Tecogen Inc. (TGEN) Q2 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Tecogen Second Quarter 2019 Earnings 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 our host, Bonnie Brown, CAO of Tecogen. Thank you. You may begin.

Thank you, Diego. Good morning, and thank you all for joining our second quarter 2019 earnings call. On the call with me today are Ben 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 Investors section of our website for 14 days following the call. A copy of the press release regarding our second quarter earnings is also available in the Investors section of our website. Before we begin, let me briefly cover our safe harbor statement. Various remarks that 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 are 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 available in our earnings press release and in the Investors section of our website. I'll now turn the call over to Ben for a business update.

Thank you, Bonnie. So as 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 second quarter of 2019, along 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 will then have some final remarks before we take questions. As always, I'd like to start off by reminding those investors 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 traditional methods of heating and cooling and powering buildings and infrastructure. Turning to Slide 6. The second quarter of 2019 saw revenues of $7.9 million versus $8.5 million in the second quarter of 2018. And though our revenues declined quarter-over-quarter, our net loss was $357,000 compared to a loss of $754,000 in 2018. This was in large part due to our improved margins in the quarter which increased to 44% in the second quarter as compared to 37% in the second quarter of 2018. The end result was a gross profit of $3.4 million and 8% increase from the second quarter of 2018 and an adjusted EBITDA of negative $205,000. Working capital at the end of the second quarter was $15.5 million compared to $13 million in the second quarter of 2018. Moving to Slide 7, you can see more detail on the quarter. We are very encouraged that we achieved higher gross profit on our Q2 revenues despite the 7% revenue decline from Q2 of 2018. Since our operating expenses are essentially remained flat, our higher gross profit is mainly due to our improved margins, particularly in our Service and Installation segment which saw a 14% year-over-year increase. The improvement in our service margin is important as it demonstrate the value of local factory service presence to ensure our equipment maximize the savings for our customers while generating good margin service revenue for the company. I will be talking later in the call about this topic and the opportunity we have for an 11th service center in North America shortly. The last item I will note on this Slide is our continued investment in our growth prospects. Specifically, we are maintaining our R&D and sales expenses as we prioritized the market rollout of the TecoFrost system, which I will discuss shortly, and continue the development of our Ultera Emissions Technology, which Bob will discuss. Moving to Slide 8. Our backlog is a robust $28 million as of yesterday, August 12. Product backlog, which consists of our equipment and associated accessories, stands at $12 million and the remaining $16 million of backlog is in installation services. There are a few things I'd like to point out about our backlog. First is that it’s a healthy mix of chillers and cogeneration equipment. I mentioned this because we see quarterly variations in product mix, but in general, we continue to see strong sales of our gas engine chiller equipment as well as our core CHP products, despite any variation and product contributions quarter-to-quarter. I would also like to indicate that we have our first TecoFrost order in our backlog with the installation of our improved system at a local facility here in Massachusetts expected in the second half of the year. We are excited for this first order and chose this site specifically as a soft launch due to the proximity to our factory in Waltham, so we can closely monitor its operation. We expect a similar soft launch on the West Coast later this year and are already building a strong pipeline of projects for TecoFrost in the 2020. The other item I would like to point out in our backlog is what's not in it. For over a year, we have been pursuing a large two to three megawatt cogeneration opportunity spread among many buildings in a mostly new geography for us. We expect a decision to be made on this opportunity in the third quarter, but due to its size and importance, thought it material enough to mention at this point. I will talk more about this opportunity and what it means for our business in just a few minutes though I will not be disclosing the location or other details of the project just yet. Another important item I'd like to mention about our backlog is a drop we saw in our indoor growing segment, which was 7% last quarter. It is now 1%. Suffice to say, I see no dip in demand for our unique cost saving gas chiller solution for indoor cultivation facilities such as cannabis. Indeed the transactional nature of the chiller sales is reflected in how quickly the orders come in, get built, sold and closed sometimes all in the span of a quarter. As noted in our recent press release, in the past few months, we have announced Tecochill orders for our cultivation facility in Nevada and two additional cultivation facilities in Massachusetts. As indoor cultivation scales up and becomes increasingly competitive, operational cost savings from Tecochill is becoming standard practice when designing new cultivation facilities, planning expansion in such areas as New York and New Jersey. I expect to see the indoor growth segment increase again in the coming quarters as new orders come in. I should also indicate that our backlog includes the revenues expected from our Ultera retrofit project in California that Bob will be talking about. I see the strategic importance of this project far outweighing the financial returns of the actual project, but to give investors some idea of scale, the net project costs was a few hundred thousand dollars in total. Lastly, as I said previously, our backlog consists of products and installation revenues and does not contain our recurring maintenance contract revenues, which is a consistent contributor each quarter. Again, this is very important when I discuss the prospects of additional expansion of our service segment. Moving to Slide 9. I want to reemphasize key achievements for the company and how they relate to our plans going forward. First, as mentioned, we adjusted our sales strategy to have a renewed focus on our chiller products. Tecogen is the only natural gas engine-driven chiller manufacturer and adding the TecoFrost ammonia chiller line will further our product offering for an entirely new market and industrial refrigeration. As I've mentioned, replacing an electric chiller with Tecochill or TecoFrost, accomplishes the same energy savings as cogeneration, but with far less competition and in most cases with lower capital outlay than an equivalently sized cogeneration system. Chillers are also typically specified to engineers and manufacturers' representatives and are therefore much more transactional in terms of project closing. As I mentioned, we have identified our first TecoFrost project here in Massachusetts, set for installation later this year and anticipate the similar West Coast project before year-end. These two East Coast, West Coast sites are important to establish customer confidence as we anticipate full U.S. rollout next year. Next, we increased the productivity and reliability of the sites acquired from ADG to the point where we sold some of them to a third-party ESCO earlier this year, while retaining the O&M agreement for Tecogen to continue servicing these sites. So despite the loss in energy revenue, we will benefit from the service revenues for the life of these contracts. We currently do not have any plan to sell the remaining ADG sites still owned and operated by Tecogen. Next, as Bob will talk about in a few minutes, we have made excellent progress with our Ultera Emissions Technology, most notably through our partnership with Caterpillar, Mitsubishi Fork Truck of America or MCFA. As Bob will describe about the work we are currently doing, it's focused on the emissions of the Mitsubishi engine using the forklift. The goal of the program is to make this OEM engine a certified near-zero emission engine through the retrofit. For this project, this engine will result in a near-zero emission forklift both from a technology development standpoint, achieving this goal to demonstrate that Ultera retrofitting engine could be used to make any other alternative fuel vehicle such as propane or natural gas fleets certified to near-zero emissions. And lastly, with the ADG asset sale and our expectation of positive earnings and cash flow in the second half of the year, we expect to achieve financial stability that allows us to execute our growth plans going forward. With that, I'd like to turn the call over to Bonnie, who will cover more detail on our financials followed by Bob, who will describe our emissions progress in more detail. Bonnie?

