Tecogen Inc. (TGEN) Q3 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Tecogen Third Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Bonnie Brown, Chief Accounting Officer. [Audio Gap]. We are having technical difficulties. Please stand by. Bonnie Brown, you are now live.

Thank you. Thank you, Omar. Good morning, and thank you all for joining our third quarter 2018 earnings call. On the call with me today are Benjamin Locke, our CEO; and Robert Panora, our President and Chief Operating Officer. Before we begin, I’d like to read our safe harbor statement. This conference call and any accompanying documents containing forward-looking statements, which may describe strategies, goals, outlooks or other non-historical matters or projected revenues, income, returns or other financial measures that may include words such as belief, expect, anticipate, intent, plan, estimate, project, target, potential, will, should, could, likely or may and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update or revise any forward-looking statements. In addition to those factors described in our annual report on Form 10-K and our quarterly reports on Form 10-Q under risk factors, among the factors that could cause actual results to differ materially from past and projected future results are the following: fluctuations in demand for our products and services; competing technological developments; issues relating to research and development; the availability of incentives, rebates and tax benefits relating to our products and services; changes in the regulatory environment relating to our products and services; integration of acquired business operations; and the ability to obtain financing on favorable terms to fund existing operations and anticipated growth. In addition to GAAP financial measures, this presentation includes certain non-GAAP financial measures, including adjusted EBITDA, which excludes certain expenses as described in the presentation. We use adjusted EBITDA as an internal measure of business operating performance, and believe that the presentation of non-GAAP financial measures provides a meaningful perspective of the underlying operating performance of our current business and enables investors to better understand and evaluate our historical and prospective operating performance by eliminating items that vary from period-to-period without correlation to our core operating performance and highlights trends in our business that may not otherwise be apparent when relying solely on GAAP financial measures. I’ll now turn the call over to Ben for a business update.

