Tecogen Inc (TGEN) 2015 Q2 法說會逐字稿

Good morning and welcome to the Tecogen second-quarter 2015 financial earnings conference call. (Operator Instructions) For your information, this conference is being recorded.

As reminder, a recording of this conference call will be available for playback approximately 1 hour after end of the call and will remain available until Friday, May 15, 2015. Individuals may access the recording by dialing 877-344-7529 from inside the US, 855-669-9658 from Canada, or 412-317-0088 from outside the US. Please enter conference replay number followed by the #.

Now I would like to introduce David Garrison, Chief Financial Officer. Please go ahead, sir.

Thank you. I will read a Safe Harbor statement. This presentation includes forward-looking statements within the meaning of Section 27A of the Securities and Exchange Act of 1933 and Section 21E of the Securities and Exchange Act of 1934.

Such statements include declarations regarding the intent, belief, or current expectations of the Company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that can materially and adversely affect actual results, as identified from time to time in the Company's SEC filings. Forward-looking statements provided herein are as of the specified date and are not hereby reaffirmed or updated at any time.

I now turn it over to Ben Locke.

John, would you like to say a few words before --?

Yes. Ladies and gentlemen, I am John Hatsopoulos. I wanted to apologize to all our shareholders for the lack of volume of our security and the lack of trading, which has upset some shareholders. And I don't blame them.

The reason that this has happened in the past, and hopefully it won't happen in the future, is that we have, in our effort to grow our Company, we didn't want to use a lot of time and capital to have an IR person. Everybody that bought the stock, including the person that bought the shares in the last couple of days, are all fragile mind that they honestly believe in our story and our business plan. Therefore, there is no selling.

On the other hand, since there are no new investors available because we don't have any IR, there is no trading on the stock. This is about to be corrected. I am in the process of interviewing a list of people, and starting in September, we will have a dedicated IR department to bring us to various institutions and retail shareholders. And hopefully we will get some more activity in our stock. Thank you.

With that, I would like Ben to give you our business plan.

Thanks, John. At the conclusion of this call after our Q&A, for those interested, we will have a short discussion about Ilios, which we issued a press release today giving an update of the status.

So turning back to Tecogen, I would like to start off our call by reminding those who may be new to our Company with Tecogen's core business model as shown on slide 3: 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. As I'll describe in this discussion, the combination of our unique technology, overall trends in energy supply and demand, and the increasing global emphasis on environmentally clean technology all favor Tecogen's continued growth.

Turning to slide 4, in the second quarter, we continued to make substantial progress in the three major metrics for our success: revenues, margins, and backlog. First, we continued our trend of growing revenues. Revenues for the second quarter increased to $6.3 million compared to $4.5 million in Q2 2014, an increase of 41%. This brings our year-to-date revenues to approximately $12.5 million, in line with our revenue goal for the year.

Secondly, gross profit increased to $2.14 million compared to $1.35 million in Q2 of 2014, an increase of 59%. Gross margins came in at 33.5%, which is a bit lower than our goal of 35%, but still a 12.8% increase over Q2 of 2014. I'll talk a little bit more about our margins later in the call.

Third, we continue to maintain a robust backlog of projects. Backlog as of August 5, 2015 -- yesterday -- was $10.77 million, ensuring a healthy continuation of our revenue growth in the third and fourth quarters of the year. Our goal is to continually maintain backlog above $10 million.

And importantly, as indicated by our press release yesterday, we now have sufficient capital to fully execute our business plan. The additional funds will allow us to expand our sales team, increase business development activities of our Ultra emissions technology, increase our marketing investor relation efforts, and provide overall working capital as we continue to expand our production.

Turning to slide 5, we reaped some additional noteworthy achievements in the second quarter. We shipped 14 of our flagship InVerde CHP units, just 1 less than our record quarter last quarter and an overall record for any second quarter. This further demonstrates that the unique capabilities of this product -- approved utility interconnect, variable speed operation, microgrid capable, and ultralow emissions -- position it as the most compelling choice for our target markets.

As Bob will describe in a few minutes, we continue to make headway establishing our Ultra emissions retrofit system as a game-changing technology for emissions regulations. By working with air quality management regulators in states like California, our goal is to demonstrate that our Ultra technology should be the basis for future emission standards, thereby establishing us as the only cost-effective solution for meeting emission limits.

We continue to receive projects from large energy service companies, or ESCOs, as part of larger energy efficiency measures. In the second quarter, we were selected by ESCOs for projects in school districts in New Jersey and New York. Our goal is to solidify Tecogen as preferred product for these ESCOs.

