Tecogen Inc. (TGEN) Earnings Call Transcript

Greetings, and welcome to the Tecogen Q2 2026 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jack Whiting, General Counsel. 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 second quarter 2026 earnings and the presentation provided this morning are available in 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 of the Safe Harbor provisions of 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 Q2 2026 earnings and on our website. I will now turn the call over to Abinand Rangesh Tecogen's CEO, who will provide an overview of the second quarter 2026 activity and results; and Roger Deschenes, Tecogen's CFO, will provide additional information regarding Q2 financial results. Abinand?

Thank you, Jack. Welcome to Tecogen's Q2 2026 call. Today, I would like to start with the key question that many of you may be wondering about. Given that Tecogen has been working on the data center strategy for a while and the product seems to make perfect sense for the market, what is taking so long for orders to close? Is there something missing in the story? To answer those questions, I believe we need to start with the objective. In my view, the objective is, what is the fastest way to maximize the value of Tecogen, given we have great technology but have resource constraints as a small company. Originally, our strategy was to target smaller data centers. We could then use that as a reference to get the bigger names interested. As we got bigger names interested, the company's technology starts to become incorporated by big-brand data centers, and now we have technology that everyone wants, making Tecogen very valuable. Now we may have an opportunity to go straight for the end goal, which is the hyperscale and big brand developers. In March this year, I shared an opportunity pipeline with you. Many of these opportunities were with data centers that were of smaller scale. While many of these projects will likely close, these projects are subject to external factors such as tenants, delays in construction permits, et cetera. The big -- brand data centers don't have the same limitations. In addition to these smaller opportunities, we have been simultaneously working on access to the larger names. It has taken an enormous amount of work on the part of our sales team to make inroads on some of the larger names. But now I believe we have managed to gain some serious traction. Over the last 2 months, we have hosted 12 product demonstrations, 6 in-person and 6 virtual. The in-person group included 4 data centers that are hyperscale or build-in hyperscale campuses and partners. The virtual visit group included chip manufacturers, engineers and another 4 data centers. These data centers collectively represent greater than 8-gigawatts of data center capacity operating today and multiple gigawatts in construction. Although I cannot tell you the names of the data centers that attended, I'm sure you will know many of them. To put this into perspective, the data centers that attended, either virtually or in person, collectively represent 15% to 20% of present data center capacity in the U.S. The natural question at this point is, does attending this product demonstration show any real commitment or interest? For the in-person group, given how busy data center engineers and senior level people are, locking off the whole day for multiple people is a significant commitment. It has taken many months of finding the right internal champions with influence at these larger companies and educating them on the value of our products before we got to this point. Second, beyond the list that attended, we are talking to other large and hyperscale data centers. The ones that are earlier in the process declined attending. This is consistent with our experience in other markets where once a potential customer attends a site visit, our close rate is usually high as they are serious about entering a business relationship. Lastly, I think the market has also evolved. In addition to power, there are some key challenges that the bigger data centers are facing that our products solve. As you may have read in the press, many data centers are facing opposition for on-site water use, noise and air pollution. Here's where our products really shine. We solve all three problems. The dual-power source chiller is closed loop, so there's no water evaporation. Our products already operate in noise-sensitive environments, such as on rooftops next to penthouse apartments. Recently, during the scorching 4th of July weekend, black smoke could be seen in Northern Virginia from continuous diesel generator usage from data centers. Diesel generators were being used to avoid a blackout as the utility grid was running out of power and forcing data centers to shed load. Therefore, unlike a diesel generator that attracts noise complaints and pollutes, data centers can install our products without worry. This is where seeing a product demo brings these benefits to life. There is a difference between seeing a data sheet with a [indiscernible] reading and hearing our products in person or reading about near-zero NOx and carbon monoxide emissions versus seeing the readout from an emissions analyzer in real time. There's also a big difference between saying you can add extra megawatts for compute during hot days versus watching in real time a jump in cooling load and seeing the electrical power remain capped or saying you can provide uninterruptible cooling during a power outage versus watching someone shut off the electrical power to the chiller while it's running. These big name data centers have permitted projects, capital and the ability to shape the whole industry. The feedback has been extremely positive across the board and specific projects, delivery dates, et cetera, have been discussed, but we feel confident enough to begin building some inventory of our dual-power source chiller and power gen modules to get a head start. In addition to the data center push, our base business backlog now stands at greater than $8 million. In addition to what is already in backlog, we expect a further $2 million to $3 million in projects to close over the next few months. This means we expect Product revenue to increase in Q3, and we expect to collect more deposits, improving cash flow. Although our focus has predominantly been on our Data Center strategy, during the last call, we mentioned that we expected to reduce expenses in our Service group to increase margins. During Q2, these reductions were made mid-quarter, so the full impact will be seen beginning in Q3. Onetime costs in Q2 reduced margin by around 7 percentage points. Without these onetime costs, margin is starting to recover in Service. In addition to cost reductions, we have also started to make contract pricing adjustments where appropriate and are working with customers, especially on larger sites to make improvements that would help them increase run hours and help us increase revenue and margin. Given that our Service revenue was substantially higher year-on-year, this continuous improvement is expected to result in higher margins and therefore, a significant increase in gross profit dollars. I'll now hand over to Roger to talk about the financials.

