Tecogen - Q2 2023

Transcript

Operator (participant)

Greetings. Welcome to Tecogen's Q2 2023 conference call. At this time, all participants are in listen-only mode. Question and answer session will follow the formal presentation. If you'd like to ask a question at that time, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to Jack Whiting, General Counsel for Tecogen. Mr. Whiting, you may now begin.

Jack Whiting (General Counsel and Secretary)

Good morning. This is Jack Whiting, General Counsel and Secretary of Tecogen. Please note, this call is being recorded and will be archived on the Investors section of our website at tecogen.com. The press release regarding our Q2 2023 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 the earnings press release presentation. Various remarks that we make, may make about the company's future 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 these forward-looking statements as a result of various important factors, including those discussed in the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q under the caption Risk Factors, which are on file with the 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 at some point in the future, we specifically disclaim any obligation to do so. Therefore, you should not rely on any forward-looking statements as representing our views as of any date subsequent to today. During this call, we will refer to certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in the press release regarding our Q2 2023 earnings and in the Investors section of our website. I'll now turn the call over to Abinand Rangesh.

Abinand Rangesh (CEO)

Thank you, Jack. Before I proceed, I'll just introduce everyone that is on the call with me today. Firstly, I'm Abinand Rangesh, the CEO of Tecogen. You also have with me, Robert Panora, who's our Chief Operating Officer and President, and you have Roger Deschenes, who's our Chief Accounting Officer. Firstly, welcome to our Tecogen's Q2 2023 earnings call. In the last couple of calls, I laid out our objectives and plan. In order of importance, a focus on cash flow, followed by revenue and marketing, and lastly, margin and cost. I'll start by giving an update on where we are with regards to meeting these objectives. Roger will then take us through the financials, and then I will wrap up with our next steps. We saw tremendous growth toward the above objectives.

Revenue has grown 25% since Q1 2023 and 5% since Q2 2022. We generated cash from operations and finished the quarter with $1.87 million in cash. We started the quarter with $1.6 million in cash. Our current cash position is presently approximately $1.2 million, over the next 30 days, we expect to collect more than $3 million in customer deposits in addition to our regular receivables. Our backlog has steadily increased and presently sits at $11.3 million. This backlog is predominantly CEA or indoor agriculture. As you may have seen from our press releases, we established some new sales relationships with companies that are selling complementary products in the same industry. We also received favorable write-ups and have begun advertising in the Vertical Farm Daily publication, which has helped increase our exposure to the CEA facility owners.

We expect to take a similar targeted approach in other market segments, such as ice rinks and process cooling, where our equipment offers tremendous savings. We expect to turn the strong backlog into product shipments and reduce inventory levels in Q3 and Q4, further freeing up cash. We also completed the Aegis service contract acquisition and saw an increase in our services revenue of 29.6% quarter-over-quarter. The sites performed well, and the service technicians we took on as part of the transaction are well on their way to being integrated with our team. One thing to note is that the total present value of the consideration to be paid to Aegis is accounted for as a liability on the balance sheet and amortized on the P&L over the life of the agreement. Roger will explain this further when he goes over the financials.

Lastly, the air-cooled chiller marketing continues to progress with customer interest. Although we have not yet received purchase orders, we are specified on multiple projects and expect to start seeing orders for this product soon. We presently plan to focus on shipping our current backlog first before shipping air-cooled chillers. Now that our order backlog is increasing, our next steps are to start increasing margin so that we can move towards profitability. I'll talk more about what we are doing to increase margins after Roger reviews the financials. I'd like to do a quick recap of our products and our business before we go over financials. We have three value propositions for end customers. The first is power generation and resiliency. This is electrical cogeneration for energy savings and in some cases, for backup power in the event of a blackout.

We use a natural gas engine to generate electricity and use the engine heat to produce hot water for the building. We are twice as efficient as an equivalent fossil fuel power plant, as we are able to use the heat, so have a much lower greenhouse gas footprint. The second is our clean cooling products. These products generate chilled water and hot water simultaneously. In applications that require climate control, such as healthcare, CEA, et cetera, we are the cheapest source of producing cooling and humidity control. Typically, the highest cooling load occurs in the summertime, when natural gas prices are lowest. We also offer customers substantial energy savings. In addition to energy savings, our chillers require little to no electricity to operate, so are ideal for applications where utilities are unable to supply sufficient power.