Ilios continued to demonstrate that it is the highest-efficiency water heater available in the market, offering customers tremendous savings and compelling ROIs. As our press release indicates, we shipped a record number of Ilios units in the second quarter, with the units going to new projects in Hawaii, Florida, Puerto Rico, and the United Kingdom. And we currently have a backlog on track to exceed $1.0 million in revenue.

Turning to slide 6, I would like to provide a little more commentary on each of our key revenue segments for the Company: product sales, service, and turnkey installation products. For our product segment, we saw a 66% increase in revenues over Q2 2014 and product margins coming in the range we expect. In the second quarter, we sold products in all of our key market segments -- school systems, hospitals, residential housing, athletic facilities, assisted living facilities, and hotels.

For our service segment, we saw increases in service revenues, which correlate to our increased unit sales and our focus on turnkey installations. We are very happy with the margins from the service segment and expect continued growth going forward. As a reminder, many of our customers sign long-term service agreements when we sell the equipment, and this backlog of service revenue is not included in the sales backlog number previously stated.

For our turnkey segment, we continue to select key projects that demonstrate our ability to handle start-to-finish construction projects. Many large customers, such as hotel chains, property management companies, and ESCOs, prefer using the product manufacturer for installation to ensure that the units are installed and operate with the best engineering practices. From a strategic standpoint, it is a key part of our long-term sales strategy to establish Tecogen as the best-performing CHP product. And doing turnkey installation ourselves assures this will occur.

Occasionally, we accept a turnkey project that although it does not have compelling margins, demonstrates our product's superiority to a key customer with potential for many future orders. Specifically, we are currently installing a large tri-generation system at a recognized hotel chain. And while the project is going very well in the customer's eyes, we have accepted a lower margin in order to foster good relations with this ownership.

The slightly lower margin in our service segment, which includes turnkey installation, reflects this and is the main reason our overall margins fell slightly below our goal. We fully expect our turnkey margin to improve going forward as this project wraps up in the third quarter.

Lastly, we are gradually growing our backlog of Ultra retrofit systems. As previously mentioned, the uptake of these systems is largely dependent on verifying performance over sustained periods of operation. We have to overcome the doubts of other emission control technology that did not produce the promised result or longevity of performance. As we complete more retrofit projects that demonstrate our robust performance, other customers will have less worry about adopting our technology. Bob will give some more details on this very shortly.

Turning to slide 7, I wanted to provide a little more detail on our key market segments. As you can see, our backlog gives a good representation of where we are selling our products. Hotels, residential, schools, nursing homes, and athletic facilities typically dominate our sales pipeline.

As you can see, the correctional facility segment is not as predictable, but we already have a few prisons with our units installed in them. And a few projects are looking very promising in the coming months. All in all, I am very pleased with our results for the second quarter and I'm fully confident that we will continue to meet our key metrics in the third and fourth quarters.

With that, I'd like to ask David to provide some context to what we have achieved thus far in our key financial metrics and what our goals are for the rest of the year. Afterwards, Bob Panora will provide a technology update on our Ultra emissions system development. David?

Thanks, Ben. The following are some of the key measures management uses to analyze and gauge our success. On some of the graphs, the shaded blue box on the right-hand side relates to time in future periods.

If I can draw your attention to the revenue graph, service revenue is a combination of service contracts from our factory maintenance program and construction services from installing our products. Our trailing four-quarters revenue has increased at a CAGR of 43%, or from $11.3 million ending 2013 Q2 to $23 million for the trailing four quarters ended 2015 Q2. Management's goal is to achieve nearly $24.5 million for calendar 2015.

Looking to the gross margin graph, review of gross margin percentage using the trailing four quarters eliminates the seasonality and shows our return to a gross margin of 35%. On occasion, as Ben previously discussed, projects of lesser margin are intentionally initiated as part of a larger goal or a program of projects. These events will affect margins in the short term, but management's goal is to sustain an average margin above 35%.

Turning to operating expense as a percent of revenue. In the second quarter of 2015, operating expenses decreased to 38% as a percentage of revenues. While continuing to lower the trailing four-quarters percentage to 45% on the graph, management expects some of these costs to rise in the short term. Again, while pleased with the results, the goal is to continue controlling these costs while growing revenues at a faster pace.

Selling expenses will increase prior to seeing the resulting revenue gains from increased sales staff. Management's goal beyond 2015 is to work towards operating expenses less than 25% of revenues. To reiterate, this will be achieved with a combination of increased revenues and controlled expenses.