Thank you, Bonnie. Moving to Slide 4, I’d like to start by reviewing the company’s performance and financial results for the quarter along with recent achievements and accomplishments. Bob will then give an overview of our emissions technology development followed by Bonnie with more detail on the financials. I’ll then have some final remarks before we take questions. As always, I’d like to start off by reminding those who maybe new to our company about Tecogen’s core business model shown on Slide 5: heat, power and cooling that is cheaper, cleaner and more reliable. Our proprietary technology for improving efficiency, emissions and grid resiliency is truly disruptive to the traditional methods of heating, cooling and powering buildings and infrastructure. Turning to Slide 6. The third quarter of 2018 saw revenues of $7.9 million, a 6.6 decrease over the second quarter of 2017. This brings our trailing four quarters revenue to $37 million and resulting trailing four quarters gross profit to 13.7%. Trailing four quarters adjusted EBITDA, which is more representative of cash flows, was almost $250,000. ADG Energy production revenues came in at about $1.45 million for the quarter generating approximately $616,000 of profit. Moving on to Slide 7. In addition to the 14% increase of product sales, we achieve total gross margin of 36.3%, helped by strong product margins of 38.7%, tendered by slightly lower installation margins for the quarter, which lowered the service margins. Our operating expenses for the quarter were also higher by 8.6% quarter-over-quarter. A number of factors drive our operational expenses, notable increases in our R&D investment and selling expenses, which we feel are necessary to support overall business growth in the future. We also stood up our 10th service centre in Florida this quarter to allow more cost effective and prop service to our customers in Florida, Georgia, Carolina and the surrounding states. We expect the initial start up cost of this centre to be quickly recouped as it will allow more economical maintenance dispatch to size as well as propel new projects forward for Tecogen systems in the Southeast United States. Takeaways in the quarter, that overall company growth is strong as evidenced by the 14% increase in product revenues quarter-over-quarter. Our installation margins, which are really construction projects, were down for the quarter due to project-specific costs and delays, but are expected to rebound. And we are carefully controlling expenses while making calculated investments in the future such as our new service centre in Florida and R&D in our Ultera Emissions Technology. Moving to Slide 8. I’d like to review some of the notable achievements for the quarter. First, as discussed in the previous call, we obtained an important certification that is required by the State of California for interconnection to the utility, but ultimately is expected to be adopted by many states in the future. UL 1741 SA or Smart Inverters certification was developed to help meet the critical needs of utility when large amount of distributed generation is an operation on the network. The requirement for the smart inverter certification is staged with new requirements rolled out incrementally. We met the most recent update for the certification in August and are ready to meet the more complex requirements of the certification evolving communication with the utility in 2019. Having the smart inverter certification will allow Tecogen projects to participate in additional revenue generating utility programs such as reactive power control and frequency correction thereby creating additional economic benefits of the system. By virtue of Tecogen’s CERTS micro-grid feature, we can also integrate battery storage operating and controlled by our inverter electronics, allowing additional revenue stack to the foundational CHP economics. Next, in terms of product development, as I mentioned on last call, we are expanding our gas engine cooling technology to reintroduce our TecoFrost product line of chillers. Unlike Tecochill, the TecoFrost product is meant for industrial ammonia refrigeration systems typically found in manufacturing facilities or circulated refrigerant systems are more efficient and cost effective and chill water or air systems. Examples include dairy operations, meatpacking, bottling facilities, food processing and cold storage facilities. In this case, our current Tecochill product are not a fit as they circulate chilled water or directly chilled air, more commonly known as comfort cooling and hotels and large buildings, but not precise relying on compressor circulate refrigerants, which are almost entirely operated by electric motors. The TecoFrost product will address these large markets and in already an established product in terms of technical performance, product manuals, marketing literature and maintenance procedures. The product line was discontinued in the early 2000s due to high gas prices, but the resurgence in gas availability combined with continued electric grid escalation, particularly on the demand component of electric grids, made the TecoFrost an excellent product to reintroduce given the strong market pull. As I’ve mentioned previously, chiller sales are an excellent contributor to our business because the sales process tend to be more defined and transactional. Chiller replacements occur all the time throughout the HVAC sales and engineering community, which allows a continuous flow of opportunities through those established channels. An important aspect to this product reboot is to work with our previous compressor manufacturing partner Filter Systems to jointly bring the products to market. Filter is a leading manufacturer of compressors using these industrial refrigeration systems and was Tecogen's manufacturing partner in the 2000's for the TecoFrost product. As such, as I mentioned, all the product engineering, manufacturing data, testing, operation and maintenance are in place to minimize the timeframe for product re-launch. The goal is for Tecogen filter, a division of Emerson Climate to join the market and sell the product using our combined phase sales channels. With their help, we plan on building and selling the first new TecoFrost unit in the first half of 2019 with sales of more units expected throughout 2019. From the sales side, we’re continuing to get strong market pull from the indoor growing facilities. In August, we announced another Tecogen sale of two STx chillers to a Massachusetts indoor cannabis growing facility. The order was Tecogen's 12th into the rapidly emerging cannabis grow industry in North America with several other Tecochill systems in design and construction planning. As such, the Tecochill product is increasingly becoming the design basis from indoor growing facilities. By first reducing the facilities electric cooling load, the overall electric capacity required by the facilities reduced, which reduces the infrastructure costs and complexity for the growth facility, sometimes needing more power than utility available to provide. Next, we also continued to sell our co-generation systems for projects that can only uniquely be served by Tecogen products. In September, we announced a Massachusetts School District that required a microgrid-enabled charge trigeneration system chose Tecogen to provide everyday savings on electricity, heating and cooling, but also provide backup power to the school due to their susceptibility to weather-related power outages. This microgrid functionality is also the driving criteria for a 1-megawatt trigeneration system within an energy services company, or ESCO, which we completed engineering design for in the second quarter. The project entails multiple InVerde units deployed in an existing New York City high-rise data centre to provide power, heating and cooling as well as resiliency to grid outages. This project is expected to imitate with the ESCO in early 2019. A second megawatt project is also expected to start in mid-2019, involving a large New York School System. In this case the combination of modular InVerde installation, high efficiency, low noise and the Ultera emissions made Tecogen the design basis for this site. And lastly, on the emission side, we announced last month that our forklift partner, Mitsubishi Caterpillar Forklift America, or MCFA, had elected to move forward with the next phase of development. MCFA is a leading forklift manufacture and have decision to proceed validate the value proposition of an Ultera forklift retrofit and/or OEM component that maintains the advantages of propane power and flexibility while achieving near zero emissions. We also announced the successful permitting of the Ultera retrofit Generac generators located at a Southern California facility, and continue to work on catalyst optimization with a research institution recognized for their vehicle emissions expertise. Bob Panora will talk about these developments in more detail as well as the ongoing work to develop Ultera for other vehicle applications. Moving to Slide 9. Our backlog continues to grow as a result of our product detail accomplishment that will ensure success in future quarters. Our backlog stood at $15.7 million at the end of the second quarter, and is currently at $20.2 million as of Friday, November 9. And as mentioned in our press release, chiller unit sales account for about $6.3 million of the backlog as the HVAC industry increasingly recognizes the tremendous value of so-called mechanical CHP with the Tecochill product and cooling using gas instead of traditional electric equipment. The chiller back – the overall backlog does not – the chiller backlog, I’m sorry, does not include any expected sales from our new TecoFrost line of chillers. As the Pie-chart indicates, the key markets for our products continue to be multiunit residential, particularly for our CHP systems, as well as core markets like hospitality, recreation, healthcare, industrial and manufacturing. And as a reminder, our overall backlog consistent products and installations, but does not include our steady service revenues. Now, I’d like to turn the call over to Bob, who will describe our emissions progress in more detail followed by Bonnie with some more detail about the financials. Bob?

