Tecogen Inc (TGEN) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Tecogen Second Quarter 2017 Results Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Bonnie Brown, Chief Accounting Officer. Thank you, please go ahead.

Thank you, Brenda. Good afternoon, and thank you all for joining our second quarter earnings call. On the call with me today are John Hatsopoulos and Ben Locke, our co-CEOs; Robert Panora, our President and Chief Operating Officer; and Jeb Armstrong, our Director of Capital Markets.

Before we begin, I'd like to read 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 provision under the Private Securities Litigation Reform Act of 1995. We may have forward-looking statements about our future financial performance that involve risks and uncertainties. These risks and uncertainties could cause our results to differ materially from our current expectations. We encourage you to look at the company's filings with the SEC to get a more complete picture of our business, including risks and uncertainties just mentioned.

Also during the call, we will be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of the non-GAAP financial measures used on this call to the most directly comparable GAAP measures is available in our press release and in the table the company has released.

We may elect to update forward-looking statements at some point in the future. We specifically disclaim any obligation to do so if our estimates change and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

I'll now turn the call over to John Hatsopoulos for some opening remarks.

Ladies and gentlemen, thank you very much for participating in our conference call. I wanted to thank you all for your patience after well over a year of trying to merge with ADG, we finally have been able to achieve it, and I think that this is going to be very helpful in the years to come.

Before I pass it onto my partner and co-President of the company, Ben Locke, I wanted to introduce Jeb Armstrong, who is new Director of Capital Markets. And it's something that we needed badly. And now, we can finally, when we're profitable, we can afford to hire. Jeb?

Thank you, John. It's wonderful to be here, thank you so much. It's a pleasure to join the team, and I look forward to speaking with many of you over the next coming days and weeks.

With that, I'd like Ben to take over. Ben?

Thanks, John. First and foremost, I'd like to welcome our new investors in Tecogen as a result of the ADG merger. We believe the acquisition of ADG will contribute meaningful value to Tecogen as we continue to grow the business. We hope the new investments that are now part of the Tecogen shareholder base realize the tremendous success Tecogen is achieving and the promise of future accomplishments going forward.

It's been a very busy quarter for the company, so to make sure we'd cover everything, Slide 4 outlines the topics we'll cover.

I'll start by reviewing the company's performance for the quarter, key financial results, impact of the ADG acquisition and key drivers to the business going forward. Bob and Ahmed will then give an overview of our emissions technology. Bonnie will provide more detail on the financials then I will have some final remarks before we take questions.

But first, I'd like to start off by -- our call 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's Cheaper, Cleaner and More Reliable. Our proprietary technology for improving efficiency, emissions and grid resiliency is truly disruptive to these traditional methods of heating, cooling and powering buildings and infrastructure. And now, with the acquisition of American DG, we have added the on-site utility business to Tecogen, making this a completely vertically integrated clean technology company, able to offer equipment design, manufacturing, installation, financing and long-term maintenance service. The ADGE fleet will contribute steady, annuity-type revenue to supplement Tecogen's revenues. We'll talk more about the impacts of the ADG acquisition throughout the call.

So turning to Slide 6, we are immediately seeing the financial benefits of the mid-quarter ADG acquisition supplementing the strong performance of Tecogen we have already demonstrated over the past few quarters.

Total revenues for the second quarter were the highest ever for the company at almost $7.6 million compared to a little under $5.7 million in the second quarter of 2016, a 33% growth in top line revenue quarter-over-quarter. The ADG revenue contributed approximately $750,000 of the revenue when the acquisition became effective on May 18.

Product revenues were approximately $3.1 million for the quarter, consisting of a good mix of cogeneration systems, chillers and engineered accessories that support installations.

Surface revenues came in at a healthy $3.7 million for the quarter, which is less than the jump we saw in the first quarter from increased installation activity but an increase over the second quarter of 2016.

Gross profit for the quarter increased by 43% from the prior year quarter to $3 million versus $2.1 million in the second quarter of 2016. This resulted in a net loss from operations of $246,000. However, this includes onetime merger-related expenses of approximately $100,000. I will talk a bit more about this number in just a minute.

Looking at the balance sheet, our cash balance increased approximately $42,000 to $3.3 million at the end of the first quarter to the end of the second quarter on a pro forma basis for the merger.

The total company gross margin for the second quarter was 39.3% as compared to 37% in the second quarter of 2016. The total gross margin consists of Tecogen product and services margin of 37.3%, which is essentially the same as the second quarter of 2016, and the new energy production margin component from American DG of 57.3% for the 42 days of consolidation in the Tecogen. The end result is a net loss of approximately $293,000, but I would like to provide some context to this number in the next slide.