On to backlog. It is worth noting that backlog only relates to product and installation service revenues. The service revenue from our maintenance contract, which exceeded $2 million in the second quarter, is not included in this metric. This reoccurring revenue is nearly one-third of our revenues, providing steady cash flow and profit. The backlog graph illustrates the variability and timing when projects are added to our backlog and when shipments are made or installations are completed.

Management's near-term goal of maintaining a consistent backlog over $10 million has been achieved. Our longer-term goal is to maintain a book-to-bill ratio of between 1 and 1.5, matching increased production capacity with increasing orders.

Now I turn it over to Bob Panora.

Thank you, David. And good morning, everyone. As you may recall, our emissions reduction process, which we call Ultra, is protected by several patents and has been available on our own products for several years. Most systems we manufacture include Ultra, as customers want assured compliance with the strict air regulations we generally encounter. Also, they want to be prepared for stricter regulations that might be encountered down the road.

It has been evident to us for some time that our admissions process is readily adaptable, with significant end-user benefits, to a wide variety of engines unrelated to our core CHP business. These would be engines of various sizes applied to water pumping, power generation, certain mobile applications and so forth, and sited in regions or applications where emissions regulations are difficult.

To this end, we introduced an Ultra retrofit kit for larger stationary engines through about 1,000 horsepower, which we have been marketing primarily in Southern California. So referring to slide 9, as announced previously, we received three important orders from California-based customers.

One is to outfit a 50-liter biofueled engine manufactured originally by Caterpillar with a scaled-up version of the Tecogen emissions system. The equipment for this order was fabricated and shipped in Q1, and we currently expect initial operation in September.

The on-site work, which is being directed by the Water District, was delayed by several months due to a change in contractor, but otherwise the project is proceeding well. We look forward to providing an update as soon as we have meaningful data.

This customer operates over 60 engines and has requested us to quote systems for 3 large engines in a second water treatment plant. This was provided in June and we're optimistic as to the outcome.

The second order was in two phases from an industrial customer needing their on-site standby generators to be permitted for use beyond the 200-hour exemption allowed for simple standby generators. To achieve compliance would require operation of these generators at unprecedented emissions levels -- actually below that of our CHP systems. Because simple generators do not get the efficiency credit for waste heat recovery.

As we reported previously, the first phase of the order, which was to demonstrate the technology in our laboratory, went very well. The customer took our data and specifications and then submitted permits to the SoCal regulators for their generating group. These were groundbreaking permits, as no engine has attempted or achieved compliance to these levels.

This has made the process somewhat protracted. However, the regulators provided draft permits several weeks ago, which we reviewed with comments for final processing. Now that the permitting process is being concluded, we expect the Phase 2 order to be forthcoming.

I want to point out that this is an important order for the Company because standby generators are currently prohibited in many cases from extended use for peak shaving or demand response programs. Peak shaving refers to operation of a generator during periods of especially high electricity costs. Demand response programs involve a similar concept with a different revenue structure.

The generator owner in this case is reimbursed for assisting the utility with load reduction during periods when the grid is strained. In either case, a simple generator with a clean emissions profile would be appealing, as it could produce significant revenue, as opposed to what they do normally, which is to just sit idle.

The third order is for the Gage Canal Company -- a water district, essentially. This engine, also a Caterpillar, is a 15-liter water pumping engine. The kit was shipped in June and is being installed by the customer. When this work is complete and the permit is squared away, we will proceed with start up.

We have had quotation activity, including the waste treatment plant I mentioned earlier, as well as a municipality in the San Diego area. Again, we are optimistic that some of these will turn into orders.

There is also some favorable regulation in progress to report. The very strict regulations that began in Southern California in 2008 require regular self-testing of the equipment. The consequences of a test failure is essentially a lot of paperwork and readjustments or repair to the engine -- painful, but for many operators, an acceptable cost of doing business.

Regulators have started the process, however, to remove this loophole. The proposed rule amendment is as follows. Noncompliance in a self-test, if it is significant, will result in automatic notice of violation. This is a very serious situation. It involves fines and if it's repeated, it can result in the permit being revoked. If the exceedance is small, but occurs three times in a quarter, the same result: a notice of violation will be issued immediately.

We believe closure of this loophole will significantly benefit our sales efforts for Ultra in the region. Operators currently -- that are content with their current systems because they can continue to operate by maintaining good paperwork will be forced to upgrade their engines to a robust system or retire them. The most important attribute, as I've said in the past, of Ultra is its highly dependable 24/7 performance. You can count on it day after day.