Thank you, Ben. Slide 10 contains some highlights of our Q2 2019 year-on-year financial results. Total revenue for the quarter were $7.9 million with overall gross margin of 44% and gross profit of $3.4 million to the second quarter 2019, compared to a 37% gross margin and $3.2 million gross profit for Q2 2018, showing an improvement in gross profit of $266,000 or 8% year-over-year. Revenue from energy production for the quarter was $578,000, a reduction from the previous year's total by $930,000 compared to Q2 2018. This decline is attributable to sales of certain of the company's energy producing assets and the seasonality of those assets that the company retained versus those sold. Collectively, both asset groups meaning those retained by the company and those we sold and now managed performed on par with the previous year. However, the equipment sold and managed is more concentrated in chillers, which proportionally elevates revenue derived from these assets in warmer months. While overall operating expenses decreased by $35,000 or 1% remaining relatively flat, G&A expenses decreased by $67,000 or 2.5% while selling expenses increased to 11% year-over-year as we invest in our future. Net loss attributable to Tecogen for the quarter was $357,000 compared to Q2 2018, which was a loss of $754,000 an improvement of $397,000 or 53% year-over-year. As Ben discussed earlier, our backlog has remained sizeable and is currently at $28 million, positioning the company for long-term growth. Slide 11 presents the reconciliation of adjusted non-GAAP EBITDA for the second quarter and first six months of 2019, compared to those for the same period in 2018, which has been referenced throughout our presentation and in our earnings release. Adjusted EBITDA, a non-GAAP measure that management uses as an important metric. As shown on Slide 11, after adding back interest, taxes, depreciation and amortization to net income or loss attributable to Tecogen, we come to with standard EBITDA, which for the second quarter of 2019 with negative $225,000 compared to a negative $523,000 for the second quarter of 2018. After adding back non-cash adjustments of stock-based comp, the mark-to-market adjustments, creating the unrealized loss and investment securities, goodwill impairment charge and non-recurring merger-related expenses from the prior year, we reach a non-GAAP adjusted EBITDA. For Q2 2019 adjusted EBITDA was negative $205,000 compared to a negative $330,000 for the second quarter of 2018, an improvement of $125,000 or 38% year-over-year. Adjusted EBITDA for the six months ended June 30, 2019 was positive $473,000, compared to negative $26,000 for the same period in 2018, an improvement of $499,000. Now I will turn the call over to Bob for a technology update.