Good morning, and thank you, Ben. I will update listeners today about our progress in developing commercial applications for the Ultera emissions technology. I’ll begin with the forklift truck program, which most what we call, was initiated by the U.S. propane industry group PERC, and included an industry partner, which we were not able to identify publicly previously. In our October press release announcing our presentation to the -- at the World Propane Forum in Houston with their permission, we identified our industry partner, as Ben has said, Mitsubishi Caterpillar Forklift America or MCFA, which coincidentally is based in Houston as well. At present, we are working with the MCFA engine group in Japan to provide us with custom engine control software to maximize the performance of the Ultera system. I have discussed this custom engine tuning as being an important part of the process, and one we routinely use in our Tecogen products. I want to elaborate except to say that we are pleased that the Mitsubishi engineers readily understood our technical approach in preparing the control software. Our plan is to test the software of Tecogen, refine it as necessary and send a prototype forklift truck to Houston where MCFA will test the system on its test-track using its standard cycles. We are optimistic that this will lead to the successful commercialization of a near-zero emissions forklift truck, although there is still, of course, a fair amount of work to be done. We have had discussions with PERC and some of their member companies at the world forum and afterwards, and they are clearly enthusiastic regarding our prospects. We have submitted a request for additional funding to help with this phase and we believe it will be approved. The independent propane company seem willing to offer incentives to customers to purchase the near-zero option, again, if we are successful of getting to the commercialization phase. There are two other Ultera activities that are ongoing that I can report on today as well. Last year, we had supplied a customer with Ultera kits for a group of natural gas generators in Southern California that required permitting for general use well beyond the 200-hour annual exemption given to emergency generators today. As such, they needed to be to operate within permit limit 3 to 4 never achieved by a commercial natural gas engine without some extension such as the heat recovery credit at are CHP products yet. At this time, I’m pleased to report all the units, but one, has been successfully tested by a third-party to confirm compliance. This official test is the final step in the approval process, so very good outcome there. Lastly, our work with the research institute relating to Ultera applications in light vehicles is progressing. This was the first phase of eminent work, which relates to custom catalyst formulations and is funded by Tecogen. The researchers have identified catalyst material unfamiliar to us, but common in other applications, which can be reformulated in order to further improve the Ultera NOx removal. Through this institute, we have contacted a leading material scientist in the field, who has confirmed the institute’s assessment. And we’re discussing the production of samples for their evaluation. With that, I’ll turn the call over to Bonnie Brown for discussion of our financials.

Thank you, Bob. Moving on to the third quarter results. Slide 11 contains some of the highlights of the year-on-year financial results. First, total product revenue for the quarter increased by 14% compared to the third quarter of 2017, chillers alone grew 89% year-over-year. On a trailing four quarters basis, total revenue growth was 23% reaching total revenue level of $37 million compared to $30 million for the same trailing four quarters period a year ago. Long-term service contracts and part sales decreased by 2.1% on a year-over-year basis and continue to provide its reliable annuity life revenue stream. Total service and installation revenue is declined by 17.8% for the quarter compared to the third quarter of 2017, or if it continues to deliver more than half of our product and service revenue for the quarter. Energy production revenue for our ADG sites contributed $1.5 million to our revenues for the quarter. This revenue stream adds an important second source of stable cash flows with its long-term service contracts. Product gross margin was 38.7% for Q3, 2018 compared to 36.6% for Q3, 2017, a 6% improvement year-over-year. Service margin was 32.2% for Q3, 2018 compared to 34% in Q3, 2017. This margin decline is due to installation project, which carry a lower margin bringing the overall service margin down on a comparative basis. Energy production activities from the ADG fleet provided 42% gross margin and $617,000 gross profit bringing out our overall consolidated gross margin to 36.3% and consolidated gross profit to $2.9 million for the third quarter of 2018 compared to 38.3% and $3.3 million for Q3, 2017, a decrease of 11.5% in gross profit year-over-year. Net loss attributable to Tecogen for the quarter was $603,000 compared to income of $27,000 for Q3, 2017, a decrease of $630,000. As discussed earlier, we have invested in research and development activities. These costs for Q3 amounted to $281,000 compared to $241,000 for the same period in 2017. Additionally, selling expenses increased by 78% -- $78,000 year-over-year as we invest in various activities. In addition, we opened our Florida service centre contributing to the increase in G&A expenses of $155,000, and a decrease in gross profit of $375,000 in Q3, 2018 compared to 2017, accounts for the $630,000 of additional loss year-over-year. Slide 12 presents backlog and historical adjusted non-GAAP EBITDA. On the left is our backlog chart product and turn-key service projects. At the end of Q3 '18, our backlog was strong at $15.7 million and has grown to $20.2 million as of November 9. Backlog at the end of Q3 was $14.5 million. As always backlog does not include a projection of service contract or energy production revenues. Looking at the schedule on the right, our adjusted EBITDA was negative for Q3, 2018 by $259,000 compared to a positive $296,000 in Q3, 2017, a difference of $554,000. As discussed previously, increased investments in selling and R&D activities and an increase in G&A expenses as well as a decrease in gross margin year-over-year accounts for the shortfall in adjusted EBITDA. Turning to Slide 13. Let’s review the charts that track our metrics using a trailing four quarters model. Starting with the chart on the left, total revenue for the trailing four-quarter period ending September 30, 2018 reaches $37 million. This chart illustrates the trend of increasing revenues overtime in all revenue categories although the Q3 '18 service dipped slightly from the previous period. Energy revenue is represented by the yellow right most bars in the chart, where product revenue is green, and service, blue. The chart on the right illustrates the growth trend of our gross margin in blue, along with the decreasing trend line of G&A and selling costs as a percentage of revenues overtime, in green. We expect various sales initiatives and focus cost control efforts to improve these results going forward. Now I’ll turn the call back to Ben to conclude our discussion.

