Ladies and gentlemen, greetings and welcome to Tecogen First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this program is being recorded. It is now my pleasure to introduce your host Bonnie Brown, CAO, Treasurer and Secretary. Thank you. You may begin.

Thank you. Good morning and thank you all for joining our first quarter 2019 earnings call. On the call with me today are Benjamin Locke, our CEO; and Robert Panora, our President and Chief Operating Officer. Please note this call is being recorded and will be archived on the Investor section of our website following the call. A copy of the press release regarding our first quarter 2019 earnings is also available in the Investor section of our website. Before we begin, let me briefly cover our Safe Harbor statement. Various remarks we 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 SEC and available in the Investor 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 in 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. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in our earnings press release and in the Investor section of our website. I'll now turn the call over to Ben for a business update.

Thank you, Bonnie. And the agenda on slide 4 indicates, I'll start with a brief company overview followed by a top level review of the company's performance and financial results for the first quarter of 2019 on with recent achievements and accomplishments. Bonnie will then discuss the financials in more detail followed by Bob who will give an overview of our emissions technology development efforts. I'll then have some final remarks before we take questions. As always I'd like to start-off by reminding those who may be 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 first quarter of 2019 saw revenues of $8.2 million versus $10.2 million in the first quarter of 2018. During the quarter, we closed on the sale of a subset of ADG assets for $5 million cash which allowed us to reduce debts to essentially zero and significantly improve our working capital to $16.2 million at the end of the quarter. The transaction resulted in a gain of $1.1 million from the sale in a goodwill impairment loss of $3.7 million. This non-cash impairment loss resulted in the bottom line loss for the first quarter of $3.3 million. Bonnie will discuss the accounting of the ADG asset sale in more detail during her discussion. While the goodwill impairment loss distorts the actual bottom-line, we were still able to generate $678,000 of adjusted EBITDA in the quarter further improving our cash position and strengthening our balance sheet. Our gross margin for the quarter was 36% versus 38% in the first quarter…

Thank you, Ben. Slide 10 contains some of the highlights of our Q1 2019 year-on-year financial results. Total revenue was $8.2 million for the quarter with overall gross margin of 36% in gross profit of $3 million for the first quarter of 2019 compared to 38% gross margin and $3.8 million gross profit for Q1 2018. Since we sold a portion of our ADG assets during the quarter, the operating expense section of our P&L deserve some discussion. Our G& A expenses decreased by 5%, while selling R&D costs increased by 3% and 14% respectively as we invest in our future. Operating expenses this quarter also included goodwill impairment charge and a gain on the sale of energy producing assets. After the sale of these energy producing assets in March of 2019, we performed a goodwill impairment test. As a result of this analysis, the company recorded a goodwill impairment loss of $3.7 million. By way of explanation of this impairment loss, let me start by saying, our goodwill resulted from our stock to stock merger with ADG in 2017 which account -- was accounted for as an acquisition. The assets we acquired in the merger comprise our energy production reporting unit. A goodwill impairment results when the fair value of those assets become less than what we originally paid for them. In this case that happened due primarily to the sale of assets. We base our fair value determinations for the reporting unit primarily on the discounted cash flows from those contracts. As time passes, we recognize those cash flows and earnings. However as the remaining terms under those contracts shorten or assets are sold, the remaining cash flows become less and accordingly so does the fair value of the reporting unit. Since the date of the merger with…

Good morning, and thank you, Bonnie. Let me begin with the forklift truck program and by the way background, we received our initial funding from the Propane Education and Research Council, PERC, whose members are keenly interested in the technology as being important in maintaining market share relative to battery powered competition. Central to the issue is criteria emissions, whose those pollutants directly relating to human health and which are of heightened concern in indoor operation. We are working with MCFA as Ben said, Mitsubishi Caterpillar Forklift America, a well-known manufacturer in North and South American markets of both electric and propane for trucks. MCFA agreed to provide custom engine tooling for the test truck, which we would utilize to maximize the effectiveness of the Ultera process especially in reducing NOx. Engine tuning is an important part of the process and one we routinely use in our Tecogen product line to enhance Ultera performance. Once this software was finalized, the Tecogen MCFA would receive the test truck for evaluation at their facility in Texas. Since our last call, we completed our testing with the second batch of engine control software and reviewed the results with MCFA. With the second batch which was an improvement over the first, the tail pipe NOx and CO emissions were improved significantly from our baseline tests of the truck as received from MCFA. NOx and CO emissions in the final tuning setup where one-fifth and one-eighth respectively of the standard baseline testing. If we extrapolate this relative improvement to the certification, it appears that we are where we need to be for near-zero certification. Let me explain what I mean by that. The certification test involves a prescribed dynamic load being imposed on a gear engine in a dynamometer. There is no forklift involved. However,…