Good morning, and thank you, Bonnie. So let me begin with the Forklift Truck program. As discussed previously, we have been working with the propane industry and with MCFA, the Mitsubishi Caterpillar Forklift America, a well known manufacturer of both electric and propane trucks. Our objective has been to adapt Ultera to the propane trucks. If successful, our technology would provide propane fuel trucks an answer to their electric counterparts relative to criteria emissions. Those are the emissions that produce health – negatively impact on health. Emissions from Forklift Trucks are of heightened concern due to their frequent application indoors. Of course, in the second quarter having successfully adapted the Ultera System into the MCFA truck, we were focused on the final step in the project that would be retuning the engine to maximize the effectiveness of the Ultera process. Through two iterations of retuning, which is done through software, the tailpipe NOx and CO emissions were improved significantly from our baseline test with the truck as we received it from MCFA. As reported in our last call, NOx and CO emissions in the final tuning set up, we're one-fifth and one-eighth respectively of the truck as tested in its baseline form. In our discussions with MCFA, we advised them that additional tuning could bring further emissions reduction, particularly regarding NOx. However, we realized that the current tuning process being widely separated between Japan and the U.S. was very inefficient. As such, we had recommended that we conclude the tuning for now and revisit wall engine certification to the California near-zero standard was underway. During certification, the process would be more efficient as the engine is tested on a dynamometer with a prescribed cycle so the tuning engineers could make quick impactful iterations to the software. So in June, MCFA met with Mitsubishi Management in Japan and the Ultera program was reviewed along with our recommendations. We were pleased that MCFA’s feedback from the meeting was very positive with several options for moving forward under their consideration. Recently, we heard definitively what they wanted to do next. The corporate parent has requested that the engine supplier, Mitsubishi Company, send engineers from Japan to work on finalizing the tuning interactively on the Fork Truck with Tecogen at our facility in Massachusetts. We agreed of course that this collaborative approach would be highly beneficial. We have tentatively scheduled this work for the last week of September. Okay. There are several other Ultera activities that are ongoing that I can report on today as well. As a follow-up to a bid request mentioned in our last call, the company has received an order to complete the engineering of an up-sized Ultera system for use in municipal water pumping in Southern California. The design specifications are applicable to in 800 horsepower caterpillar natural gas engine and would represent a doubling of the largest capacity system supply today by the company. The engineering has been completed and our work submitted for acceptance by the customer in a lot of district. Two kits are scheduled to be ordered in early 2020 and will be applied to newly procured engines from the local caterpillar dealer. Lastly, and this is discussed in previous calls. We are engaged with a leading research and development organization to formulate and characterize the performance of a specialized catalyst for Ultera. The testing is scheduled for completion in September. We are hopeful that this composite catalyst will improve Ultera, NOx reduction and that it has an immediate application to the forklift program. With that, I'll turn the call over to Ben for his final words.