Thanks, Bonnie. So as we look ahead to the end of 2018, and the year ahead of us, I believe the trends in market forces that favour Tecogen's clean, reliable, natural gas generation systems will continue. First, natural gas will be an abundant and cost effective resource in the U.S. for many years to come, while electricity generation and distribution remained expensive in many urban areas with the aging infrastructure. Our natural gas generation systems whether they'd be co-generation or chillers, are in excellent position to displace electric consumption for many industrial processes in favour of cost effective and clean natural gas systems. By reintroducing the TecoFrost product, we can take advantage of this outlook to allow significantly more penetration into industrial operations or high electric costs make natural gas systems far more cost effective and ultimately cleaner from an air quality standpoint. I’m looking forward to sharing more information about the TecoFrost rollout in the coming quarters. Next, as more attention globally is focused on emissions, our proprietary Ultera emissions technology continues to be validated as a cost effective and adaptable retrofit, or OEM component, for many gas engine systems whether to be our own CHP chillers, other stationary engines, standby generators, forklifts, light vehicles, medium trucks, buses, or automobiles, we have shown to be Ultera dramatically reduces CO and NOx emitted in the environment. While the timing of emissions regulations is imprecise and certainly debatable, we feel that state-by-state, country-by-country, the Ultera near-zero emissions technology will be valued highly in both transportation vehicles and industrial engine systems. And lastly, simply put our goal to return to profitability next quarter. We will do this by continuing to grow our product sales, particularly in the chillers segment, managing our turnkey construction projects better to improve margins and controlling our expenses in a way that builds for the future, but as pragmatic and efficient to maintain profitability. So I’m not happy we did not have a profitable quarter, I am happy with how we are positioning ourselves for the coming years. Our fundamental business is strong and growing, our product advantages are well understood and have raised by the industry, and our emissions technology offers tremendous upside and value creation for our shareholders. With that, I’d like to turn it over to the operator for questions.

[Operator Instructions] Our first question comes from Amit Dayal, Rodman & Renshaw. Please proceed with your question. Q – Amit Dayal: So in regards to, you know, say looking into 2019, core generation was this chillers, it looks like you guys are getting more traction on the chillers side. It's been discussed a bit more extensively in the last two earnings calls. Where is cogeneration sort of sitting in terms of your growth outlook? Is that market softening a little bit like how are you seeing what is happening on the cogeneration side versus chillers side?

Yes, I think, cogeneration market is still very strong. What we're starting to realize, Amit, is some of these facilities are seeking cogeneration. Upon further reflection and careful engineering, our understanding that a chiller is a more cost effective way to accomplish their goals in terms of reducing how much energy they use. So that the drop in co -- that there are many reasons why cogeneration sales have get -- that there are certainly timing issues, we have projects that are ongoing. But in some cases Amit, a cogeneration project may change into a chiller projects because it makes more economical sense for the site in terms of our overall infrastructure. And we encourage that. I mean that that is our advantage. Because, if we are going into a cogeneration bid with other cogeneration suppliers, we, of course, have our differentiating advantages, but when come in with chillers, we're really by ourselves in terms of savings. And that's a great place to be. So I thought my own long way of saying Amit, that a cogeneration market is still very strong. It's certainly competitive and we have our advantages. But I'm appreciating our ability to take advantage of some of those opportunities and switching to Tecogen sale – Tecochill sales with sometimes we have more benefits to the customer and certainly from our standpoint, I'm happy to sell in the Tecochill as well as a cogen unit. Q – Amit Dayal: Could you talk about this TecoFrost offering? You’re saying it's going to be reintroduced. Could you give us some history about when it was previously launched and why it may not have been continued?

Yes, sure. And I'll start, but I'll quickly hand over to Bob who was around during those days and understood it quite more. But, yes, essentially, Amit, as I said, a lot of these industrial processes, food processing etc cetera, they have many, many pumps that the pump ammonia refrigeration throughout the facility for their cooling needs, whether it's cold storage or whatever. And again, those pumps are all mostly electric. Back in the 2000s, we had a TecoFrost product which are basically put a natural gas engine to drive that compressor to accomplish the same thing. But when gas prices went up in the 2000s, it didn't become a very good product to market and we kind of shuddered it. But now, given all the market forces that I mentioned before, a lot of natural gas and expensive but still very high electric rates, it's a perfect opportunity for us to reintroduce it. The market's right, all the literature there, I mean new product rollouts sometimes a little scary, but this isn't a new product rollout because we have all the manuals written we have all the service protocols. Bob, do you want to talk a little bit about our extensive history of Tecochill - TecoFrost?

Yes, the TecoFrost was actually quite popular in the early 2000s late 90s. We sold fair number of them. And they -- many still running today. And it’s a different market. But when gas prices fight 2007, I think was, then we just can keep all those falls in the air. So we said, we’ve got our hold back on TecoFrost because let's keep Tecochill going. And frankly, I’m still amazed how strong the chillers have come back, it's like roaring back. And it’s obvious that the TecoFrost, which was -- it's causing -- would have a similar market. And the customers -- just everybody know, they’re really our key customers. They were like crap foods and so and so forth, I can name a whole bunch, but it’s a different market, but it's -- it has the same economics with customers that are generally industrial in nature though. But it’s – we have a good history. And I think the machines that we sold are still running, many of them, and running quite well and we service them. So we even have the institutional knowledge pretty current, because we visit them and we work on them. So we -- it isn't like we have to re-educate everybody either, our salesman know what to sell them.