As I mentioned, on May 18, American DG became a wholly-owned subsidiary of Tecogen, with its annuity-type revenue stream being consolidated into Tecogen's financials as energy production in the revenues and cost-of-sales categories.

Both companies incurred merger-related costs in the quarter, with $100,000 attributable to Tecogen and another $118,000 attributable to American DG prior to the consolidation on May 18.

An important consideration when evaluating the consolidated earnings of Tecogen and American DG is the effect of noncash depreciation expense. It has been ADG's practice, when resetting earnings, to show non-GAAP EBITDA since the on-site utility business model is capital intensive and depreciation is a substantial part of the financials.

Despite a considerable reduction in depreciation basis that occurred as a result of the acquisition, it is still helpful for investors to see the non-GAAP EBITDA for the consolidated company. As you can see on Slide 6, when excluding nonrecurring merger expenses in the quarter and the noncash depreciation and amortization as well as stock compensation, the consolidated company showed an adjusted EBITDA of approximately $64,000 for the quarter, an improvement of approximately $276,000 over the second quarter adjusted EBITDA loss in 2016, when the depreciation and amortization of Tecogen alone was much less.

While our goal, of course, is to have bottom line profitability going forward, we believe showing positive adjusted EBITDA for the quarter is a meaningful accomplishment as we move forward integrating ADG's financials into Tecogen's.

Turning to Slide 8, I'd like to spend some time reviewing some of our achievements for this quarter. As I've mentioned in previous calls, the technical superiority of our new InVerde e+ provides far better performance and savings than any other CHP system in its class. As we finish installations and commissioning of the new InVerde e+ fleet, customers, engineers, ESCOs, project developers and other sales channel partners are seeing firsthand the benefits of superior economics of our technology.

Similarly, we are demonstrating that our turnkey lite offering was consist of engineered mechanical accessories built on [skids] on our factory, significantly reduces the installation complexity when working with third-party installers. This is an additional revenue stream for Tecogen that also ensures that the system will operate as designed.

In the second quarter, we also continued to build on an emerging new sales channel of indoor growth facilities. These facilities have tremendous electrical needs because of the lighting, cooling and dehumidification requirements of the plants and sometimes, even utilities -- even if utility can simply not provide enough electrical capacity to the building and even if they can, electricity is the major expense in running growth facilities.

While CHP is often initially considered to address these problems, a deeper engineering and economic analysis shows superior savings using a Tecochill system. The installation of gas-engine-driven chiller systems is much less complex and less costly than a CHP system. In most cases, the free waste heat is used for dehumidification of the facility and sometimes even the waste exhaust CO2 is used to help the plants grow.

In July alone, we announced orders for 3 150-ton chillers for our grow facility in Florida and an additional 3 150-ton chillers for our grow facility in Massachusetts. Prior to that, we announced an order for 2 350-ton chillers for a different grow facility in Massachusetts. Including orders shipped earlier in the year and in late 2016, this makes 12 chillers in 6 different growing facilities, with a sales value of over $2.3 million.

We have more growing facility prospects in the pipeline and expect more announcements as the year goes on.

As we look ahead to the rest of the year, there are several areas that will continue to grow our business. First, we continue to build relationships with new and existing energy service companies that provide comprehensive energy savings programs for customers. Traditionally, these companies provide savings via lighting, solar and other efficiency measures. But increasingly, CHP, both electrical and chillers, are being emphasized because of tremendous savings potential they can provide. As such, new companies are emerging with backlog of CHP projects needing qualification, engineering and installation for energy-saving measures.

In addition to the ESCOs we have worked extensively with in the past, we are engaging with a handful of new groups that are well positioned to implement energy savings contracts with customers using Tecogen engineering, equipment and service. A good example of this is a project we announced in May to provide 7 inverters to a large residential complex in Manhattan. We partnered with WGL Energy, a subsidiary of Washington Gas, to engineer, install and service the system, which WGL will own and sell energy back to the building. We are also working on several projects with another ESCO that offers a unique mechanism for third-party cost savings. We hope to have good news on these projects later this year.

Second, we will continue to monitor the progress of additional growing facilities as various states permit their construction. As more facilities adopt our equipment, Tecogen is increasingly becoming specified by engineering companies involved in their construction.

And third, we will continue our efforts to improve the performance of the ADGE fleet to maximize the returns we can get from the acquisition. With the merger completed, maintenance of the ADGE fleet has been incorporated into Tecogen operations, primarily into the Tecogen Service Group. This integration has gone well, and we are pleased with the thermal and electricity production of the ADG sites, chillers and CHP systems, collectively increased 22% year-over-year in the second quarter. Upgrades to the sites improved their financial performance are ongoing, primarily focusing on achieving greater productions but also to optimize operating strategy. As such, we are confident this trend will continue.

