer Session

Operator

(Operator Instructions) Alexander Blanton, Clear Harbor Asset Management.

Alexander Blanton

Good morning. At pointing out my my first question is you mentioned at the beginning of the call, headwinds in New York City clearly and cancellations of contracts. What is the reason for that?

Abinand Rangesh

So I believe a large part of that is driven by New York City becoming very, very empty gas and in particular, some of the city housing agencies becoming very Antik 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 hub and right now co-generation is no longer seen by the city as a viable way to reduce greenhouse gas emissions despite the fact that their significant greenhouse gas emissions. And as a result, those co-generation sections are being canceled from projects that were developed and actually, in some cases gone out to bid contractors.

Alexander Blanton

I've been selected Well, given that Kim can reduce the greenhouse gas emissions substantially are almost completely or is there still the anti science? What is the reason that they're doing?

Abinand Rangesh

Yes.
So this is something that hit hard to tell. But I think there is what is happening in the background is we are working with other CHV. lobbying groups do make this case. I believe there will be exemptions made, especially under Local Law 97 for co-generation 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 that were well along the way and some of these got canceled right up the Q. three at the end of Q3, early Q4 for the cancellations driven by by local political considerations the city government ordered the two buildings to cancel the contract. So it is being driven in some cases by the local political considerations by New York City. And because these projects a lot of these were paid. The funding comes from the city itself. No, they are essentially pulling the plug on any funding for co-generation built into in building redevelopments and improvements are there city regulations established to prohibit?

Alexander Blanton

We used some gas for this purpose at this point? Or is that just the funding?

Abinand Rangesh

It's really in this case. So there is some regulation with regards to prohibiting gas in city buildings.
And there are certainly multiple definitely the city buildings are privately owned.
So there any so there's two pieces that New York City has passed with a local one is a four city buildings.
There's the earlier date in which any renovation cannot include. In 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 CAT, but there's a there's more to it than that. But this is really driven by the funding itself.

Alexander Blanton

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

Abinand Rangesh

Yes. So we did included both last year in our 10 K like all our 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 yet our lease in our current facility is expiring at the end of March, and we see the new location as better setup for our operations. It gets those the flare, the factories better laid out allows us to do better chiller production and will allow us to reduce our rent.

Alexander Blanton

Okay. But and finally, the adjusted EPS without these charges well, the fourth quarter, what was it would be?

Abinand Rangesh

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

Alexander Blanton

So right, when I was looking for EPS, I can point out that yes, yes, you do it here?

Abinand Rangesh

Yes, it's going to be around $0.03, $0.03.

Alexander Blanton

Okay.
Thank you.
That's a decent loss.

Abinand Rangesh

I mean, yes, $0.03 last year first.
Okay. Sorry.

Alexander Blanton

Thank you.

Operator

(Operator Instructions) Michael Zuk.

Michael Zuk

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 hope state taxes are doubling.

Roger Deschenes

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

Michael Zuk

It seems like that's an impediment to do business in New York, as I said, a market access partner also on the balance sheet under the liabilities section, there is a current acquisition liability of 845,000 and an unfavorable contract liability in the current year of 176,000. What are those amounts or those amounts payable this year, is that a cash item?

Operator

And for the due diligence speaker line, could you please check if yourself muted yourself?
Al?

Michael Zuk

Hello.
Can you hear me now.

Operator

Hello, we can hear you, Michael. I just can't hear the speaker line right now. Are you self muted?

Michael Zuk

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

Roger Deschenes

Michael, can you hear me if I didn't hear you.

Michael Zuk

Can you hear me?

Roger Deschenes

Yes, I can hear you. I think were good.
Okay.
Can you hear me now is Roger?
Michael, you're right.

Operator

We are okay.

Michael Zuk

On impulse buying banks are right on the liabilities and and stockholder equity line. There's an acquisition liability current and an unfavorable contract liability current are those cash items to do this year.

Roger Deschenes

Okay.
So the first one, the acquisition liability current that Mike, that has to do with as I was mentioning, when we acquired the agent contracts, we reviewed the fleet of engines and noted that there were some some delays in actually some engines that were operating. And so under the accounting rules were permitted to come to record a liability as of the date of acquisitions. So and in some cases, the so the in terms of the cash flow on that, there will be some money spent this year in all four of those were to replace some of those engines they want. It's not 100, 45,000 is probably more in 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 determination that the the on the expected profit from the contract wasn't up to what we see and we had expected it to be. So again, under the purchase accounting rules, you're permitted to record a liability at that time. And this liability, Michael, is really just it's a non-cash charge. I mean, it's a non-cash benefit actually because we debit the liability, we credit our amortization expense. So there's not there's no cash being issued to to relieve that liability.

Michael Zuk

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

Roger Deschenes

Okay.
So then the on the other I'm sorry, the other aspect of the acquisition liabilities I didn't discuss. It also has to do with some we as 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 the other the whatever revenue levels are achieved. So at the time of acquisition, we record the anticipated on on color royalty that will be paid over seven years using a discounted cash flow model and record what we anticipate anticipate to pay in occur in one year's time as current liability than 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 item. The liability will be reduced noncash method.
As Mike told, you are aware, the percentage that we pay agents 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 that's more you're doing.