Yes. Thanks Bob. And I think, I have mentioned this before and I’m sure I'm going to continue to mention it. Chill was our lot more transactional sale. They have -- chiller sales happen all the time, people are -- check them, they do it. Cogeneration, sometimes it’s transactional. Sometimes cogeneration is contemplated. And thought about -- and not actually transacted sometime because sometimes they don’t have to transact cogeneration. They can continue as they are. Companies, food processing and meat packing, all these pieces have to have refrigerant chiller systems. And they’re in some cases paying a lot of money firms. So as Bob said, it’s a perfect time for us to reintroduce it. Very little effort needed in terms of getting it back out there so much. So as I said, I think we’ll be back in action in early 2019. Q – Amit Dayal: TecoFrost versus Tecochill, is there any cannibalization that may occur between these products?

No, actually, not at all. The chiller, when you certainly chill water, that’s what you do in a building that's occupied by people. You don’t do that in a hotel. You don't put ammonia in a hotel or place like that and this would be not typical.

It's safely.

Yes. It’s on tremendous safety thing. But it is a gas that was smell and we’re going to get hick out of it fast. But it is absolutely standard for, as I said, food processing like crab food, its -- which you’ll find in wineries, breweries, any large food processing -- it’s probably biggest ice cream. So we sold in all of these markets with the product repacking, if you will, chicken processing, all companies. You will know the name if I name them. And they don’t overlap with chilled water. Those places do not want chilled water in the system. They want to use the ammonia. It's much more efficient. It has no global warming issues and it’s a very inexpensive. It’s intense of class of our refrigerants. So that’s what everybody who does it in the large scale, industrial scale would want to do. Every once in a while, you'll see a ice skating range that has ammonia, but even most of them these days are water chillers. So there is really no overlap there. Q – Amit Dayal: Understood.

And I would just add -- go on to say that what’s been happening is we’ve been trying to sell our Tecochill in some of these markets, trying to squeeze that round Tecochill peg in the square TecoFrost hold. And that’s where we’re getting a lot of the feedback saying we really want the TecoFrost back. So they got a truly complementary. Q – Amit Dayal: Interesting. Just maybe one more from me on Ultera side of things. So, if this the last permit you are waiting on, and you’ve mentioned 2019 as sort of the timeline. But is it first half or first quarter or maybe later in the year? And then can you talk about maybe the opportunity implications for the company?

Yes, sure. So this customer has a bunch of these engines. We sent them a bunch of kits that with several different models of engine. They finally got around of doing their official source tests with the third-party and they have one left. I called them up a week or two ago. Where the heck are you guys? He said, well, we are done, but we have one more to do. I said, terrific. And they all passed. So we confirm that. And the levels that they had to achieve are really, really slow. I mean, there’s no heat recovery credit to rely on none of that. So I think the opportunity would be that we can now -- we’ll get applications of involving demand management where a customer would put a generator into a site and would run it during certain seasons, certain times of the year and certain times of the day to shave this peak low, which is very expensive electricity indeed. So that would be the logical next step for the technology. But we haven’t taken any further than that at this time. We got our hands full. But that would be the implication. You can sell a simple generator, deal with all the difficult issues with all the alternative energies that disrupt the grid, creates real peaks during times of the day, and you could push back against the high prices of electricity would cost during those times a day with your own generation, and just be able to very small number of hours running. So that’s, I think, the main possibility here. Q – Amit Dayal: And the timeline -- is this first half of 2019, you think?

No. I don’t think we have any prospects right now. This is -- we have to refocus ourselves on that to really get into. We got … Q – Amit Dayal: I’m talking about the permit. Do you think you could …

Oh that they took -- there is one more unit. They will probably do that within the month. They were just knocking them all off. And this one was the last one to do.

Yes, we’ll likely put out an announcement. When that final one is done, Amit, we’ll likely put something out just to let investors know that it’s completed.

Our next question comes from James Jang, Maxim Group. Please proceed with your question.

So just a couple of quick ones. Can you talk a little bit more about the TecoFrost, like what kind of competitive advantage that offers compared to what's that in the market right now or if there’s anything comparable on the market right now?

Yes, I turn it to Bob. I mean, there's -- I don’t think there’s any other product out there. And we’re kind of all alone with our natural gas engine driven, not just with Tecochill, but with TecoFrost, so not any competition out there. An important nuance to this is, I mentioned our -- that the compressor manufacturer that we’re working with, now built there, very long standing great compressor manufacturer. They sell good compressors. So when they sell a compressor, they won't go back to the customer for another 20 years, right, because they need to sell another one for those 20 years. Well now, Vilter, you can see the opportunity to come back to those customers that they would be able to only sell to -- a few years back to say, hey, we have a more efficient cost effective system to you, your electric rates are this. And so it really opens up Pandora's box for us in terms of market opportunity, not just for sites that are looking to replace their existing ones because of end of life, but also looking to replace existing systems that maybe have not reached their end of life. Simply because the economics are so compelling using gas instead of electric. So as Bob mentioned, a lot of really good reasons to bring this back and we're kind of looking forward to it.

And going on to Ultera, so it's great you guys are advancing ahead with MCFA, but they sell a lot of reluctant forklifts right now. So have they indicated to you that there's a pinpoint on the consumer side looking for gas-powered lower emission full? Or is this just a complimentary thing? Like what's the rationale behind working with you guys?