Thanks Bob. So moving to slide 14, I want to give a little more color on our core business outlook and how we intend to pick up growth in our product segment. First we will continue to closely follow the permitting of new cannabis grow facilities in New York, New Jersey and other states. As we anticipate substantial new production, due to recreational use legalization. We have had excellent success demonstrating the value proposition of Tecochill for indoor growing in Massachusetts, Florida, Canada and Colorado and we'll continue working with greenhouse designers and consulting engineers to show the long term operational savings of natural gas cooling versus electric. Next we are expanding our chiller product portfolio through the reintroduction of the Tecofrost ammonia system. In this case we are modernizing the old Tecofrost system to include more advanced controls and engine technology as well as the inclusion of our Ultera emissions on the system which will enable the product to be sold in areas with strict stationary engine emission requirements such as California. Furthering the discussion of expanding our chiller portfolio it's worth mentioning for the first time our legacy Roof-Top or RT chiller product which is currently our only air cool chiller. Air cool chillers represent the majority of chillers in operation globally, given their relatively low first cost in simple installation. A simple window air conditioning unit is an air cool system. In the past air cooled chillers were limited to small and midsize buildings with cooling loads typically under 300 tons where the added cost and maintenance of cooling towers for a water source chiller are cost or space prohibitive. However increases in air source chiller efficiencies and advances in compressor technology have expanded air cool system sizing to over 300 tons. Modern air sourced chillers are…

[Operator Instructions] Our first question comes from the line of Amit Dayal from H.C. Wainwright. You are now live.

Hi, Amit.

Hi, good morning. Thank you for taking my questions. Can you talk about a little bit in this -- the revenue decline in the first quarter that impacted results a little bit? I know the backlog has been a little weaker as well. Just trying to get a sense of how we are scaling relative to the rest of the year in terms of putting up sort of a year-over-year improvement?

Yes. Sure, Amit. I understand the question. I certainly -- we understood -- we expected a little bit of revenue drops by the sale of the ADG assets. But more broadly, growth occurs in spurts and we've seen some good spurts and while we didn't have as much as a growth spurt as me might have hoped this quarter, I don't think it's representative of any other trend. We are continuing to focus on our -- on this product roll-out. I think having a third substantial product revenue contributor and the Tecofrost is going to go a long way to get our revenues back up. So I'm feeling pretty good about where we are. The backlog drop-off wasn't too much I mean, our backlog last quarter was almost $30 million and that was very high, it dropped to $26.9 million, not so much of a drop. If you recall our guidance was always to have our backlog over $10 million. So we're well above that. I'm pretty comfortable with our backlog. As I mentioned, the majority of it is going to be realized this year. So we see that our revenues for the rest of the year have a very good basis and we continuing adding to that backlog as new projects come along. So I'm feeling quite good about where we are and where we're going. But with that said, understanding that we did have this drop in revenue trying to proactively look at the future and get more product revenue going to make up for it. So I hope that helps to answer your question.

Yes, yes. Just excluding Tecofrost and are there any other catalysts that could help the backlog bounce back? I mean, we know you're at a pretty strong level, but just trying to see what are the drivers there that could help you to bounce in backlog?

Yes, sure. Well I think certainly this smart inverter certification I think is going to yield a lot for us. And I don't think I mentioned in my remarks I should have that there is a last stage of this inverter certification Bob. It's going to occur this summer.

That's right.

And the final piece of this smart inverter certification is the utility, it's establishing communications with that DG asset with our co-gen equipment. And then that would enable these revenue streams I mentioned of doing this power factor correction to take place. So I think certainly what's happening in California is, it fits right in with our core technology and being inverter based and having our smart inverter that bodes well for us. Absolutely in terms of the opportunity for, that Bob has been talking on retrofitting generators, I'm not sure if you've been following the news about the wildfires and the liability, thereof, and the concerns that exist in communities in California of the utility -- electric utilities is…

That's right.

Yes, the shutting of power when the winds get to above a certain rate. Rather than risk a down power line and resulting $1 billion forest fire, they're making plans that just terminate power on those lines and leave those communities affected potentially without power. And so certainly this Generac program that's why Bob gave you the extra detail on that because that's when these generators could be dispatched to provide power during these high wind storms. And if you had the Ultera on that, you can do so in compliance with all these -- the stationary engine requirements for emission. So I think there are a lot of drivers working for us, but absolutely in my opinion getting a little bit further behind the meter with our products, with our chillers is going to be a very successful way to grow our revenues going forward. And those installations as I've repeated constantly just a little bit more transactional when you talk about chiller sales as opposed to co-generation sales, which can sometimes go sideways from a project development standpoint. So I think there’s a lot of trends in our favor, not just on co-generation but on the chiller side and on the emission side.