Thank you, Abinand, and good morning, everyone. I'll begin with the results for the second quarter. Our total revenues decreased 21% or $1.5 million in the second quarter to $5.8 million compared to $7.3 million in the second quarter of 2025, and this is due mainly to lower Product segment revenue. As Abinand indicated just moments ago, we expect revenue to increase in the third quarter based on the recent increase in our backlog and the anticipation of expected projects that we'll close in the next few months. Our gross profit decreased 11.9% to $2.2 million in the second quarter of 2026 compared to $2.5 million in the comparable period in 2025. And again, this is due to Products segment revenue. Our gross margin increase -- our gross profit margin increased, excuse me -- by 4% to 37.8% in the second quarter of this year from 33.8% in 2025, and this is due to improved products segment gross margin. Operating expenses increased 11.6% in the second quarter to $4.3 million from $3.9 million in the second quarter of 2025. And this is due to increased operating costs in both our Products and Services segments and the general increase in operating costs incurred for the manufacturing capacity expansion that we're undergoing and the continued development and refinement of our Dual Source Chiller, which, as we all know, is focused on our entry into the data center market. During the just concluded quarter, we reduced headcount at a few of our Service centers as we work to reduce our spend there. Overall, operating expenses decreased approximately $400,000 in the second quarter of this year compared to the first quarter. Our net loss for the quarter increased to $2.2 million from $1.5 million in the comparable quarter in 2025, and this is due to lower products segment sales and gross margin and an increase in operating expenses. Moving over to adjusted EBITDA for the quarter. The adjusted EBITDA loss was $1.7 million in the second quarter of this year, which was higher when compared to last year's loss of $1.2 million, and this is due to lower Products segment sales and gross margin and higher operating costs. Moving to performance by segment. Products revenue decreased 64% to $1.1 million in the second quarter of 2026 from $3.2 million in the second quarter of 2025. The revenue -- Product segment revenues last year benefited from the shipment of Cogeneration Systems during this period to customers seeking tax credits from the Inflation Reduction Act of 2022. As we have discussed in the past, Product revenue has significant variability quarter-to-quarter. Our Products' margin -- gross margin increased 19.2% to 48.5% in the second quarter of this year from 29.3% in the similar quarter of 2025, and this is due to price increases and change in product mix. Our Services revenue increased 10% quarter-over-quarter [indiscernible] 2026 to $4.4 million, which compares to $4 million in the second quarter of 2025. And this is due to higher billable activity and higher operating hours of our equipment from both our existing Service contracts and our Aegis acquired contracts. Our Service gross margin was essentially flat compared to last year. During the second quarter of this year, as I indicated, we spent approximately $300,000 of onetime costs at a handful of sites that we service, which are electric chillers as part of the energy sites that we sold to SDCL Kyotherm in 2029 (sic) [ 2026 ]. In fact, one of these electric chillers had a catastrophic failure at the start of the cooling season and needed significant repairs and the additional cost of rental cooling during the time the systems were being repaired. Excluding this onetime cost, as Abinand indicated earlier, our gross margin from our Service operations would have been 7% higher in the 2026 period. Our Energy Production revenue increased 35% in the second quarter of this year to $0.24 million from $0.17 million in the 2025 period, and this is due to increased uptime at certain Energy Production sites. The Energy Production gross margin -- gross profit margins decreased to 9% in the second quarter of 2026 from 25.2% and this is due to the guaranteed shortfall of just under $100,000 that we recognized in the quarter. I'll now hand the call back over to Abinand for closing remarks.

Thank you, Roger. At this point, there are two conclusions you could reach. The first is that it has taken a long time today, so [ today ] the company's prospects in the data center market are slim or the second, that it has taken a while to navigate the data center landscape and get access to the right champions of the largest data centers. Now that we have the potential addressable market is massive. After all, why would some of the largest data centers bother to take a day out of their busy schedules to attend a product demonstration. Given that we now have a range of opportunities from small data centers to the largest players, what is the likelihood that nothing closes, especially if we have some inventory on hand and delivery risk is eliminated. If we land even a pilot project with a big brand data center, what does it do to our prospects industry-wide? Management and the Board have consistently bought stock because we believe the company has technology that solves some fundamental problems facing not just data centers, but a whole host of markets. You decide which conclusion makes most sense. Thank you, and I'll open [ for ] questions.

[Operator Instructions] Our first question comes from the line of Bobby Brooks with Northland Capital Markets.