Yes, so in the discussions I've with them, of course, that the, first of all the propane industry, they sell electric fork truck there. They have nothing. So they're really motivated. So on MCFA, what’s your motivation. It's, I think, they are, as a company, they do make electric fork trucks. But the predominant money-maker for them and their biggest sellers are the natural -- not natural gas -- propane fork trucks. And they definitely have an advantage there. They prefer to sell those. I think, I shouldn't speak for them. That's the impression I got. And so a customer would say, finding an electric fork truck that costs more, perhaps, doesn't make it to the whole day or it doesn't have as longer -- the charges that last and so forth. The propane is weak operation once think about it. And so that's what we're hoping for. And again, the competition will be the electric fork truck. But we think all things being equalled you get a fair number of customers who don't want to go electric because of the battery issues and so forth.

Okay. So there still is that kind of push back on using electric, right, just because utility wise, I don't think it's going to last the whole …

Fundamentally they get through six hours, they get two more hours to shift, they got to swap the batteries or move the battery in the charging station and come back, and that's kind of a -- that's bit of a problem. Batteries are getting better, but they're still not necessarily the best thing to have for all situations. We prefer not back, we don't use our electric fork forever. We just use our gasoline. Jump into turnkey though. And so you don't have the customers who prefer electrics and customers who prefer the propane. You got to take away the emissions issue off the table, get that off the table saying this thing is clean as the electric, which one you want now? And the propane dealer will give me a special deal on propane or buy or he'll find on the cost …

You get a near-zero emissions vehicle credit.

Yes, you get a near-zero. Yes, so that's the dynamics what we’re working with. And certainly the propane industry is going to help us a lot I think, if we're -- if we get to the commercialization phase, they have everything to lose. And they don't want to lose our market.

Okay. So it's kind of a timeline. So I know, you guys kind of laid out the next steps. So are you currently testing at the facility now? Or is that something that's going to be ongoing until maybe the first quarter of next year?

We're doing some refinements testing getting this rotation tide it up. So when it does shift to the Houston for their testing that they have a nice clean, no voice saying looks good and all that. And repeated the tests over and over, we've done different drive cycles, driven in outdoors, driven in with medium-weights, heavy-weights, three left-hand turns, two right-hand turns, all the combination just to look at every possible to see driving cycle, and its working great. But we'll just have to now get the software from the folks in Japan and get that last bit of performance. And I think it’s off to the races.

Okay. So did they give you a timing of -- from once they complete their evaluation to when the capacity will start working with you?

I can tell we’ve talked about things. I don’t want to say anything more than that. It’s strictly sometime where we’re not blind to show.

Okay. Got you. And maybe also could you share on -- for the testing on Ultera on, I guess, automobiles?

Yes. As I said, we really – we went down the road of this multiphase program with this research institute. And what they advised us looking at the chemistry, may know a lot more about the chemistry than I do and people here. They said we get your concept, it's really unique, but it has -- because of the temperatures you’re operating in, you can really do some things that normal catalysts cannot do. And they’ve let us down the path of -- did you know about this particular composite material? No, I haven’t heard of that. So they’ve put us in touch with this research guy. And what we’re going to do is test these samples of this composite material, save with us and then we got to scaling up further phases of the program. But we’re in this catalyst development stage, which is really good because we need some – we're really benefiting from expertise of this institute in the chemistry.

Yes. And I think it’s important to remember too, and I think we’ve mentioned this. This development work that we’re doing with forktruck program with the forklift program is similar development work that would be occurring for the asset station of Ultera for vehicles. So we’re making progress on both fronts. By virtue of this program, we’re doing with the forklift, number one. And number two, there is a strong market for medium vehicle retrofit to natural gas. I mean there are many companies out there that will do retrofits of OEM vehicles to natural gas for various reasons. And that’s a market where Ultera would be ideal for in terms of a near-term goal. I mean, I guess, long-term we want to be on the head of every car, right. But in the near-term, you could certainly envision us being part of that retrofit exercise where they put on the carbonators valve or whatever it is for the natural gas conversion, and at the same time put on our -- the Ultera emissions package. And now what comes out is sometimes factory OEM vehicle, natural gas with near-zero emissions. And that’s something -- that’s not time is sky five years and a hell merry pass to a automobile manufacturer, that’s something real and practical that we’re shooting for.

Good. Good guys. One final one. There is a lot of the news around the IMO 2020 regulation on the shipping side, on the marine side. Have you guys done any up-end work or try to see what Ultera could do for the marine industry?

Well, that would be largely diesel-based engines and that's far he guided, as far as I know not [indiscernible]

I mean, well, they have LNG and LPG power vessels, right? So …

I guess you’re right. I’m not -- we’re not plugged into that right now. I hadn’t even known that they were seriously considering LPG fuelled ones. But I don’t know about that. We have discussed and went into a little bit is the problem at the ports where you have trucks coming in and out. We have fork trucks driving around.

And it is idle around, right?

Yes, that’s what that are most familiar with and that we made some outreach into that area, but not vessels themselves.

Yes. We'll talk off-line.

Our next question comes from Rick Molinsky, MAX Ventures. Please proceed with your questions.

First of all, I’m not going to go into the whole business part. I’m more interested, I mean, I think you are in the right business at the right time. There is a need for what you guys have, you could see by the contracts, and I like the backlogs growing. And then, the thing that drives me crazy is I’m looking at Bloom Energy, right, they showed a loss of $75 million and $190 million of revenues, whatever, was last quarter. Their profit margins are down. They got a $400 million market cap company with debt of -- quite a bit of debt off from the company, long-term debt. How do we get Wall Street to recognize that we don’t -- yes, we’re not big as like they are. But we also want to make money and we're moving in the right direction. How has that changed that perception of this company? Do you think over the next, 2019, because it just drives me crazy what they have in evaluation. They’re down from where they -- from where it was?