Turning to slide 10, and also related to Ultra. It was a subject of a feature article in the July edition of Diesel Progress, an important trade magazine that covers engine technology for gas- and diesel-fueled stationary/mobile applied engines. This edition is themed to emissions technology and regulation, so it's a very good fit for our story. If you would like a reprint, just let us know.

Also, we have submitted a formal proposal for an entirely new mobile application for the emissions technology to an industry research collective. This was following a face-to-face meeting at Tecogen and a short form proposal that we had submitted earlier.

Lastly, SoCalGas is producing a short video about the Ultra technology. We completed shooting at the Water District demonstration site in July, and the expectation is that it will be available in the fall, subject, of course, to SoCal's desired timing.

Now I would like to turn over to Ben -- the presentation to Ben for some final comments.

Thanks, Bob. I'd like to take a few minutes to discuss some of the trends that continue to favor Tecogen going forward. Turn to slide 11. All of the drivers for our products are not expected to change anytime soon. Electric rates continue to rise in our key markets. In fact, higher electric rates are spreading to other geographic regions, both in the Northeast and the West Coast, that were previously uneconomic for our equipment.

Just as important, natural gas continues to be an abundant and cost-effective fuel source. The combination of low-cost natural gas and high electric rates are the primary drivers for our CHP in chiller systems. Emission controls are rapidly becoming a decisive driver for all of our products.

As Bob described, strict regulations developed in California for criteria emissions related to smog, CO, and NOx are swiftly being adopted by other states, including Massachusetts. Any CHP chiller or heat pump system that cannot meet the mandated level of emissions face the eventual prospect of violation, fines, or as Bob described, potential shutdown.

Further evidence of this trend towards cleaner emissions can be found in the Clean Power Plan recently released by President Obama and the EPA. The plan outlines clear goals for national and state reductions of both greenhouse gas emissions and criteria emissions.

Specifically, the plan calls for a 32% reduction in CO2 emissions and a 72% reduction in NOx emissions by 2030 from power generation sector. These goals address the serious national health issues surrounding current production levels, such as asthma, respiratory illness, and premature death.

CHP technology will be a significant part of this plan. CHP systems cut CO2 emissions in half versus current electric production. A typical Tecogen InVerde system provides approximately 600 tons of greenhouse gas reductions per year.

Each year, Tecogen receives a certificate from the EPA certifying avoided greenhouse gas emissions. In 2014, Tecogen systems have avoided an estimated 95,500 metric tons of carbon dioxide as compared to conventional energy sources.

More importantly is a drastic reduction in CO and NOx that our Tecogen Ultra technology provides. Adoption of the Tecogen Ultra technology beyond our current focus in CHP and stationary engines to larger markets, such as vehicle fleets, offers a tremendous opportunity to reach or even exceed the goals for criteria emissions that cause smog.

The prospect of vehicle fleets such as buses and trucks operating with standard engine technology, but realizing fuel-cell-like emissions is tremendously compelling from a policy and market standpoint. With every passing day, it becomes more apparent that any engine, stationary or nonstationary, eventually will be required to meet stricter and stricter air emission regulations that current technology cannot cost-effectively provide.

Our plan is to seize on this opportunity and prove that Tecogen technology is the best way to meet these stringent standards. Tecogen is actively supporting any and all state or national policy addressing air quality and pollution so that ultimately it will enhance the business opportunity for our Ultra emissions technology.

As I mentioned earlier, the new capital Tecogen now has will enable us to accelerate the development of the business opportunity for our Ultra technology while securing the necessary intellectual property and patent protections in each field of use.

In summary, Tecogen is in prime position for continued growth. The CHP and chiller markets continue to be a strong revenue driver for all the reasons I mentioned. Our heat pump is being recognized in the HVAC community, which is a $15 billion per year industry, as the most efficient, cleanest, and cost-effective way to provide heating and cooling.

Building off our current backlog, I expect Ilios will soon become one of the largest revenue contributors to our business. And as I just described, beyond the growth we expect from our core revenue segments, we are working towards making our Ultra emissions system a game-changing technology, essential for meeting state and national air quality goals.

In closing, we have very bright prospects for growing Tecogen and I look forward to sharing developments with you as they occur.

With that, I would like to turn it back over to the operator for questions.

(Operator Instructions) JinMing Liu, Ardour Capital.