Thanks Bob. So moving on to Slide 14. I want to give a little bit more color on our core business outlook and how we intend to pick up our growth in our main product segments. First, we continue to see strong demand for our flagship InVerde microgrid-enabled cogeneration system. The economic savings of cogeneration is well understood, but the specialized functionality of our inverter-based interconnect, the efficiency of our variable speed operation and permanent magnet generator technology and the grid resiliency of our search microgrid capability, sets Tecogen apart from any other competitor. Additionally, our cloud-based CHP insight software integrates system monitoring, remote diagnostics, factory service dispatch, and tracking of utility incentive program data metrics. As the graphic on the slide indicates, which shows our vehicle tracking system by the way, our service techs. Our service centers indicated by yellow stars, dispatch our factory service technicians, each of them is a band, you can see there based on real-time needs of individual sites in our region. Our service centers are one of Tecogen's strongest assets and will always be a viable long-term sustainable business for Tecogen regardless of any future company endeavors. Second, we are continuing to grow our chiller business segment in new areas such as indoor cultivation as well as the established markets such as ice rinks and industrial cooling. I will again turn to a map of service centers. Since the establishment of our Florida Service Center last year has had the desired effect of establishing a beachhead, a profitable service operation while beginning to drive new business in the territory. Since we established our service center in Florida late last year, we have added 10 engines to the territory, but more importantly with our factory service center in Florida established, we are creating more opportunity for Tecogen equipment in Southeast United States and the Caribbean. Ultimately, I see our Florida Service Center playing an important role in our broader TecoFrost and Tecochill expansion. Since the economic benefits of gas cooling are particularly pronounced in the Caribbean, but only if you have factory support as we've established in Florida. Finally, I want to circle back to the opportunity I mentioned earlier for two to three megawatts of CHP equipment in a specific North American geography that does not currently have a factory service center. As I mentioned, due to the decision making process of this opportunity, we have not included in our backlog, but the opportunity is material enough that we are already proactively planning an 11 service center in this new geography, should we win this award. While I'm trying to convey the right degree of measured expectation that exists with this particular project, if Tecogen is selected, it would establish a new profitable business growth opportunity in the mostly untapped new area. I am very excited for this opportunity not just for the expected product sales revenue in the near-term, but for the long-term prospects of another factory service center in North America. We expect to find out about this important project in the early fall and I of course, will notify investors the outcome one way or the other. So moving on to Slide 15 in closing. I would like to reiterate the key value propositions of Tecogen's clean, reliable distributed generation systems. First, our systems use clean and abundant pipeline gas to produce electricity, heating and cooling that is cheaper, cleaner, and more reliable than traditional needs. Our systems are designed with North American utility structure in mind in terms of interconnect certifications, microgrid functionality and incorporation of other distributed generation assets such as storage. As facilities strive to reduce operational costs, improved greenhouse gas footprint, and become resilient to grid outages, Tecogen systems are increasingly sought after to meet these goals. Next, we have differentiated ourselves from other onsite generation technologies by virtue of our unique and proprietary technology, longevity, comprehensive factory service presence, and overall quality. Our InVerde is the only microgrid-enabled CHP system using permanent magnet generator technology operating at variable speed with an integrated onboard inverter, key features that optimize economics and savings for customers. Our Tecochill and TecoFrost natural gas chillers have no other competitors and are increasingly becoming the design basis for many facilities with large cooling refrigeration needs. And importantly, our 10 factory service centers are not only profitable foundation for Tecogen that will always provide steady revenue and margin for the company, but also a key business development tool as we enter new geography such as the North American opportunity I previously mentioned. Tecogen's longevity and strong reputation in our industry is not just due to our differentiated products, but as a result of our product support and factory service. Our factory service centers in major markets substantially reduced concerns of customers about long-term operation of the systems and their long-term savings. Ultimately, the customer benefits due to the longer run times and increased savings from the local service center. In term of our core business, we are continuing to improve our margins across the board, for materials procurement, manufacturing, installation services and maintenance. We are working on maximizing our margins and reach our profitability goals while still resourcing important future opportunities such as the TecoFrost reboot and the development of Ultera and associated intellectual property for wider vehicle markets. We have shown the scalability and effectiveness of our Ultera Emissions Technology on many engine platforms, from GM engines, the Ford engines, Generac engines, Caterpillar engines, and more recently with the Mitsubishi engine on the forklift project. The result of our retrofits on these engines is the same, near-zero emissions on par with a fuel cell. We think our message is reaching a larger investor audience and look forward to sharing another update in our third quarter earnings later this summer. With that, I'll turn it over to the operator for questions.