Yes, sure. You know what that the technology we’re working with -- it’s -- you all understand it and, of course, our investors understand it. But it’s not -- a lot of people don’t know that fuel cells use natural gas. They think of a fuel cell is something that's oh, it’s using renewable energy. I suppose if you use biogas, but ultimately fuel cells use natural gas. And so it’s a perception thing, with fuel cells in particular, that it’s equally frustrating for me to break-through, because it’s really break-through that, you say, okay, you’re not -- a unit of natural gas comes out, and the unit of electricity comes out and a unit of heat comes out. And how much goes into comes out for what comes out. And we’re more efficient than that in many pragmatic reasons why you would not use a fuel cell over us. Yes, as we say, there is a perception and they do have this market cap that would make it seem that they are the future. I don’t -- I would not want to prefer to say what the viability of the business plan is and what the foundational of their economics are. Except to say that, we are absolutely more efficient on a project in terms of overall efficiency consumption of gas in almost all the time in terms of cost of installation. So for an intelligent consumer, we’re able to quickly make those things understood and get our product specified. And shifted sometimes, again, as you know, people just want the product that's more -- that's got more appeal. It seems more sexier. And fuel cell happened to be in a realm right now. I’m not sure how long it will last. Bob, you have anything to add on that?

Well, I think if you read what they’re going into the business for, I would say, really, really it’s a terrific business you’re getting into. And we’re in a similar business, not quite exactly. But I think, rather than try to knock down, I think, what I would say is that we should be valued higher, that's how our opinion is. That's how I look at. If I read their perspective, yes, I agree with that, I agree with this, I agree with this. And they were different technologies, but basically, we have something similar that’s should be valued as well. That’s how I look at.

And are you doing the more -- are you going to be doing the more road shows or pretty much just wait for the wake up for next year, I'm saying.

Yes, I think, well, as you know, we’re really, I’ll tell you myself, I’m very much focused on getting our strategy and path set for the next coming quarters and years. And this is on Tecochill, the reboot of TecoFrost, getting some of these relationship ESCOs that are driving much larger projects that moves the needle. So that’s what I’ve been focused on. I think they’re starting to come together now. And I certainly can see myself getting more in the street to start conveying this message. Maybe I won’t shout as loud as Bloom will, but certainly, as Bob said, a lot of those things that they mentioned us, foundational economic drivers for them, are the same for us. And I'll make sure I reiterate that.

Our next question comes from Michael Zuk, Oppenheimer and Company Inc. Please proceed with your question. Q – Michael Zuk: I want to bring up the Florida service centre. Now that is up and running and going. Will you be adding dedicated sales engineers to that Florida office? Or how are you going to do expand revenue opportunities out of that office?

Sure. It's a great question. And, in fact, we have a very thoughtful and prescribed way with these things move forward as we have gone through our standing up service centres. Typically you start off with -- you reach some critical point of engines, an engine count, where you need a dive-down there. And that's of course the point that we recently started up the service centre. As that engine count increases, and these guy are busier, they’ll hire a tech. And then as we go on, it eventually will get to the point where that that the person that we selected to run this office is, of course, a service-tech and very good at it. But he's also a little bit of a salesman. Now, all of my -- all of the engineers that work here and are effective are kind of good people, people and can do a little bit of sales. So the idea that he would be able to do some business development himself, supplemented of course by our own sales people here in Waltham. And as that office grows over time, absolutely, I can envision having a dedicated sales engineer down there just like I have a dedicated sales engineer in New Jersey, and have a dedicated sales engineer in New York and California. Over time, I can see that happening. It just kind of we kind of stage it slowly as the engine count, as our metric increases. Q – Michael Zuk: Because revenue eventually will be the driver of this company, I think, we are on the cusp now of really developing a series of products across an array of technologies. I would encourage just to add two or three more sales engineers now, understanding that it's going to be a little bit of upfront cost. But if you can add good people now and develop the products that we have coming on stream that will drive the revenue. And so I would be encouraged adding some staff now even if there is a little bit of cost strain immediately. The bottom line is to drive revenue and to drive revenue. You got to have the people in place that can sell the systems and help design the systems. So I'm encouraged that I'd like us to go forward on that tech. That’s all I have.

I couldn't agree more there Mike. I mean that was kind of one of the fundamentals of Thermo Electron with John and George, which is when we get a good engineer you hire him because good engineers are hire to come by. So absolutely, when I come across a good engineer that can be an asset for the company, I’ll hire. Because they're real hard to come by and they really -- you know some of our engineers Mike are top notch. They're really hard to come by. So you want to get the good ones while you can. Q – Michael Zuk: Well, I am encouraged going forward. Keep up the good work.

Thanks Mike.

Our next question comes from Alex Blanton, Clear Harbor Asset Management. Please proceed with your question. Q – Alex Blanton: Most of my questions been answered. But I want to say, I like Slide 7. I think the way you presented the summary there was very good. And I think that's the first time you've really done it that way with all of the calculations done, so people don’t have to do that. I have a question on Slide 9. What is backlog related revenue, the smaller line?

Bonnie, do you want to address that?