As with electrical cogeneration, our greenhouse gas footprint is cleaner than an equivalent electric chiller and boiler combination, since most fossil fuel power plants are not utilizing the waste heat. Both our electrical cogeneration and clean cooling products benefit from up to a 40% investment tax credit that reduces the payback substantially. Our last value proposition to customers is our long-term service contracts. Our service centers provide end-to-end maintenance and allow customers to maximize their energy savings. Our typical maintenance contracts run for longer than 10 years, and we optionally provide ancillary services to maintain balance of plant. This is an area that our strategy will focus heavily on. We plan to increase the range of services that we offer to customers and also increase the number of sites that we service. We have 3 revenue segments.

Our product revenue consists of sales of cogeneration units, microgrid systems, and chillers to a range of markets and customers. Our services revenue primarily consists of our contracted operations and maintenance services. Our energy production revenue stream is from energy sales, including sales of electricity and thermal energy produced by our equipment on-site at customer facilities. At this point, I'll hand over to Roger to review the financials.

Roger Deschenes (CFO, Chief Accounting Officer and Treasurer)

Thank you. Thank you, Abinand. Good morning. Our top-line revenue was $6.7 million in the Q2 of 2023, which compares to $6.4 million in the Q2 of 2022, an increase of 5%, which is due primarily to increased services revenue. Our net loss for the Q2 of 2023 was $780,000, or $0.03 per share, which compares to a net loss of $856,000, or $0.03 per share in the Q2 of 2022. Our gross profit increased 4.8% in the Q2 of 2023 to $2.8 million from $2.7 million in Q2 2022. This is due to increased revenue.

Operating expenses increased 2.7% in the Q2 of 2023 to $3.6 million from $3.5 million in the Q2 of 2022. This is due primarily to incremental costs, which resulted from the Aegis acquisition, which increased operating expenses by approximately $190,000 in the aggregate, and expense increases were predominantly payroll and related employee benefits, business insurance, and depreciation and amortization. Moving to slide 9. For the Q2 of 2023, the EBITDA loss was $583,000, and the Adjusted EBITDA loss was $592,000.

As mentioned earlier, the depreciation and amortization expense increased in the 2023 period, which is due to the addition of several vehicles and the amortization of the customer contract and tangible asset recognized as part of the Aegis acquisition. The combination of these two additions to our assets increased depreciation and amortization by approximately $66,000 in the Q2 of 2023. In terms of performance by segment, our overall products margin increased to 33.8% in the Q2 of 2023, from 33% in the comparable quarter in 2022. Our chiller margin has recovered to just above 37%. Our induction-based system cogeneration margin, although better in the Q1 of 2023, are below our, our expectations. Abinand will talk more about our plans to improve margins in the next slide.

Services revenue increased 29.6% quarter-over-quarter. Existing contract revenue increased 9%, and the balance of the increase for our services revenue was from the recently acquired Aegis service contracts. Our service margin was lower, which decreased to 47.5% from 51.7%, which is due in part to engine replacements, as supply chains have eased up somewhat for engine components. We expect services margin to be temporarily lower for the balance of the remainder of this year, but anticipate they will recover to previous levels, ranging in the low to mid-50% by the early part of next year. I'll now hand the call back over to Abinand.

Abinand Rangesh (CEO)

Thank you, Roger. The Aegis transaction has been successful and has increased our recurring revenue. Our sales backlog is also increasing. Our next focus needs to be on margin. As mentioned last quarter, we have implemented better metrics to track business performance. This is going to allow us to catch cost excursions quickly. Our approach to increasing margin is also going to have to come from multiple avenues. With regards to product margin, we will be increasing prices for some of our products. We are in the process of analyzing which parts can be common across our product lines to minimize inventory variation and also improve our purchasing power. We are also looking at places where we can reduce product complexity to further increase margins. With regards to service margin, we have raised prices on contract renewals and will continue to do so.