I just have a question about your use of proceeds from the equity financing from yesterday. So you mentioned that you are (inaudible) going to expand your sales team. So I just want to understand what kind of sales strategy you want to -- what kind of improvement you are going to make to your sales strategy. And where you are going to deploy additional sales forces. And also your relationship with ESCOs.

Sure, it's a good question. I have described in previous calls how we have our sales structure set up. We've got direct sales people. We have manufacturers reps and we have sales agents. And generally that's how we do it.

What I'd like to do is expand our direct sales force to, in some cases, have a direct sales presence in territories where we might have had a rep before. That gives us much better control over the sales process in a specific geography. So I can see us expanding our sales team here on the East Coast and also on the West Coast, specifically to get more control over our sales prospects.

Another use, as I alluded to, is the business development activity for our Ultra emissions system. Right now, Bob is really heading that up from a technology standpoint, but we really need a dedicated business development effort on the Ultra because the potential, as we described here, is so enormous it is deserving of a full-time effort.

As John Hatsopoulos mentioned at the beginning of the call, we have been kind of purposefully neglecting our IR and marketing efforts because, simply, the resources needed to be deployed in a much more functionally direct way. But we hope to do more with that with investor relations and marketing.

Again, and as Dave mentioned, those are costs, of course; but they are costs that are needed ultimately to grow our revenues to where we want them to be.

And then you had a second part of your question, which I don't recall what it was.

The ESCOs.

The ESCOs, right. ESCOs are a great way -- we're working directly with ESCOs with our direct sales team and also with our manufacturers representatives. It really is tremendously important, as you can guess.

There are some very top named ESCOs out there that have chosen our products. And it's very important that we give them the attention and the performance that they are expecting of our units so they continue to spec us. So that is a very important piece of our sales strategy that I expect to increase going forward.

Ben, maybe you should also mention that Johnson Controls just put out a press release naming our equipment as part of their effort for a school system.

Yes, Johnson is one of the ESCOs, larger ESCOs, that are out there. These ESCOs typically work with school systems. And they will come in there and they will provide solar, they will replace windows, put up some insulation.

But increasingly, CHP is a core part of their overall efforts with -- again, they will swoop in and do an entire K through high school building. That's something Tecogen or some of these larger ESCOs could never do, whereas one of these larger named ESCOs can come in there and do that. So it's a good relationship. We hope to keep it going.

Okay, good. Just one more question. Regarding your Ultra system, you mentioned that you started some mobile application. So what market your Ultra system is targeting? Is that a larger Class A truck or some smaller truck market?

Yes. We're not going straight for the trucks and buses and things like that. As you can imagine, that's a pretty significant reach. But there are light industrial mobile engines out there, things that scoot around on four wheels but aren't on the highways, that are already being targeted for their poor emissions.

So we're working with the government agency --

A collective from an industry (multiple speakers)

-- that has been brought to task on this for, again, these light mobile engines that scoot around. And it's a perfect fit for our techno. The engine scale is about the right size. It's a good medium stretch of the technology that if we can show that, then you start to contemplate larger engines, as I mentioned before, like bus fleets, trucks, things of that nature.

But we are being, I think as I've described before, very careful and deliberate with each new field of use to make sure, one, the technology works. But more importantly, and number two, we have all our intellectual property in place, all of our patents in place, so we can slowly start expanding our IP estate.

Okay, thank you.

(Operator Instructions) Ralph Wanger, RW Investments.

I noticed last week that there was an outbreak of Legionnaires' Disease in New York City due to people using cooling towers. Is there a way to replace those cooling towers with our product?

Yes. Cooling towers are outside of our scope. Any building that has a big, large air conditioner has got a cooling tower that we utilize. That's outside of our realm, except to say that when we do a chiller installation, we typically inspect the cooling tower and inform the building if it, for any reason, has any deficiency. So not directly, Ralph.

Thank you.

(Operator Instructions) There appears to be no further questions at the moment. I'd like to turn the conference back over to management.

Well, that concludes our discussion of Tecogen's second-quarter results. For those of you that are interested, we did put a press release out today about some more specifics of Ilios. And I will be spending just a few minutes now talking about that press release, some of the highlights of Ilios, and some of the financials that Dave will go over.

So again, referring to the press release that we put out today about Ilios Dynamics, which of course is a majority-owned subsidiary of Tecogen, we had some tremendous results with Ilios, as I described before, in the second quarter.