Thank you. Ladies and gentlemen, we will now conduct our question-and-answer session. [Operator Instructions] Our first question comes from Amit Dayal with H.C. Wainwright. Please state your question.

Thank you. Good morning, everyone.

Good morning, Amit.

With respect to some of the weaker comps in the first half of 2019 revenue-wise relative to first half of 2018, if these were to improve going into the second half, what would be the drivers over here that would sort of help you show some better performance, I guess, sequentially or year-over-year from a revenue perspective?

Yes. Well, certainly product orders is the main thing, Amit. That's what it comes down to. Orders tend to come in orderly and sometimes not so orderly, and the timing of them can be different. I've mentioned the chillers because I think that's probably where you're going to see most of our – or a lot anyways of our increased product sales in the rest of the year is through more chillers. And I'm very confident about that because as I mentioned before, these chillers sales tend to be quite transactional. They don't drag out in time. A cogen project can sometimes by virtue of permits or other activities going on in the building take a little bit longer, whereas the chiller projects tend to be, as I said, proceeding much more quickly. So I'm very confident about the orders that we have queued up for the rest of year, particularly on the chiller side of thing. That should be very good instead of getting our topline back to our expected. And as I said, this additional order that I've mentioned is – I'm not planning for that, but that of course would provide even more boost for the rest of the year, and in fact the first half of 2020.

Got it. Thank you for that. And then gross margin levels, should we expect sort of what we saw in the second quarter to remain in place for the rest of the year or should we expect some variance?

Yes. So believe me, I'm pretty excited about our margin increase. We worked real hard to get there. We're kind of maintaining our guidance of 35% to 40%. I don't want to increase what investors should expect. Certainly, we feel that's achievable and we're constantly trying to get it above that if we can like we did this quarter. But understanding that sometimes, there are uncertainties in terms of different parts of our business and installation or different types of things that could go on, so we're going to continue to try to keep that margin up there, but I'm going to maintain the 35% to 40% going forward.

Understood. Just one last one for me in regards to potentially setting up a new service center. If this were to come to fruition, like what goes into it? How long does it take you to set it up? How much does it cost you? Do you need to hire?

Great question. And things that we've already thought out quite coherently. So the cost would not be significant. I can't tell you exactly, but I can't see it being a tremendous cost for us to get ourselves established there with a building and with a van and with people. I can see it happening very quickly. I could see it all happening this year potentially. And I could see us having the resources to do that. I don't see us needing to reach out for additional resources to do this. So we're pretty good at it. We've started up the Florida one quite efficiently and with good results. And so I can see this, the 11th one, should this opportunity proceed happening quite quickly and manageably.

Understood. That's what I have guys. I will get back in queue. Thank you.

All right. Thanks, Amit.

[Operator Instructions] Our next question comes from Michael Zuk with Oppenheimer. Please state your question.

Good morning, Ben and Bob, and Bonnie.

Hi, Mike.