Utility, utility rates have increased substantially in many of the regions we operate in. We believe we can raise our service prices commensurate with utility rate increases. We are also quoting billable work to customers to service items that are required for our equipment to interface with the building. For example, items such as pumps and heat exchangers will not only increase runtime, benefiting the customer savings, but is also an added source of high margin, recurring high margin revenue for the company. We are also working on increasing service intervals by increasing oil reservoirs so engines can run longer between preventative maintenance intervals. This will allow us to have more revenue per technician. We also continue to look for ways to extend life of critical components like cylinder heads. We're also attempting to reduce wear and tear by improving runtime algorithms.

At this point, in summary, I would like to reiterate the areas that we're focused on. We're gonna be freeing up cash to stabilize the business, continue to grow the revenue and backlog, and lastly, we're gonna be focused on increasing margins for both service and products. I think Tecogen is at a turning point. The company has impressive technology and a business model that generates consistent cash flow over the long term. However, in order to grow significantly, we need to make some major changes. With our new marketing efforts, including finding new sales partnerships, advertising and writing articles in targeted publications and social media, the potential for higher utility rates nationwide, resulting in improved savings and continued improvement of the products, I'm confident that Tecogen has a promising future. Any questions?

Operator (participant)

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 to ask a question. Thank you, and we'll pause a few moments to assemble the queue. Once again, that is star 1 to ask a question at this time. Thank you. Our first question is from the line of Peter Sidoni of Sidoti & Company. Please proceed with your question.

Peter Sidoni (Company Representative)

Hi, I'm new to the story, but I have a couple quick questions. One, can you tell me, how do you sell your product? If it's a direct sales force, are you increasing the sales force at this point in time?

Abinand Rangesh (CEO)

Hi, nice to meet you, Peter. We have a internal sales force, but a large focus right now for the company is actually using external partners and reps. Some of our chillers are sold through traditional HVAC reps, where we have multiple reps all over the country. With the chillers, we also, as I mentioned earlier in the call, we are establishing some relationships with companies that have similar products. For example, they're doing, you know, controls in indoor agriculture, or they're doing modular chiller plants. They're already looking at projects, and they're developing projects, and we basically sell our equipment to them, and they integrate it as part of their broader offering.

We feel that is an avenue that actually could help the company grow substantially, because there are multiple sectors where there are these project developers or partners who are building, who have other complementary products that could actually fit very well with our offering. With the cogeneration product line, in the past, there has been a direct outreach to end customers and sales directly. More recently, a lot of it has been coming through various project developers who have been working with our equipment, and they design projects around our equipment. Lastly, the area that does sometimes bring projects are the engineering community, where This is where sometimes our sales force will go work with various engineers all over the country, teach them about our products, the energy savings that exist.

Engineers, at this point, when they come across customer projects that might have a potential for either a cogeneration system or an engine-driven chiller, will design it into the spec of the project. At this point, typically it'll go out to bid and various contractors will bid on it. There, there are multiple avenues. We try as much as possible to use external sources to do the project development, just because that's likely to help us grow faster as a company without having to build up a very large internal sales force.

Peter Sidoni (Company Representative)

Okay. Can you talk about your competitors?

Abinand Rangesh (CEO)

Sure. In terms of the, I'll start with the, the chiller side of things, and then I'll talk about the electrical cogeneration. The chiller side of the product range, we compete against, you know, traditional electrical chillers, you know, in some cases where they, you know, where you're dealing with the Daikin, the Trane, some of the large chiller manufacturers. Typically, when you end up with a project where you have this combination of heating and cooling required at the same time, as long as the customer is not averse to going with gas, we find that there's actually not much no real direct competition, just because our savings are so much larger. Like, an electrical chiller is typically a cost on the customer, whereas our system will typically reduce their overall energy expense.

That ends up being a, there's no direct competitor in that space, especially in some of these markets, such as CEA. With regards to the electrical cogeneration, you have various competitors at various size ranges. At the very small size range. We, we typically operate between 75 kilowatts and 1 megawatt. Below that size range, we used to have, there are some Japanese companies and some European companies that, that compete in that space. In the size range that we typically operate in, there are competitors, that, you know, you have some German companies that operate in that, in that size range. There's 2G, there's a couple of different European engine-based systems.