At the time of the merger, ADG had a backlog of 4 100kW systems under construction, which we hope to have operational by year-end.

Lastly, we are beginning to identify and implement cost-saving measures that are now obtainable as a consolidated company. This will be ongoing through the end of the year, and we hope to achieve significant reductions in the cost, as described in the S-4.

Cost savings notwithstanding, we are also continuing to invest in our sales team. We have extended our sales agent network considerably in the first half of the year, allowing us more opportunities for product development via commissions rather than direct hires. We are also exploring advanced sales acceleration tools to help generate new lead and stream live the qualification in project development. We will continue to invest in the sales team going forward. As it is shown in the past 12 to 18 months to be one of the best ways to grow the business.

Turning to our emissions technology, there are 3 main areas where we'll focus attention in order to establish a business model that can be monetized our proprietary technology. I'll review these briefly and then Bob and Ahmed will provide more detail.

First, work continues on the PERC-funded fork truck emission retrofit program, and we expect to have results at the end of the next quarter to share with you. Next, we are exploring a third round of vehicle emissions testing later this year for Ultratek. And lastly, we will finalize the air permits and commissioning of the stationary generator of retrofit project this year. Again, I will let Bob and Ahmed describe these activities in more detail.

Turning to our backlog on Slide 10. Our backlog at the end of the quarter was $12.7 million, and current backlog as of Friday, August 11, stands at $16.1 million, well above our guidance to maintain backlog over $10 million. Of this backlog, approximately $900,000 is attributable to our TTcogen joint venture.

So with that, I'd like to turn it over to Bob for more detail on our emissions technology development. Bob?

Good morning, and thank you, Ben. I was unable to participate in the first quarter earnings call in March due to a travel conflict. As such, my discussion today will cover the company's emissions technology progress since the March call.

There are 3 specific programs of interest I will be reviewing today. First, I will discuss the research grant in order to Tecogen from the propane industry for adapting the Ultera technology to propane-fueled fork trucks. Second, I will discuss our progress in bringing online the special generators in Southern California that were retrofitted with the Ultera emissions system such that our customer could operate each units without annual, hourly limitation.

Lastly, I will discuss progress made by our subsidiary, Ultratek, in the automotive application of Ultera.

Because of some interesting and favorable regulatory developments in Europe that have received considerable press coverage, we have asked Professor Ahmed Ghoniem to provide his perspective as to their likely impact to our Ultratek initiative. Professor Ghoniem is uniquely qualified to do so as he is Ultratek's Technical Director and has many years of professional experience in the area of vehicle emissions and the associated regulations.

Let's begin. As announced last October, the Propane Education and Research Council, PERC, has provided the company with a research grant to demonstrate Ultera's emissions reduction capability in a propane-fueled fork truck. I want to point out that the technology rights for the fork truck application reside with Tecogen and we're specifically excluded from our agreement with our automotive-focused subsidiary, Ultratek.

The project has significant potential for the industry as these vehicles generally operate indoors where health concerns are magnified. In recent years, the market share for propane trucks has been eroded by battery-operated versions to a large extent because of this issue. The market losses occurred despite significant disadvantages to the battery systems. They are more costly and often unable to complete a full shift because of the energy storage limitations.

The program commenced this January, and this proof-of-concept phase is scheduled to be completed at the end of this year. From the program onset, the industry interest was strong because of the acute importance of managing emissions in the indoor setting. As such, we were able to quickly secure a commitment from a major -- a fork truck manufacturer to support the TTcogen engine team and to supply fork truck for our testing. The truck was received in February, and we have completed testing to characterize the baseline emissions profile.

The baseline testing confirmed our expectation, that is most of the emissions output from the fork truck was during times when the truck was already active, lifting and so forth. During these periods, the emissions control was significantly compromised, a familiar problem and the one for which the Ultera process was designed to remedy.

Our expectations, therefore, are that the technology can be very impactful to the emissions profile of the fork truck. Our primary asset over the last several months has been the integration of the Ultera system into the truck. For this program, we have worked hard to make this integration well-refined. The system is compact and is being integrated into the truck without being outwardly visible or obtrusive. This fabrication test is nearly complete, and our testing is scheduled to begin next month. Both our PERC sponsor and the manufacturing partner are planning visits to the lab in that time frame, so we're looking forward to that.