That number would be revenue that came out of the previous backlog. Q – Alex Blanton: Okay. So what are the other revenues then?

Well, there's service … Q – Alex Blanton: If they were not in backlog, what are they?

There's service and there's energy production as well. Adding up, yes, service and energy production are also in our numbers.

But not in the backlog.

But not in the backlog, right. Q – Alex Blanton: Okay. So that’s kind of encouraging, that backlog, what is the average delivery time in that November backlog to 2019?

It’s real hard to say, Mike, because -- but it’s a good thing. It’s a good point to make. And I'll address that. So the backlog, of course, has installations in it. And those installations can go out over sometime. And of course, we've got product in it, which goes much quicker. So kind of part and parcel with this kind of decision but to focus on chillers means that backlog number has got a lot more products in it, in installation, if you understand what I’m saying, because there is more product and chillers in it. So we don’t break out the installation versus the product piece of the backlog, which is why I can’t give you an average time versus turnover. But I can say that there is more product in it these days because we’re moving more chillers and they tend to turnover much quicker than our turnkey installation backlog. Q – Alex Blanton: Then, are those mega projects that you've mentioned for the January quarter in there, the data centre and there is a lot of school system?

One of them is. One of them is not. Q – Alex Blanton: Which one is not?

They’re both megawatt projects. One of them is it -- one of them is in because we’ve already -- and one of them is not. And just as a note for you and our investors as well, we are very careful about what we’ve put in the backlog. It’s not our sales and thinking he has something. This is something we’re -- we’ve been specified within documents, and in some cases just simply awaiting signature. So that first one qualified that criteria and is in our backlog. The second one is just still very close. I didn’t want to put it in backlog until we meet that full criteria for including into our formal backlog number. Q – Alex Blanton: The second one being the school system?

Correct. Q – Alex Blanton: Okay. How long did it take you to sell those two? What's the sales cycle timeline there?

It's tough to say Mike. It's tough to us to say when it originated versus when it takes up in earnest. It's probably originated over a year ago, but picking up an earnest, certainly over the past year for both of those projects. Q – Alex Blanton: Okay. How many of those or -- can you say or give us an idea of what’s in the pipeline, let's say, it’s not in the backlog, but it’s in the pipeline of those kinds of projects?

Yes. I'd rather not simply because I’m very comfortable the things I put in the backlog and I’m happy to talk about those as I just did. But things that are more speculative, I think, might lead investors to conclusions that I’m not quite ready for them to make yet. Q – Alex Blanton: Okay. I didn't want you to give me specifics, but just in general, how is the pipeline?

In general, I’ll tell you, it’s very good. If we’re not – put it this way, our CRM is not decreasing in size, it's increasing in size. We are seeing a plenty of leads. I think, I mentioned last quarter, we invested in the kind of an advanced sales tool to help us using analytics, determine sites that maybe a good fit for us, and therefore, make ourselves outreach efforts more cost effective that yield improve. So our pipeline is still very strong. And yes, our pipeline still strong, Mike. Q – Alex Blanton: What did you say, RC? You used an acronym there?

We’re using -- CRM. That’s a contract related -- it's sales management tool. Salesforce, Salesnet, there’s also CRMs out there. We have our own CRM for managing sales. And as I said, our space, it’s growing in terms of our backlog. Our sales process continued to be very strong. Q – Alex Blanton: Could you just briefly describe Mitsubishi Caterpillar? Is that a joint venture? 50-50 joint venture? Or what is it? I look on the website, but I couldn’t find it.

Go to MCFA, and just type forklift or fork truck, and you go right into it. Then I can say … Q – Alex Blanton: I looked on their website and I could not find a description of what company is financially.

We can send you like offline.

No, I think, I was just saying if I'm in the same place I direct him to, but he doesn’t understand the structure of the company. And I don’t feel comfortable that I should describe it is some sort of a joint venture that I don’t want him to speak on their behalf. But it’s largely, I think, what I see is a lot of Mitsubishi content there actually. Q – Alex Blanton: Can you give us an idea of their share of the market?

They told me, but I don’t know if I have permission to speak to that. But it’s in the top several companies of fork trucks. And they supply, just so I’m clear, this particular joint venture does North America, South America and Central America. So there are other entities within the Mitsubishi world that do other parts of the world. Q – Alex Blanton: Finally, I think, since your last earnings report, Canada has approved use of marijuana throughout the country? How does that expand your market?

Yes, yes, sure, absolutely. We’ve been selling some of our equipment to growth facilities in Canada as well, not just our, again, we've sold some cogen and chillers into that growing market. A little bit different but it's, when it’s nationally. What is national, they can pick any place to set up that growth facility where it's most cost effective in terms of utility rates et cetera. Whereas in the United States, when it's state-by-state, they have a lot less options where to locate it, and sometimes have to suffer with the high electric rates, I mean, that’s the story of Massachusetts. You're trying to put 50,000 square foot growth facility in some municipality electric that doesn’t have that much capacity. So there is opportunity in Canada. We’re making very good progress there. We have a rep there. It’s doing quite well for us. Because it’s nationalized, I’m not quite so sure. We’ll see as much traction as we’re seeing here in the U.S., but it’s absolutely is that as we’re already there.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Ben Locke for closing remarks.

So thank you all for joining the call. And we look forward to talking with you again to share our results in the fourth quarter at the beginning of 2019. Good afternoon, everyone.

It concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.