The place where we shine and where we really have an advantage over a lot of these other entities, is when you're dealing with an urban environment. A lot of those systems tend to be noisier, much harder to integrate with the utility grid. 'Cause we have an inverter-based technology, we also have an induction-based technology, which allows you to integrate with the utility much, much easier compared to some of these other systems. Then we're also designed, you know, our systems were designed from day one to be much quieter than a competing offering, and they're also designed to be able to be taken apart and put in tight spaces. Again, we have a very, very strong advantage against some of these European engines.

Then when you get above the 1 megawatt range, you start to get into the, the GE, Yanmar, and the Caterpillar, and the much, much larger systems. Although they are competitors because they're operating with similar equipment, we typically are unlikely to do projects that are much larger than 1 megawatt or 1.5 megawatts, so they're not direct competitors. Aegis, which, you know, was a direct competitor of ours for a very long time, but that's sort of the reason why we took on 200 of their service contracts, and right now are basically manufacturing units, and they're basically designing projects around our equipment. We've actually formed a very strong partnership with them, so they're no longer a direct competitor.

In fact, they're a, they're an ally at this point. Hopefully that, that answers your competitive landscape question.

Peter Sidoni (Company Representative)

Great. Thank you very much.

Operator (participant)

Thank you. Our next question is coming from the line of Samir Joshi with HC Wainwright. Please proceed with your questions.

Samir Joshi (Analyst)

Hey, good morning. Thanks for taking my question. Congratulations on the good progress, especially on the services side of the business.

Abinand Rangesh (CEO)

Thank you, Samir.

Samir Joshi (Analyst)

Yeah. Looking, looking forward into the second half, are you seeing similar levels or of services revenues, or how, how should we look at projecting it out over the next 2-6 quarters?

Abinand Rangesh (CEO)

I think using a similar level of service revenue, I'd be just a little more conservative than where we are right now, because there is always some fluctuation quarter-to-quarter. I expect to have similar revenues, but you're gonna see some quarters where, as I mentioned in the thing, you know, we do, we are doing billable work for clients as well. That one might fluctuate a little bit. But I think, you know, between $3.8 and $4.1 is probably a reasonable number to use as a services revenue for the next 2-6 quarters.

Samir Joshi (Analyst)

Thanks. That, that's helpful. On the, the backlog is also nicely increasing sequentially. Let me ask you this way: Over what period would this backlog be delivered? Is it two or three quarters, or is it more than 12 months?

Abinand Rangesh (CEO)

I would say, you know, there's always gonna be some projects that ship in the 12-month range. I would just say, you know, we are shooting for sequential improvement in revenue quarter to quarter, right? We're not trying to ship all of this backlog in 1 shot, just because the systems of the company also need to improve to catch up to, as we try to improve margin, as we try to do a lot of these other things. I think assuming, you know, product numbers similar to where we were before, we saw the dip in revenue, is not an unreasonable assumption. Probably numbers, again, similar to where you had some of your model, but, you know, from your last report, I don't think of that unreasonable in terms of product numbers.

also some of this, as I said, we're waiting on customer deposits on some of these items. You know.

Samir Joshi (Analyst)

Yeah.

Abinand Rangesh (CEO)

Given that the large amount of these are CEA projects, we're also gonna be a little careful before we... Although we have purchase orders on pretty much all of these, these numbers here, we're gonna until we get customer deposits, we're just gonna be a little more careful about shipping projects as well. I expect to have similar numbers to where we are, you know, pre-dips in terms of product revenue before we saw decline. I think over the next two or three quarters, of course, we're gonna try and grow the product number sequentially every quarter.

Samir Joshi (Analyst)

Understood. Yeah, you mentioned these advances on orders. Will you remind us, is it like 20% or 30%, or what is the advance that you receive from customers?

Abinand Rangesh (CEO)

Our standard terms and conditions, on our website, basically, we look to have 40% down minimum. That, that's, that's usually our guideline to the sales team.