A question on indoor growing, what are the future opportunities in indoor growing from a geographic standpoint? I know that you have a lot of systems installed in Massachusetts and a couple of systems coming onboard in Massachusetts. But what other states or geographies are there opportunities in?

Sure. Well, I think New York, New Jersey are certainly the ones that are the largest right now. And just – I'm not sure if the audience knows that the medicinal use of marijuana is allowed in both New York and New Jersey and both states are working actively to get recreational use. And the common thinking is it's just a matter of time. And in fact, Michael, a lot of the builders and the permit holders in these cities are just assuming that recreational is going to happen and the volumes of sales are going to happen regardless. So New York, New Jersey, the biggest ones. We’re of course, quite active in those geographies anyway as we've got reps in those and sales agents in those areas. More importantly, we are tracking who has the permits and who is looking to build facilities. And we're in constant discussion with site developers and permit owners as they look to expand. After New York, New Jersey, Mike, Nevada, we mentioned our chiller we sold there. That's a smaller population. There are a few other states. Certainly, the fact that it's state-by-state works in our favor. I don't see that going away. I'm following the press and everything that's been going on. This seems to be still be a state-by-state authorization thing and any type of federalization of it wouldn't occur for some years. And that works in our favor, because, of course, people are stuck in the state and the utilities that they work within that state.

And then as a follow-up question, changing the subject a little bit. With regard to the new regulations coming into New York City, in the Greater New York City area, and with the possibility of a capping of natural gas hookups, will this be a positive or a negative for us from an opportunity standpoint? It seems on retrofits with natural gas already existing in the building, it would be a positive, but for new hookups, it might be a little bit of a negative?

Yes. Well, in general, Mike, the greenhouse gas benefits to CHP is well understood. We're operating at 90% efficiency and the building getting their electricity from the grid, whatever their grid profile is one thing and however they're heating the building. So regardless of anything, CHP is going to be a higher efficiency. And as a result, buildings can actually see a reduction in their carbon footprint as a result of using CHP because of the overall efficiency. And they can see themselves being in a favorable position as a building. When it comes down to these carbon limits for buildings, they could be in an advantage position as opposed to a disadvantage position. And I think Bob, I'm looking at Bob now. Certainly, the grid profile of all the utilities, some have better renewable components, some have worse, but in general, we see almost typically 50% greenhouse gas savings versus utilities.

That's right or better. Many states were better than that, but the big ones that we deal with California, New York, Massachusetts it’s two to one in those states and maybe better than two to one in Massachusetts. So the carbon tax regulations as they come about, if you have a big building that you can't do anything much for your supply of electricity other than cogenerate it, there's no room for solar panels. So we're hopeful that will work out in our favor. We think it will. The hookups and so forth, I think that's probably a problem in Westchester, is it Ben?

Yes, well, there are certain areas where there's gas.

Yes. Typically, though, many of the buildings we see, there's already a big gas hookup there with boilers and everything else, and we just tap off into that gas supply that exists. So the new hookups may hurt us maybe in Westchester, but we think that will sort itself out because I think they'll figure out a way to get more gas there eventually in Westchester.

And then from a sales and marketing standpoint, we expanded our sales effort beyond the northeast and with the new service center in Florida, what are we doing in California?

Yes. We have of course our two service centers in California in San Francisco and Los Angeles. And our existing fleet there is running quite well and it's profitable. California is – it's a mixed bag of opportunity. Certainly, their utility structure needs help. That's the smart inverter certification I mentioned before, 1741 SA, where if you've got this smart inverter certification, California utilities can reach out to you to help them during periods when the sun is peaking in and out of the sky and the solar is going up and down and they need frequency correction and these types of services. That's an opportunity for us. And we're very much trying to take advantage of that. On the downside of California, certainly they have their own visions of renewables and how much of their energy production they want to be renewable. That's a bit of a challenge. But suffice to say, I think most of our projects proceed in California, proceed just simply on economics, core economics of CHP. It's a building that’s got high electric rates, and even though you may not be able to get incentives from California because you're not renewable. The fundamental operation of that cogent plant, it's just going to give you an ROI that will lead you to go forward. So again, California, it's kind of a mixed bag. Certainly, there's opportunity for savings and you try not to get stuck behind any type of policy directives of gas versus renewables. But sometimes that happens and there's not much I personally can do about that.