In fact, Ilios had its first positive quarterly net income during the quarter, as a result of the orders that we have received. Nine gas heat pumps were shipped, the highest single quarterly shipment total since the Company's establishment. And as I mentioned, the backlog of Ilios is more than double of any previous year, on track to surpass $1.2 million in revenue.

We previously announced to review and analyze the acquisition of remaining noncontrolling interest by Tecogen, and that process has begun.

I'd like to turn it over to Dave to describe that a little bit more in detail.

Thank you, Ben. First off, in the press release, we included three years of financials and the first six months of 2015. We were hoping to supply this information to show the success of Ilios over the last three years and to understand why now is the time to buy the last piece of noncontrolling interests by Tecogen.

Ilios earned its first profit in the second quarter, and that's an exciting outcome. I want to just let everyone know that we have started the valuation process and the committees, independent committees of each Board have been formulated to assure that the transaction can occur in an orderly fashion and with the correct evaluation.

If there are any questions on the line about this or about the Tecogen call, you can get back in the queue and ask those questions now.

(Operator Instructions) Ralph Wanger, RW Investments.

Given the size and importance of the California market, I'm not -- I don't -- I see a lot of results from you guys for New Jersey and New York City and nothing in the building market in California. Why is this?

Yes. You know, the utilities tariff structure, Ralph, in California is extremely complicated. They have a number of -- they will never admit, but they are cogen killer type tariff structures. Past -- what do they call that, push, pass and tariffs, Bob?

Time of use.

Time of use rates.

And different rates that have skewed to be anti-cogen and anti-efficiency, really.

Right, right. So they are not as progressive as the utilities in the Northeast -- Con Ed, Eversource -- in terms of their tariff structures. And it's extremely complicated to unravel that. Now fortunately, we've got a guy out there that has the experience and knows how to untangle these tariff structures. But at the end of the day, sometimes the economics aren't there because the rates, once you get through all of these particular tariffs, aren't as strong.

Now with all that said, Ralph, as part of our increased sales effort, we are going to be spending a lot more time in California and trying to increase our activity out there.

Okay. That seems to be very peculiar because California has such tight standards. And yet you can't -- they are keeping you from putting your equipment to fix it.

Well, we actually -- this now is a new thing that we can actually meet the regulations. Only about a year and a half, two years ago, before Ultra, we would have struggled and certainly in Southern California.

So part of the problem is that the cogeneration market in California was dormant for 2008 to the arrival of Ultra. So now the rep structure, the quotation, all that stuff is now becoming much more active, whereas it had gone to sleep because of this putative emissions situation. But it is definitely reawakening now.

Okay.

Ralph, the battle we've got from utilities in Southern California -- actually, Northern California, mostly -- it was unbelievable. They came up with stories -- I'm talking now a few years ago -- that we'd end up killing maintenance people by starting our equipment when they are working, which is impossible to happen. It's an amazing story. But with our new technology, they lost all their arguments.

Okay.

Roger Liddell, Clear Harbor Asset Management.

I want to pursue the Southern California air quality issue situation with a couple of questions. Can you give us some texture on the issue of whether Ultra could be designated best-available control technology? And if so, my understanding is that that sets the standard. And what are the implications of that and what is the probability of being designated BACT?

I'll answer that, Roger. Last month, I visited the South Coast regulators for a meeting. And we were talking about this issue and others, and they informed us that they had gone to one of our permitted sites, our cogeneration sites that were Ultra equipped, and they were now proceeding to -- their case to make our system be a BAC -- best-available control technology. And so that has started.

Now they also said this will be -- as it is not publicly -- the hearings haven't started for us. But it will be quite opposed by people who don't have this technology. So it will be a protracted situation. But they did visit our system. They looked at the results; they said this is very impressive. And they are going to pursue that. So let's see where it goes.

The implications are that currently in California, engines that don't drive electrical generators, our BACT is much higher than electrical generators. Cogen has a much lower standard. What will happen eventually is that the other engines in California, water pumping and so forth, if it now has to meet BACT, the regulation will require it to meet our BACT, the new BACT, which is a much stricter number, four or five times more strict.

So that's the implication. And of course, BACT is something that's a national standard that the EPA puts forth. And that could become something that moves across the country. That's long time coming and a lot of hearings and so forth between that time, but that's how these things progress.

All right. And you had alluded in an earlier conference call to meetings with engine manufacturers. And I believe in this call, you spoke of a consortium, an industry consortium. I don't know if the two entities are the same or the engine manufacturers are part of the trade association. But is there anything you can comment on regarding the likelihood of a household name, whether overseas or US, offering as an option or standardizing on Ultra?