Samir Joshi (Analyst)

Okay, got it. Then, in terms of the air-cooled product, how, how is that? I mean, I know you mentioned it briefly, but how is that pipeline looking? What is the potential size of individual orders? Again, over what period do you expect to start delivering and getting some revenues from that?

Abinand Rangesh (CEO)

At the current point, I'm expecting that we're gonna start shipping product for that only, probably sometime in 2024. Exactly when is still to be decided, partially because we have a strong product backlog right now of our existing products. A lot of what we have right now is the larger water-cooled chillers that we have that have good margin. like, everything that's in our backlog right now, it's, it's well-tested, very. It's a strong product that we can, we can ship to the marketplace. I'd rather, in the short run, just focus on getting our financial numbers to improve and build up an overall, you know, backlog of over the, you know, continuing to improve the backlog further. The air-cooled chiller, you know, we're starting to go through testing right now.

We are specified, as I said, in at least two or three projects. You're probably looking, you know. You know, it's hard to tell actually exactly how many projects will come through in what period of time. I think what I would say here is just keep a lookout. As soon as we start seeing orders on this, we'll put some press releases out with regards to the air-cooled chiller.

Samir Joshi (Analyst)

Understood. Thanks for that color. Just couple of quick ones. Is the energy production, revenue, lower just seasonally, or has there been any change in the number or, like, deployments?

Abinand Rangesh (CEO)

The decline between Q1 and Q2 is primarily because of seasonality, right? You see a typically in the winter months, you're gonna see the number in the 500 range, $500,000 or so. In the summer months, it's gonna be high $200s, low $300s, maybe $350, something like that. Again, because your thermal load reduces. With regards to overall decline, we have seen a little bit, and there are some contracts that do expire, but what you're seeing right now, really, it's, it's primarily seasonality. We had a couple of 1 or 2 sites that were down for maintenance to make some upgrades and things like that, but nothing major. At this point, you know, the difference that you're seeing between, say, Q1 and Q2 is really just seasonality.

Samir Joshi (Analyst)

Got it. Then last one from me. The selling costs are just marginally lower sequentially, despite the sales being higher, what, what level should we expect for selling costs, again, over the next, like, 4 quarters?

Abinand Rangesh (CEO)

I would use the historical numbers because this is.

Samir Joshi (Analyst)

Okay.

Abinand Rangesh (CEO)

it's hard... The selling cost typically also includes, if we, if we sell product through HVAC, manufacturer, a manufacturer's reps, any commission for them would be built into the selling cost. That does fluctuate quarter to quarter. Part of the reason that our selling cost is lower is some of that has been, you know, sales to people that are buying and reselling. We're not paying a commission, they're just marking up the, the unit. It's hard. The, the selling cost, I would just take an average over the past and use that as your thing for the moment. If it fundamentally changes, I'll give updated guidance, but at that, that point, that's probably your closest with regards to modeling it.

Samir Joshi (Analyst)

Understood. Thanks once again, and, congrats on all the progress. Good luck.

Abinand Rangesh (CEO)

Thank you, Samir.

Operator (participant)

Our next question is from the line of Alex Blanton with Clear Harbor Asset Management. Please just proceed with your questions.

Alex Blanton (Senior Analyst)

Good morning. I, I got on, on a little late, so, I missed the first part of the call, so forgive me if I ask something repetitive. I was looking at the progress update in your presentation, and, I see that the, controlled environment agriculture is a very large part of your backlog. The rest is mainly multifamily residential. What has happened to commercial structures?

Abinand Rangesh (CEO)

Oh, sorry, did you have a further question, Alex?

Alex Blanton (Senior Analyst)

Well, yes. I, I assume there's some of that in the other category, but, things like, hotels and, other commercial structures don't seem to be in the backlog much anymore. Is that because you've changed your focus or what?

Abinand Rangesh (CEO)

Yeah, so that's so let's I will let me unpack that a little more for you. That's a very, very good question. Some of this is, as you know, right, we, we had a decline in revenue. To recover the revenue, we needed to firstly approach markets that had a faster turnaround in terms of product designed to close cycle. The other thing was, what we wanted to do was focus on areas that we had a very big advantage compared to other technologies, and controlled environment is one of those. As I laid out earlier in the call, right, we wanna increase our marketing channels through complement, you know, through, through sales partnerships.