Appreciated.

Sure, Mike. It's good talking with you.

Thanks. Our next question comes from Alex Blanton with Clear Harbor Asset Management. Please state your question.

Hi, Alex.

Good morning. I wanted to ask about capacity in your plant there in Waltham. Assuming that you go to other shifts, more shifts, what's the capacity of that plant compared with what you're doing now?

Yes, sure. It's a good question, something we thought about certainly enough. And I'm very comfortable with what we can do here in terms of what we have at our facility. We can certainly double our capacity without too much sweat, just cleaning out our basement, if you will, and sorting out some of our offices here. We've got room in this building to expand our capacity. Certainly, I'm not worried about that. Now beyond 2x expansion, certainly, you could look at doing – having different shifts. We've looked at evening shifts, et cetera, to maybe get your capacity beyond that. But I think before we ever got to that point out, if we ever got to the point where we had 2x capacity expansion and the one to look beyond that, we would probably start thinking about where else we could build these things locally, so – but maybe a little bit more cost-effectively. Certainly, there's a lot of manufacturing in the northern part of Massachusetts and southern New Hampshire. And there's certain products that are more amenable to be farmed out and built somewhere else, then some of the products could still be built here. So it's not something I'm too worried about. Certainly, I'd be excited to start knocking down walls and expanding our production if the market calls for it.

Do you have approximate percentages? You said more capacity, but how much more? Do you say you could double your capacity without going…

Yes. I think I can safely say we could double our capacity here in Waltham. With a little bit of investment in knocking down walls, et cetera, but without having to change our building we could double it here.

And without going to additional shifts?

Possibly. I'm not sure if I can get into too much detail there, but I could certainly see us doubling our capacity, whether it's just by knocking down walls and taking out offices or to go into different shifts. I'm sure there would be a lot of thought into the cost effectiveness of both or either of those. But suffice to say, I don't think we're going to have [indiscernible] for a different building because we can manage that here.

Fine. That gives you leverage, a lot of operating leverage if you can expand within your building.

Yes. It sure does. And just as another little aside, Alex, having these service centers is really helpful, too. There are places that we can put units. There are places that we can – so we can – we don't just have this building, we've got 10 other buildings and hopefully we'll maybe have 11 other building soon.

I see. Okay. Well, that's a very good point. I wanted to ask you about Eastern Kentucky. There's a company called AppHarvest, which is developing the indoor agricultural industry in Eastern Kentucky around Morehead, Kentucky. And this was described on an edition of 60 minutes back in March and is probably available on the 60 minutes website. But the first indoor farm that they're planning will have 2.7 million square feet with 60 acres under glass and will cost $85 million, employ 280 people and will grow tomatoes, which is reportedly one of the largest current imports from Mexico, and they plan to expand from there. Have you any marketing efforts in relation to this effort? This is a big, a very big indoor agricultural effort.

Sure. Yes. And I'm certain if I – we walked down the hall, I mentioned it to my guys, their ears would perk up and they know about it because we are in fact monitoring where all these big facilities are going. And in fact there's a little bit of a metric you can look in terms of cooling, and we’re kind of using a 10,000 square feet of cultivation. It’s about 400 tons, one of our DTx chillers or so. So as we look at these different facilities and again, AppHarvest, I'm familiar with a little bit, you can make a guess as to how much cooling they may need and what their energy needs maybe. And more specifically then are we applicable to them? And I mean that to say, are they too small, so many of these facilities are too small for our equipment. Now in the case of AppHarvest, I think it's the opposite. It's a very large opportunity for us. So there's ways we could do that, not just through our chillers, but through our cogent equipment. So to answer your question, Alex, we’re definitely staying on top of all these facilities. There’s one in Kentucky and then I’ll go back and look at specifically. But generally speaking, the larger the facility, the better fit we are for it.