Yes. I can start to answer that question. And then Bob, feel free to jump in. The consortium we were looking at is different than these discussions we have been having with engine manufacturers.

The discussions we have been having with engine manufacturers reflects these companies, many of which are international, not US based, concerned about their products operating in the United States, based on this increasingly stringent environment for emissions. And so these discussions were initiated with that in mind and Tecogen understanding their engines and us providing them with the possibility of how we could retrofit their engines on a larger scale capacity so that they could continue to operate in the United States. Instead of a retrofit, it might be part of their actual manufacturing process.

So all of those discussions, as you can imagine, are a little delicate, certainly preliminary from any action item standpoint. But a very important part strategically of how we choose to bring the Ultra to other engine platforms.

All right, thank you. And if I could follow up with what you stated earlier in the call on Ilios. There were sales in Hawaii. Given their electric load issues and cost levels -- electric prices in Hawaii -- I can't believe this isn't a large opportunity.

Can you give texture on the slope of activity in Hawaii? And by their nature, Caribbean islands typically have diesel generation and expensive electricity. This should be another great opportunity. Can you give any texture to those two locations?

Absolutely. Hawaii is a perfect place for Ilios. Propane prices are very high. And as you know, Alex, the whole value proposition for Ilios is to cut those propane bills in half, if not reduce them by two-thirds.

So when you go to customers and say, hey, you're going to have to fill up your propane tank once a week instead of twice a week, that's pretty compelling. So we are -- these first two units that we sold there is really we hope to be just the tip of the iceberg in terms of getting more units installed in Hawaii.

Now, we have been engaging with the utilities in Hawaii to discuss what right next step could be. And by next steps I mean -- as you said, electric rates are pretty high. It's a perfect market for chillers and cogeneration. Even though the gas is expensive or the propane or syn gas was what they use there, the electric rates are that much more expensive. So you still got a spark spread; it's just that the spark spread has jumped up a whole other level.

But what is very important to Tecogen is to be a little careful and deliberate. We don't want to just start dropping cogen units down there without any type of dedicated service support because that has been a recipe for disaster. And in fact, even in Hawaii, many years ago, 15, 20 years ago, that exactly happened. The cogen manufacturer dropped down a bunch of units, ran out of town, and then these units never ended up running and left a bad taste in a lot of people's mouths.

So what we're hoping for is by populating initially with Ilios units and perhaps a chiller here and there -- and again, chillers is a basic HVAC product. You can get people on the ground that know vapor compression and refrigerants, et cetera. Once we get a critical mass of population of those two products, then we can seriously contemplate putting cogeneration on the ground and having Tecogen factory support in place for it.

So that's our model for Hawaii. But in fact, you mentioned Caribbean islands. That's the exact model I intend to replicate there: start off with Ilios, which, again, is a no-brainer. As you mentioned, there are expensive fuel sources there.

Work up to chillers. Get a factory representative there that can support cogen installation. So that's the very precise strategy that we're going to be using for Hawaii right now. It's starting to happen in Puerto Rico and some of the other Caribbean islands are going to be following.

One last bit of color I'll give on that is we have reps there right now. And again, this is how you do international expansion. You can't just hire a salesman for every one of these far-flung locations. We've got a very capable rep in Hawaii that is perfectly in line with our business plan and he's executing the strategy there. We have a new rep in Puerto Rico. Same thing: perfectly aligned. He already sold a couple of units for us.

So by starting up our Southern Florida office, which we mentioned I believe last quarter, we are able to now have that be a touchpad to manage these reps in a very active way. Again, the whole thing with reps is you have to stay on top of them and manage them closely. We are able to do that from our Southern California -- Southern Florida office and Hawaii from our California office. So we really expect a lot of increased sales there.

Mexico -- cheap gas coming in from Texas into Northern Mexico, the maquiladora plants. We haven't seen anything on that for a while. What are the opportunities there?

Sure. That one is -- that's a great success story for us. We started off with one chiller at one kind of a blue chip location that took a chance that it's going to save them a lot of money. It's a saving them a lot of money -- just cheap gas, very high electric rate.

And workers in Mexico aren't too keen on working in 100-degree heat anymore. These buildings need to provide air conditioning. So we now have ramped that up to a few more chillers to this same customer.

Another blue chip company down the road -- because these guys all talk; the engineers all get together quarterly and have their discussions -- saw the result. We installed two chillers there. We were hoping for an order for a third one there.