Understood. Just one last one for me maybe on these ADG asset sales. Was this primarily to eliminate debt and you clarified I guess there's no more sales of those assets expected. But just wanted to see if that debt elimination was the priority driver behind this if there was any other reason?

Well, it was part of the reason, certainly I don't like owing people money and that is costly. So I -- eliminating that debt was certainly up there, but really Amit I'm looking at the future of growing Tecogen and growing that product base and taking advantage of our competitive advantage, which is we are the only gas engine driven chiller out there. I think using that those resources to develop that is probably the main driver I had for that asset sale, but eliminating debt of course was weighing on my mind as well.

I think that’s all I have, Ben. Thank you for taking my questions. I’ll just get back in queue.

Sure. Thanks, Amit.

Thank you. Our next question comes from the line of Craig Irwin with ROTH Capital Partners. You are now live.

Hi, good morning, and thanks for taking my questions.

Hi, Craig.

So, Ben I just wanted to ask a couple of questions about the backlog. So $27 million is still very healthy miles above that $10 million level that you want to maintain. Can you maybe break down the backlog as far as when we look at the products what the mix of chillers versus DG systems is? Is there anything on the product side in there for the Ultera emission system that's a piece of that $13 million?

Yeah. Sure. So as I mentioned that backlog about $13 million of it is products. And as I said last quarter, I wanted to point that out because products tend to get out the door more quickly, whereas, the installation services can last a little bit longer, it takes a long time to do some of these installations. The product mix, I did not give any color on the chillers versus co-gen. It's a good healthy mix. I don't think there's anything notable in there. Certainly we've seen particularly last quarter a bump up in our chiller sales, this quarter we saw a bump up in our co-gen sales. We're going to see these bumps of each of these segments in different proportions. So I think giving any color on what the backlog particular proportion is of that day wouldn't be helpful, but except to say that it is co-gen, its chillers and sprinkling in of what we call engineered accessories that go with it. Other good high margin products that have control skids with pumps and expansion tanks and heat exchangers on it. Any piece of equipment that ships specifically for an installation is in that equipment dominated by co-gen and chillers, but with a smattering of these engineered accessories.

Understood, understood. And then I don't know if you're able to share this with us, but can you maybe give us some color on what portion of the backlog you would expect to ship over the remainder of the calendar year. Should we see the vast majority of this backlog shipped? Or is some of it potentially extending into the next fiscal year?

Sure. Yeah. I'm expecting about two-thirds of it to go this quarter two-thirds of the entirety of the backlog…

This year.

This year, well did I say this quarter, no, not this quarter this year. So about two-thirds of it, Craig to go this year. The remainder of it, yes, it does go into next year and if you can believe it a little bit if it goes in beyond, because we have some new construction projects, which is nice that we're the basis of design for but they've got to dig a big hole in New York City before our equipment can get in there. So some of the backlog stands out. But to answer your question directly, the majority of it is going to go this year.

Understood, understood. And then last question is really a clarification. So with the year-over-year revenue trend, right? I noticed that product margin is actually up fairly nicely couple of 100 basis points and that's with the absence of the chiller revenue that was there last year. I always thought that chillers were pretty high margin product. Was there anything sort of on the ancillary products side that maybe lifted margins a little bit this quarter? Or is this something more in line that we you should look at as a natural margin on the DG side for the next few quarters?

Yeah. Yeah. I think the margins -- we're going to see a little bit -- in general, our product margins are generally about the same that the co-gen, the inverter, the 75, the chillers. They're all -- the goal is to have around the same margin on all of them. Some jobs you're going to get a little bit better margin than others. But, in general, I think, the margins are all kind of equally weighted and I don't think there's any particular factor that would lead us to say one product is going to consistently have higher margins than the other.

Understand. Great. Well, keep up the progress and thanks for taking my questions.

All right. Craig, thanks.

Thank you. Our next question comes from the line of Michael Zuk from Oppenheimer & Company Inc. You are now live.

Good morning, Ben and Bob.

Hi, Michael.

Two question. First of all, what's the breakdown on the agricultural systems between cannabis and vegetables?