What we ended up doing was really taking a very focused approach on CEA, because we felt that this is a market that moves relatively quickly, we have a big advantage, and that we had some potential avenues with sales relationships that could really result in sales pretty quickly.

Alex Blanton (Senior Analyst)

Mm-hmm.

Abinand Rangesh (CEO)

What we ended up doing was establishing, two new sales relationships, one with BioTherm and the other one with Accelerated Growth Solutions. BioTherm has, has been, designing indoor, HVAC solutions for greenhouses and CEA facilities for 20 years. Long before cannabis came along, they were doing, you know, cucumbers, tomatoes, those kind of facilities. Accelerated Growth Solutions is primarily focused on cannabis, but they do, HVAC-

Alex Blanton (Senior Analyst)

What, what is that second one?

Abinand Rangesh (CEO)

Accelerated.

Accelerated Growth Solutions. They're actually, they're listed on our last press release. You'll see the full name, and you can Google them. They again, they do a lot of work in the cannabis space, and they build modular chiller plants. They design various climate control solutions. Both of these, we felt, could be very good relationships for Tecogen, where they basically buy our equipment integrated as part of a broader offering to end customers, and they handle that integration. They basically mark it up as part of the bigger project. That's. Then on top of that, what we also felt with, with regards to marketing into the CEA sector was, we've been getting favorable press coverage in some of the publications in that space. We also started advertising in that space. That.

Alex Blanton (Senior Analyst)

What is that, what is that press coverage? Where is that?

Abinand Rangesh (CEO)

There's a magazine called Vertical Farm Daily, and then there's also MMJ Daily. It's sort of a very targeted newsletter that they only target controlled environment agriculture or Vertical Farms, and one of them is really targeted towards cannabis. They did an article on us about how our.

Alex Blanton (Senior Analyst)

Vertical Farm Daily, is that it?

Abinand Rangesh (CEO)

That is correct. Yeah.

Alex Blanton (Senior Analyst)

When was.

Abinand Rangesh (CEO)

I can email it to you.

Alex Blanton (Senior Analyst)

Yes, thank you. Yeah, please do.

Abinand Rangesh (CEO)

Yeah, I will email it to you. Yeah. After getting that first article in, we realized that it maybe made sense to start advertising in that, in that magazine as well. We started advertising in there, and they've done a couple of subsequent articles as well on the back of that. That is leading to better exposure in that, in that industry altogether. The combination of that, combined with some of these, these sales partners, has resulted in better penetration into the CEA market. The reason you're not seeing a broad spectrum of sales in other areas is partially because there are a bunch of projects that are there that are close to making it, but they haven't yet made it into the backlog. They're— We're still working. Some of those sectors just take a little longer to close.

They'll eventually happen. You know, they're, we also felt from the sales standpoint, we were better off focusing our resources on a few key markets. We're gonna take the same approach in 2 other markets, such as ice rinks, maybe some process cooling as well, and see how that goes. It's, it, it was a very much a choice on our part to stay focused in 2 key markets to really try and turn that into sales.

Alex Blanton (Senior Analyst)

That sounds very good. What was that second publication you mentioned? You mentioned Vertical Farm Daily, and then there was another one.

Abinand Rangesh (CEO)

MMJ Daily.

Alex Blanton (Senior Analyst)

MJ Daily. Okay.

Abinand Rangesh (CEO)

MM, there's two M's. MMJ Daily.

Alex Blanton (Senior Analyst)

Oh, MMJ. Okay.

Abinand Rangesh (CEO)

Yeah.

Alex Blanton (Senior Analyst)

Yeah, thank you very much. Now, this focus seems to be having an effect on the backlog, since your backlog was up to $11 million. Would you expect that to continue? I mean, what kind of acceleration are we going to get in revenue? Because obviously you need to get to profitability at some point, and that's a function of volume.