So it's starting to be a trend in this particular manufacturing area, where they have cheap gas and expensive electricity, that natural gas engine-driven chillers are indeed much more economic than buying the big electric chillers there.

We've got a rep in Mexico as well -- again, very aligned with our thinking; is actively mining that whole strip of industrial activity. And I really hope you are going to see, Roger, more press releases about our chillers in Mexico. And the same as I applied to Hawaii -- once we get to some critical mass, we can have a Tecogen factory-supported service person down there, you can start contemplating cogen down there.

Okay, final question. The large procurement, the Long Island School District that you announced on July 16 with an ESCO, whether that's Johnson Controls or not -- it's not really the subject of my question. But I welcome that particular contract -- or that announcement, a memorandum of understanding, maybe -- with contracts to come going forward.

But do you foresee a rise in those kinds of bulk procurement programs versus the one-offs that are troubling to assess in terms of the Company's product risk and the relevance of each one-off to the overall picture?

Yes, I absolutely hope that we reach the point where you are going to see more of those things. Building relationships with these ESCOs is a very, very delicate thing, as you can imagine. These ESCOs are large and they can swing in one direction or the other very quickly. And it really comes down to interpersonal relationships of our folks and their folks.

So we manage that relationship preciously and make sure that we are, of course, doing our job and that the thing is performing well, that we give them good competitive pricing and good support all the way through the construction process. And only by doing that on a repeated basis, one project to the next project to the next projects, we get to the point where you are getting spec'd in.

So I guess -- I'm hoping I'm answering your question. Suffice to say the relationships are very strong. We are paying particular attention to it in terms of our engineering support and we hope to see more orders as a result.

Thank you very much.

Alex Blanton, Clear Harbor Asset Management.

I also have a question about that Long Island contract. And I understand that the first part of the contract is the engineering of the 14 units for the 6 school districts. And that when that is completed and the order for the equipment comes in, as long as these are deemed to be economic. At that point, (technical difficulty) the entire amount of the work.

My question is, what is that amount? 14 units? That's quite a bit of equipment. And assuming that all of these units are deemed economic, what would be the total dollar value of that work for you?

I think the -- you can do the math; 14 units. In this particular case, this contract or this ESCO -- what we have done in the past and I assume it will be the same case. We will have the engineering revenue, but we will also have a lot of pre-engineered accessories that we will build in the factory that will accompany the units. In other words, they want to minimize the work in the field.

So they will buy from us, skid mount the heat exchanger pump assemblies, they will buy control panels that control the whole plant, and so forth.

So if you look at an earlier press release -- not that one but another one -- it describes the type of revenue we got on it. I think it was a single-unit sale, where it was not just the unit, it was also these additional stuff. And this sale, these 14 units will follow more or less what I said in that press release. There's --

What did you say, Bob, on the --

Yes, and this is from memory. I believe the revenue from the unit was almost doubled by the amount of material that went along with it with these accessories.

Well, to save us from doing the math, could you give us the final number?

For the 14 units or just 1 unit?

Well, on the 14 units that we are talking about.

I'm a little nervous about doing that. I'd rather --

Yes. Alex, as you can imagine, this is still -- we can't give you pricing when in fact our customer has not even had final pricing and negotiation hasn't occurred yet.

Yes. It may --

It's just a little premature.

What is per unit? Do you have a per-unit figure?

Well, if I gave you per unit, you could just multiply it by the number of units. So we are just trying to be a little cautious and protective of our relationship here and don't want to provide any pricing at this point.

Okay, thank you.

JinMing Liu, Ardour Capital.

Just one quick question regarding the financials of Ilios. I saw Ilios has $1.7 million accounts receivable outstanding, which is relatively large comparing to its revenue. So why is that?

Okay. You are looking at Ilios and you are saying 1.5 --

Accounts payable is $1.6 million.

Included in accounts payable is the payables owed to Tecogen. So that includes -- that's a combined total of the stuff that has been purchased from us over time as well as work that has been done in Tecogen for Ilios.

So that's what that number is. It's really a related party. We tried to truncate the financial statements to make them smaller and more digestible instead of a full-blown audited detail.

Okay, got that. Thanks.

At this time, there appears to be no further questions.

Okay. Well, I'd like to thank everyone for joining this call, particularly for the questions. We really are happy to answer any and all questions. And we will be having another conference call for the third quarter in a few months.

And as you all know, feel free, anyone of you, to call me directly at my office. And I will try within a few hours to give you any answers you might need. Thanks.

Okay. Thank you.

Thank you very much for participating in today's call. You may now disconnect. Take care.