That's a good question. I don't have that at my fingertips. Anyways, Mike. I can tell you what's dominated by cannabis almost by far. We do have some other crops without being mentioning any specific customers lettuce and cucumbers and some such things and other high value crops. But certainly the majority is on the cannabis.

Are we going to be focusing additionally on the vegetable side, because that seems to be long-term?

Yeah. Absolutely, Mike. And in fact, it's -- this work that we're doing on the cannabis stuff which is all happening quite quickly, as I think you know it certainly happened very quickly in Massachusetts and we're trying to keep pace with activities in New York and New Jersey, et cetera. But what it's allowing us to do is interact with these greenhouse designers that -- they are sometimes ambivalent about the crop -- the greenhouse designers. And therefore are indeed opening up other leads for some of these higher value crops. But the only a little bit of downside of that and the upside of cannabis is, the cannabis crops got to be located in the state if -- and therefore, they're subject to the electric and utility rates of that state where the these higher value crops can seek out locations that have good utility rates were perhaps the value proposition of gas cooling isn't as strong. Yet still I mean, I think, you're exactly right on a trend there, Mike, these folks are looking at long-term operational costs. Certainly that's what's driving the cannabis industry is not what they can make cannabis for today, it's what they can make cannabis for two years down the road when there's five more competitors and it's been fully recreational use permitted and they have very established metrics in terms of volume per unit square foot that they need to make. And so, the Tecogen becomes an -- a very important part of that when they look at their long-term operational costs. So I say that because that is indeed playing out as some of these other crops are starting to be become [Technical Difficulty] higher value crops. So, again, as not as much [Technical Difficulty] working with these greenhouse designers is helping us to find some of them.

As a follow up on the ag side, is our technology applicable to fish farming?

Interesting question. I think fish farm [Technical Difficulty]. Hey, Mike, can you hear me okay?

And then a final follow-up, with regards to New York City and all of the regulations that are coming in place, how are we addressing our increased sales efforts in New York City?

I'm sorry Mike. Can you repeat the question? [Technical Difficulty].

With the New York City regulations tightening, how are we expanding our sales efforts in New York City?

Yes. Yes, sure. New York is an interesting place [Technical Difficulty] the building requirements for coverage, et cetera. Those are all trend [Technical Difficulty] reality check. How much do you build [Technical Difficulty]. So there is an opportunity for us [Technical Difficulty].

Well, I appreciate all the efforts and we look forward to the next quarter.

Okay. Thanks Mike.

Thanks Mike.

Operator, can [Technical Difficulty].

Gentlemen, I'm not quite sure I can personally not hear you too well. You are coming in very choppy.

Okay. Well, [Technical Difficulty].

I'm sorry gentlemen, would you mind repeating that?

Operator, [Technical Difficulty].

Our next question comes from the line of Haiden Kohl from Banchi Holdings [ph]. You are now live.

Hi, Hayden. Most importantly, can you hear me okay?

You are breaking up a little bit, Ben. Can you hear me all right?

Yes. I can hear you just fine. I think our [Technical Difficulty] have some problem [Technical Difficulty]. Please proceed, Haiden.

Yes. Great. Thanks so much. I just wanted to get a little bit more granular -- maybe this is a better question for Bob then on what's happening with the MCFA fork truck project next. If he can talk about it? And just give us sense for the parts per million improvements and what he kind of thinks is next in commercialization?

Right. If I just go back to what I said a few minutes ago, the profit was initially to demonstrate the feasibility of it on a -- on this MCFA fork truck and we did it and it worked the way we wanted it to. So we've said to MCFA and that was only about a week ago, we talk to them, we said look we think the next step we should -- that should be done to the program is we should certify the engine and once it certified, it certified, we can recertify it, if there's any changes that's not hard to do and that requires them really to do that work. And at the same time, we're going to send the truck back to them and their intent is not so much to focus on the emissions, but I think they want to drive it around make sure it doesn't break that kind of thing.

Okay.

So that's the next step I think. In terms of the PPM values, I honestly don't have them at my fingertips, but they're probably in the range of low tens for NOx and maybe a little something similar for CO, but don't quote me on that too much because I only have the converted values that I showed.

Okay. Okay. Great. And I guess otherwise with this program on the other -- on the adjacent sort of parallel side with the medium trucks and I guess like -- you've mentioned the towing unit like at an airport. Has there been any discussions yet that you can comment on alternative vehicles using the same engine?

No. Not with that engine. We have had talks with some of the companies that are in this business and they're just preliminary stage discussions about our technology. But in terms of this engine, I'm fairly certain it's used for other fork truck manufacturers and probably in some of these other vehicles and that could be a follow-up. But I have not had any discussions like that with MCFA.