If anybody would like to look at the 60 minute broadcast on the website, the original broadcast was March 17 this year. It’s 13 minutes. Okay, well that was very good. One more question. Mayor de Blasio of New York was recently on Fox in an interview with Sean Hannity. And during that interview, which was an hour long Hannity program, and he took the entire hour. I don't usually watch Hannity, but in this case, I wanted to see what Mayor de Blasio had to say. And he said at one point that he wants every building. Now this is of course exaggerated on his part, but he said he wants every building in New York City to reduce their current footprint and their emissions. And he said that in his opinion, buildings are one of the worst emitters of greenhouse gases and New York City has to do something to reduce that and to get green. And he compared this with Green New Deal and so on. Now, I don't know how much of this is aspirational and how much they are actually willing to do to further that goal. What can you add to what I just said about New York City, and what they might be thinking about in terms of reducing carbon footprint and emissions in buildings?

Sure. I've been puzzling that question myself. New York certainly has their goals in terms of carbon neutrality, which is all very exciting. And then certainly, the energy needs of buildings as you say, is significant. People are plugging in their laptops. There's more energy need. Energy needs in buildings are going up, not down. And of course that creates a contradiction in terms of trying to cut their greenhouse gas footprint. And CHP, as Bob kind of mentioned, is the best bang for the buck in terms of making significant reduction in a building's greenhouse gas footprint. A couple of solar panels isn't going to move the needle. Curtailing maybe your elevators or something like that that may move the needle a little bit, but getting your power generation from a 90% piece of efficient equipment, that's going to move the needle in terms of getting your greenhouse gas footprint down for these buildings. So I think it's going to be an opportunity for us. And to be honest, I think where a lot of these programs are going to, the end result is going to result in higher electric prices. And then one way or the other whether it's through wind or if it's through what other type of renewable resources, the distribution of that electricity is not going to go away. The distribution infrastructure to deliver that power, whether it's from wind or anything, it's still going to be a challenge. So I think electric rates are going to be still faced with an uphill trend. And I think by virtue of the greenhouse gas reductions, our equipment provides, it's just going to create that much more economic incentive to put CHP in those buildings. Now, whether that's going to happen overnight and whether all of this legislation pans out and building start having real carbon tax bills, we'll see how it goes in the next few years. But what I'm telling my customers, Alex, is that by putting in this cogeneration equipment, you're getting ahead of it. You’re improving – drastically improving the greenhouse gas footprint of your building, more so than you could expect probably any other measure. So I'm not going to go so far as to say this is a good thing for us. But ultimately I think building owners are going to understand the role of CHP and the importance in reducing their greenhouse gas. But anything you must add to that, Bob, you can.

No. I think that's a good characterization. The large buildings that we deal with in New York City, they just don't have too many options. And as new buildings are built, they have more glass, they use more electricity and the cooling and so forth. They don't want to have their architecture impacted negatively. And I've seen this in a couple of sites in San Francisco where they would look at our equipment because it can meet the carbon requirement of footprint for the building, but also maintain architecture. So all those things, I think will – if they're enacted fairly, these type of legislations are always good for us. So…

But you mentioned legislation. Do you know of any specific legislation that is coming along these lines that will deal with this? Or is it just aspirational?

Well, I think the city council – New York City Council certainly passed that requirement. Now how much teeth and enforcement goes into it, that's kind of the next thing that we'll wait to see. And then of course, who knows if that city council is in this area two years. And then we start to get into things that are unpredictable from my standpoint. What I just try to show customers is what their greenhouse savings is. If there were some type of carbon cap or penalty, this is how much you'd benefit from it because this is how much you're saving from the grid, and just lay all the information out for the customer and then let them make their decision based on that.

Okay. Thank you.

Sure, Alex.

Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks.

Well, thanks again for everyone for listening on the call and we hope to give you updates in the coming weeks and months as they happen.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.