So very exciting to hear about the 12 demonstrations. I wanted to unpack that a little bit more. Were all 12 demos with 12 different potential customers? And you disclosed having those 6 demonstrations at the beginning of July, so had another 6 over the last month. Was there any acceleration in that? Just curious to hear more there.

Great question, Bobby. So out of the 12, 8 were potential direct end customers. The rest were engineers or other people, either designing data centers or partners that could help us accelerate some of that. So really that have key influence on the end result. And then one of them was one of the chip manufacturers. So generally, it was all high-profile visitors. Definitely, what we tried to do with regards to the scheduling was to schedule the most important ones towards the end, just so we got better practice with the demonstrations as well. And it just so happened that's how the schedule works. So we gradually escalated in terms of size towards the -- so which is why our press release earlier in July probably showed a lower installed capacity, and we had more towards the end.

Got it. That's helpful. So 12 -- so it was like 12 different customers across the 12 visits?

Yes. So exactly 12 different entities.

Got it. And then when we spoke after the last print, you mentioned how the larger data center operators were sort of split in two, both interested, but group one, let's say, would learn of the capacity limits you currently have and sort of lose interest and say, call me when you can do more. But then interestingly, you had mentioned that, that second group were some who were seemingly willing to scale up with you. So I wanted to follow up there and hear, is today's commentary on these larger potential customers a sort of evolution of that second cohort getting more comfortable on the technology? Or just any additional color you could share on that dynamic?

Yes. Yes. No, that is a great question. I believe once -- again, when people come for demonstrations, there's generally a certain level of interest, right? The way at least I think of the sales process, you've got two portions to it. The first part is getting the interest up to the point that somebody says, this makes sense for me. And then the second part of it is, of course, reducing the -- anything that might add friction to it or might act as a negative to them not closing the deal, right? And out of that capacity is one of them. That's part of why we're starting to build some inventory, so we can cut the lead time and we can turn these things around without having to tell somebody, you need to give us an order right away, and this is our lead time, right? We can start getting a head start on some of that. Having said that, I believe based on all of the discussions that we had during these meetings. Again, the advantage of having, especially the ones in person is you get a decent amount of time to really probe their requirements and what they're looking for and where they're thinking. We're starting to find, I think, applications that we could essentially start small and grow with them. That is also one of the advantages of these bigger data centers that have existing locations because you could either add almost as a retrofit as a pilot or you can do it as part of one phase of a bigger project. So there's ways to do this without having to have all that capacity upfront. And we believe that this is -- the capacity issue, although is important, I think there's a way around it in this case, but we will see as further discussions go forward.

That's really helpful color. And then maybe just on building that, the building capacity ahead of orders as the confidence has grown. I was just curious to get a sense on the size of that and how much that might cost?

I'm not sure I can comment on that exact number, but I'll give you kind of how we think about it. What we're thinking about is what would people want, let's say, in the very end of this year towards the early part of next year, right? What's sort of a rough number that -- and then if we can -- if we, let's say, have three or four different potential customers saying, I need roughly this amount of capacity, then we'll say, okay, our odds -- if we build x amount, then we'll sell it to at least 1 out of the 3 or 1 out of the 4, right? We -- our odds are good in terms of getting that sold. So that's how we're thinking about it in terms of risk, cash and in terms of also timing because I think part of the issue I'm sure everybody is thinking about is what does this mean in terms of cash flow and inventory. And if we time it right, in theory, we should be able to bridge -- we won't necessarily need to put up all the capital upfront, right? It's -- if you look at the timing of when these things could potentially be shipped or delivered, that's what we're hoping for. But even if it ends up slipping a little bit, that -- it allows us to manage the risk versus the cash flow.

Our next question comes from the line of Eric Stine with Craig-Hallum.

So maybe first, talking about those 12 demos. Just curious, is there a way to think about that, which opportunities you may pursue under the Vertiv relationship or not? Or is that even the right way to think about this? I mean, is that kind of a separate path?

I'd say the two are parallel paths. Pretty much all of this -- all the demos that came were arranged through us and our sales team and our marketing efforts. We, of course, if it makes sense in these projects, there are places where it may make sense to collaborate. But right now, those are all -- came from our marketing efforts.

Got it. And then maybe sticking with Vertiv. I know you got the initial order. Just curious if you can speak to both the progress towards finalizing the MPA? And then also, I know you've talked about in the past that Vertiv was specking you into, I think, 25 to 50 megawatts of projects. Maybe if you could just give an update on where those specific projects stand?

Yes. So one thing on this particular call, we -- as we mentioned anything, of course, on either party, right, we have to get prior approval on both sides. In this particular case, I talked to my counter-parties, and we decided that let something close so that we save the approval process with Vertiv for something that's more substantial. So at this point, I can't comment too much on that without -- so I think stay tuned, let things happen, and we'll announce deals as they happen.

Okay. But beyond the deals, in terms of just progress towards the MPA, I mean, is that just still in process?