Okay, great. Thank you both for taking my questions.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Alex Blanton from Clear Harbor Asset Management. You are now live.

Hi. Good morning.

Hi, Alex. Thank you. Good morning to you.

Yes. I want to clarify something that was said earlier, earlier questioner on the backlog, he said the backlog is now I don't believe that's correct except if you look at March 25th because the December 31st backlog, you listed as $16.6 million, which was slightly above the prior year of $15.7 million. And then you said on March 25th the backlog was $29.9 million and then March 31st the end of the quarter it was $26 million and then on May 14th $26.9 million. So it's not really down it's up?

Yes, absolutely. I'm very happy about our backlog to be quite honest with you Alex. It's got a really good mix of product and installations and while it's not where it was as you said in March whenever it was at 29….

March 31st -- March 25th when you go in the fourth quarter you gave us the March 25th backlog was $29.9 million, but a few days later at the end of the quarter it was only $26 million. So you shipped out some stuff in that week. So it's not really correct to say the backlog is down if you look at quarter ending, it's up substantially very substantially.

Yes.

All right. And also I wanted you to on slide 14, there is a very interesting chart there of the worldwide sales of the chiller market, which the site says is in 2015 was $8.8 million. Is that correct?

Yes. Yes. It's a big market, Alex. AC systems globally is huge. And as you've probably followed commentary yourself, it's mostly -- a lot of is in Asia Pacific, areas where the people don't expect cooling but now they want cooling. They want to work in an environment that's got temperature control. So it's a pretty impressive growth.

What is included in these numbers? What kinds of -- I mean, is this all air conditioning units combined?

Yes. Those three segments that I was alluding to on that slide, which is ammonia refrigeration, these water sourced -- these water cooled chillers and these air cooled chillers, of which air cooled chillers really dominate that market. I think I saw maybe 70% of it was air cool, but I don't want to be held to that, except to say, the air cooled segment of those three products, I think, dominates a lot of what you're seeing on this chart.

Yes. But what -- who are the end users of these? Does it include residential?

This -- I believe this is industrial. I don't think this includes your window units. This is industrial chilling.

Yes. We recall commercial.

Commercial, yes.

We recall commercial, Alex.

This is commercial air conditioners for companies or factories or whatever.

Yes. Buildings that are office buildings, hotels, hospitals, anything that's larger than a home.

Yes. And what is the main technology here that's used, I mean, that you're competing with?

By far, it's vapor compression, which is a compressor turning, like a new refrigerator or your air conditioning at home. It's a compressor being turned by an electric motor. And we are doing the same thing, except we are powering that compressor with an engine.

Yes, okay. Well, I just wanted to clarify that, exactly what that was. Because effectively what portion of this market can you address with your --

Yes. Alex, it's a good question. I see what you're circling around and I'll just go into very small technical diversion here, which is, our engine is in our Tecochill product that we've been selling -- our engine turns a shaft. And so that requires the compressor that we use for our Tecochill have a shaft, which mean it can't be one of these sealed bearings, hermetically sealed compress -- super duper fancy compressor technology that you can buy there today, because they don't have a shaft sticking out of it. We're limited to shaft driven compressor technology, of which it's out there and of which that's good and obviously we're working with it, but it's not allowing us to get our hands on these advances and these MagLev compressors that are super efficient, whereas if we were able to develop an air source unit and use our electrical advantage, our proprietary generator inverter technology, Alex, to power that compressor. Now we're not -- now we don't need a shaft drive. Now we can power these electric compressors with our own package. So that's my long way of saying, Alex, what this could potentially do for us is, open up a whole entire new range of modern refrigeration technology available to us commercially and made it up to our proprietary engine generator set, to make an air source chiller that could be a real competitor to electric incumbents, again, in areas where electric prices of a spark spread fits. That's a pretty powerful thing. I mean, again, you look at these areas in New York City and worldwide where electric prices are real high and they all have electrics. I mean, everybody has electrics and be able to potentially offer a gas-driven air source chiller that has all the VFD technology and seal bearing technology that exists today, would be pretty compelling. So maybe that's where you're heading with your question, but I wanted to point out that that's exactly the way I'm thinking, Alex, is that chart represents a huge volume of chillers, some of which we have available today, but some of which I want to develop in the future.

Thank you very much.

Thanks, Alex. Nice to hear from you.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing.

Well, we thank you all for joining the call. And as always, we'll keep you updated as more events happen, otherwise, we'll talk again at the end of the second quarter. Thank you.

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation and have a wonderful day.