Michael Zuk

Okay.

Roger Deschenes

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 there at all.
This was the EuroSite shares that Tecogen as owned for many years so day, we have the mark to market. So we have a 1.8 million shares of EuroSite Power and it fluctuates and we have to mark-to-market.

Michael Zuk

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

Abinand Rangesh

So I think this is one where we will at some point sell it. It is while 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 and order, getting this move done, getting ourselves, getting our costs under control first. And then I think we will start optimizing the other aspects but I feel like these are like the business has to stay very, very focused on getting these items resolved first.

Michael Zuk

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

Abinand Rangesh

Yes.
So Tigor, 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 felt recently, but there's chillers from the 1980s that had a 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 Palm Healios and 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, we 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 debts 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 right off at this point.

Michael Zuk

And then with regard to the bad debt provision group, 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.

Abinand Rangesh

So in this case, there were really nice sort of 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 if the rebate becomes at risk in some cases, a customer actually even remove the units. So we are going to take, yes, we're going to use legal means to take collection efforts. And we, I believe, will recover a portion of the money again the amount that will be recovered uncertain the cost to recover, 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 like it was getting harder and very unlikely collect these portions. So we chose again, do write it off at this point, but we're not going to we are going to continue collection efforts to collect as much of that money as we can.

Michael Zuk

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 the way it works.

Abinand Rangesh

So in this case, Tutogen was actually discounting the value of the project by that anticipated end and rebate.

Michael Zuk

So the no radical quick here and yes, and hence in the future, we shouldn't we shouldn't do that. I mean to get the rebate, I get the full up front price and then a partner if the rebate comes you can negotiate accordingly.

Abinand Rangesh

I totally agree with you on that one.

Michael Zuk

And then finally, clearly you said that we are now emphasizing a lot.
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 we're talking to engineering firms? What are we doing to widen our national market effort.

Abinand Rangesh

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 rate.
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 tradeshows really targeted at the vast needs 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 co-generation technology. We are also looking at making advertising in again, these kind of process type application magazine specialist trade publications, writing articles to educate customers and were lastly in the process of updating our website to also make it much more market driven so that we could customers looking for, let's say, a chiller for a brewery fair searching for that on the Internet will be one of them com 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 segments relevant.
And then of course, we we do work with engineers.
We do a lot of lunch and learns. We're trying to educate them on the benefits of our technologies, especially some of the engineering firms that operate in multiple states. We're trying to get to as many of the regional offices as we can. And 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 that. 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 it is coming from some of the engineering community and some of the consultants that work in this space.

Michael Zuk

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 co-generation area or do we have generalists that apply their knowledge across those different segments?

Abinand Rangesh

So we do have there's a little bit of overlap on the two it on the engineering team. We there are some 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 both our key sales team have sold both co-generation and chillers. They're still worse than that. But there's definitely some overall mid market specialization on a couple of the members 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 there supports that market.

Michael Zuk

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.

Abinand Rangesh

So that is definitely an expansion opportunity.
But what we have done and actually I'm glad you mentioned that we've hired some sales people for the service side long and where there's an immediate need, it's 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, we'll add a significant amount to our service revenue and more importantly, to 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. I think eventually we might look to service other pieces of equipment, but just expanding the box, doing some of those as billable work is going to give us significant increases in sales.

Michael Zuk

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's a mine approaching this correctly.

Abinand Rangesh

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 and those plants have enjoyed over question, it sounds to me like we should be making a monumental effort in that in that segment because we're already on site and it's just a matter then of increasing what we perform on that side.
Yes. So stay tuned on this, I will be providing more updates in this space.
This is definitely a huge priority for me, and we do kind of increase that stream there.

Michael Zuk

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?

Abinand Rangesh

Yes, the way I look at these next two quarters is 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 and securing more service contracts and some of those billable work for 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 up Q three, we should be back on at full steam and on all all aspects of it. And then when we do the Q. one earnings presentation. I'll talk a little more about the operating cost side of things and what we're really trying to do 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 positive and profitable.

Michael Zuk

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

Abinand Rangesh

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

Michael Zuk

Thank you.

Operator

Alexander Blanton, Clear Harbor Asset Management.

Alexander Blanton

You talked about the different markets outside the New York nationwide. Could you characterize each of the last two orders that you announced publicly. Could you it tell us where those are and how they fit into that plan?

Abinand Rangesh

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

Alexander Blanton

These are potential orders you're talking about.

Abinand Rangesh

It was there were some last year, so there was there were some last year that shipped to Missouri, but now we have some potential orders into 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, Illinois, Texas, those kind of things. The.
Yes.
So we're seeing staff projects all over the country right now.

Alexander Blanton

I think that's very encouraging.

Abinand Rangesh

Yes, 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.

Alexander Blanton

Okay.
Thank you.

Abinand Rangesh

Thank you.

Operator

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.

Abinand Rangesh

Thank you for your participation and enjoy the rest of your day.