Abinand Rangesh (CEO)

That is correct. I think we are going to see definitely an acceleration in revenue, right? We've already seen an increase as a result of the service side of it. Our baseline revenue has already gone up. As I said on the last call, my expectation is to try and sequentially improve revenue every quarter going forward, right? In the meanwhile, we're going to stay focused on also trying to improve margin, because some of that is a function of, you know, we took a lot of price increases as a result of COVID and all of that from our suppliers. We've raised our prices in turn. We're gonna do a little bit more price increases, but we're also gonna focus on what we can do better with our products ourselves to, to improve margin. Same with the service, right?

Because that— the two together are what's gonna take us to profitability. Looking out into next year, I mean, there, there are a lot of projects in the pipeline right now. It's hard to tell where the backlog will be, but we're gonna take as focused an approach as we can. We're getting a lot of customer interest, especially with the tax credit being present, it makes the payback very lucrative in a lot of places in the country, so we're gonna take advantage of that. The thing is, the tax credit is not directly driving projects, just because I think people have typically make the decision to go with this technology or not, and then the tax credit is, is a bonus, but it's not necessarily the core driver in a lot of cases.

Just from what we're seeing right now, we are getting a lot of interest. I'm hoping that the backlog will increase. At this point, you know, what we're doing is just focusing on seeing what marketing approaches work, testing a few different things. We're gonna do it in each of the different segments where we have an advantage. Then take it 1 step at a time.

Alex Blanton (Senior Analyst)

Thank you very much. I wanted to say, I found the press release a little sparse. I think it would really be good if the kind of detail that you just provided, and what's in the progress update in the presentation, more of that in the press release, because it basically just had numbers and not much about the future. That's just a suggestion. Thank you very much.

Abinand Rangesh (CEO)

Thank you, Alex. That's a great suggestion. I think we'll incorporate it in the next press release.

Alex Blanton (Senior Analyst)

Okay, thanks.

Operator (participant)

Next question is on. From the line of Michael Zook, a private investor. Please proceed with your question.

Michael Zook (Private Investor)

Good morning to you.

Abinand Rangesh (CEO)

Good morning, Michael.

Michael Zook (Private Investor)

I have a question with regard. We have an existing chiller fleet. Where are we on an analysis of potential upgrades from our current chiller fleet to the new electric chiller? Have you done an analysis to see what the potential market is for an upgrade on the existing fleet?

Abinand Rangesh (CEO)

Yes, we have. That's a great question. There are two places that we look to with regards to replacements. There's a whole set of water-cooled chillers that are existing right now that might be operating on the old R22 refrigerant, that are a great fit. As the refrigerant prices get higher, especially because R22 is being phased out, although you can still get refrigerant, you can still operate an existing chiller. We target some of those chillers first because they have a great potential to be replaced with a like-for-like water-cooled chiller.

With regards to the air-cooled chiller, we have definitely gone through our existing pipeline, I mean, our, our existing chillers that have been, you know, some of the older model, RT chiller that we had in, in the past, and have identified a bunch of different potential replacements and have started to talk to them. In terms of exact numbers, I would rather, you know, not put numbers or just give any guidance in that space right now. We have definitely gone through a lot of those chillers and identified them, have started talking to a lot of those customers to see whether they'd be an interest in replacement. That's definitely part of the, the space that we're using for marketing.

Michael Zook (Private Investor)

As a follow-up, when you replace an old chiller with a new chiller, does the tax credit apply?

Abinand Rangesh (CEO)

It does. It does apply.

Michael Zook (Private Investor)

Then let's talk about geography. I know that our Northeast geography is pretty much centered in the corridor from basically Boston to New York City and Northern New Jersey. We also have some small efforts in Florida. What are we doing in Florida to expand our efforts? Because it seems that Florida would be a natural growth market for the company.

Abinand Rangesh (CEO)

Again, very, a great question. What we are doing, so we actually, you know, have sold, on some of this, there's a little bit of this backlog that actually is in Florida. There's a bunch of new projects that are being built or designed in Florida that have our equipment specified in there. We are going to a lot of the smaller gas companies in Florida and talking to them to see if we can forge a partnership, to see if there might be a way to, for them to incentivize gas chillers to a lot of their customers. And then we're also trying to get as many showcase-type projects over there.

Then eventually, we'll also expand our service presence over there, so we can further increase the number of the fleet of units that we can put in, put in Florida and support in Florida. It's definitely an area. We're also looking at other parts of the country, where, in particular, where cannabis is going to be licensed and it's going to be where facilities are gonna be built. They may not necessarily be Florida, but they'll be in other states in the country where cannabis is going to be legalized.

Michael Zook (Private Investor)

From a marketing standpoint, what is the most important factor to marketing going forward? Is it the cost of electricity versus the cost of gas? Is it a regulatory issue where conversion to electric units over alternative units is mandated by local authorities? I mean, how do, how do we rank where our sales effort should be from a standpoint of cost opportunity?

Abinand Rangesh (CEO)

At least the way the sales team and I are approaching it is very much by market segment rather than necessarily pure economic drivers or resiliency or. Primarily because even having gone through some of our existing sales to identify what the drivers were, there's a whole range of drivers, from resiliency to economic savings. It's a bit of everything. And if, especially if you look at places like New York, Boston, where traditionally utility rates have been the driver, some of those areas are becoming slightly more anti-gas. Doesn't mean projects aren't happening. I mean, we still continue to sell units into New York, especially cogeneration units. It's likely that it's gonna be a bit of all of those drivers, right?

What we are really looking at is market segments where customers can use all of the byproducts from our equipment. Either all the electricity and hot water, all the chilled water and hot water, where in those cases, pretty much whatever the utility rate is, the customer is gonna save money. And those tend to be, you know, controlled environment agriculture, things like process cooling, hospitals, ice rinks. Those are the areas that we're, we're just really approaching it by market segment, not necessarily by pure drivers of either economics or resiliency, because I think all of those factors play into effect in different ways for each of the different customers.

Michael Zook (Private Investor)

A final question: Do we have a white paper available on our website that discusses the resiliency opportunities of our systems versus competitive systems? I know that resiliency now is becoming a critical issue when you have rolling outages in many parts of the country.

Abinand Rangesh (CEO)

You know, I am not sure on that. I'm gonna have Bob, maybe, because Bob's written most of our white papers.

Robert Panora (COO and President)

Yeah, I'm trying to think if I have one specifically on it. It touches on that in some of the existing ones, but not specifically to that issue, because-

Abinand Rangesh (CEO)

You wrote a great one on the, environmental benefits.

Robert Panora (COO and President)

Right.

Abinand Rangesh (CEO)

Recently, yeah.

Robert Panora (COO and President)

Yeah, I, I wrote, I wrote one on the. Resiliency is part of it, but it, it was mostly about the economic drivers, the financial benefit of, of, of, of, of our products. I'm not, I don't think I have one specifically about resiliency.

Michael Zook (Private Investor)

Well, Bob, I'll give you a challenge. In your spare time, let's come up with a resiliency commentary, because I think it's on a lot of people's minds today.

Robert Panora (COO and President)

Yeah.

Abinand Rangesh (CEO)

Yeah. No, it's a, it's a good point.

Robert Panora (COO and President)

Where, where it'll fit well, actually, is with that air-cooled chiller, because that's the whole, that's part of the whole design approach, is that that chiller can run during an outage, and you can go back and forth between the electrical side and the gas side. That, that might be a way to introduce it. Anyway, thanks for the comment, Mike. Good, good to hear from you.

Michael Zook (Private Investor)

I just want to comment that it looks like, we're, we're on a solid track going forward, and I like your game plan of incremental increases on a quarterly basis. If you can deliver that over a series of quarters, I think the company has real potential to finally flourish. With that, keep up the good work.

Abinand Rangesh (CEO)

Thank you, Mike.

Robert Panora (COO and President)

Thanks, Mike.

Abinand Rangesh (CEO)

Thank you for the support.

Operator (participant)

At this time, we've reached the end of the question and answer session, and I'll turn the call over to Abinand Rangesh for closing remarks.

Abinand Rangesh (CEO)

Thank you, everyone, for your time today. If there are any further questions, feel free to email me. You have my contact information. Also, it's at the bottom of the press release. I'm happy to answer any further questions or anything else that comes up. Thank you very much.

Operator (participant)

This will conclude today's conference. You may disconnect your lines at this time and log off the webcast. We thank you for your participation.