Now the SoCal retrofit. My second topic -- which is my second topic, these are degenerated in Southern California that we talked about previously. In the other earnings report, we discussed this project with concerns of customer owning a group of natural gas fuel generators that need to be operated frequently. As (inaudible) has received the maximum allowed for emerging generators, the units must meet the standards for continuous power generation. These are the same standards as our cogeneration products where we have been successfully permitted. However, the simple generator receives no heat recovery credit in sending its emissions level under the standard. As such, the emissions levels required to permit these engines are the lowest we're aware of and have not yet been achieved by any engine.

As reported before, a sample generator was purchased and outfitted at Tecogen in 2015. It worked extremely well and the customer proceeded to apply for permits for that test generator and also for their existing on-site units to be retrofitted. We are pleased the generators have received their permits to operate and are in the final stages of retrofitting the last generator. The others completed have been unofficially tested by our field engineering group and show robust compliance. Third-party source testing, the final permitting step, should be completed in Q3.

I want to reiterate the significance of the successful outcome of the program. Achieving these limits, essentially the same as our fuel cell, will enable simple generators to be applied without hesitation to peak shaving and demand response programs, which is an important milestone for the Ultera technology.

And now lastly, Ultratek. Ultratek is the partially owned Tecogen subsidiary formed in 2016, whose purpose is to demonstrate the emissions' after-treatment process on gasoline-powered vehicles. This work has been funded primarily by strategic investments in Europe and of course, is related to the heightened awareness of the pollution brought on by the Volkswagen scandal. In every earnings call, I have mentioned that the topic is still being actively reported and remarkably, this continues to be the case, and we will have more to discuss in a few minutes about this.

For the Ultera process, the fifth, of course, is a gasoline engine. The category -- this category has not been implicated in any improper testing. However, there is a growing awareness that the pollution output measured in controlled laboratory test drive cycles significantly underrepresents the true emissions output of vehicles of this type in real-world driving. As such, there is an expectation that the certification process will be altered in some aspect during the shortcoming. The Ultera strength is well suited to this issue because the system provides robust performance especially in the extreme edges of operation, that being high acceleration, deceleration, heavy volume and so forth.

Last year, we were made aware that our assessment of the shortcomings of the existing certification methods would be eventually modified to include some sort of supplemental on road testing. In fact, over the next few years, the EU certification will phase in to include an on-road test as a basis for certification. The test protocol specifically applies to the EU 60 emissions regulation, which will implement real driving emissions, or RDE, in the 2017 through 2020 time frame. Thus, we are encouraged by this development as it sets a highly positive regulatory environment for our technology without requiring special effort on our product. We are hopeful that RDE protocol will be incorporated into the domestic certification at some point.

6 months ago, we successfully completed the second phase of vehicle testing, the Ultera device was fine-tuned and more accurately sized to the test vehicle providing us with excellent documentation of the systems affecting this through a wider range of similarly driving conditions. We were also able to showcase its effectiveness with the type of vehicle most problematic in the auto industry, the very small, high-power density engines with advanced features for fuel economy.

At the SAE Light Duty Emissions Control Symposium held in the 3rd week of January in Washington, we presented our results to an audience of industry experts, which provided us with valuable feedback regarding our technology and insight into the nuances of these upcoming regulations, both domestic and foreign.

Also involving SAE, we prepared a substantial peer-reviewed paper for the SAE World Congress in Detroit, in April, describing the vehicle test results in detail. This substantial research has provided us with a good foundation to engage in the industry. Accordingly, we have had several productive meaningful potential partners, all positive feedback and for obvious reasons, however, I can't discuss this in detail at this time.

Regarding Ultera intellectual property, we received good news about our base Ultera patent from the EU office. The patent office notified our attorneys that our patent has been accepted with the minor changes we provided in the last submission. We expect formal notification, of course, in due course. I want to add that we are very pleased to have full patent applications in process involving the vehicle application that will provide, if successful, stronger IP in this more substantial and competitive industry.

Currently, we are considering our next steps to the Ultratek research based on feedback from the auto industry, we believe the prototyping needs to be completed to a more advanced level. That is incorporated more or less as it would be in the real vehicle, refined, compact and overseen by the vehicle's control system. There are several large research entities that are very capable in this work and plugged into the auto industry as well, and we are currently engaged with them to develop a Phase III. The refined prototype will be much more effective, we believe, for showcasing the system, while providing a basis for accurate costing.

At this point, as I said earlier, I want to introduce Professor Ghoniem to speak about these very interesting reports regarding the long-term emissions regulations in Europe, specifically, I'm referring to recent announcements by 4 European countries, I think France, Germany, the U.K. and Norway, that they are considering a ban applied to vehicles with internal combustion engines in the time frame of 2030 to -- through 2040. This is one of those stories that might appear first blush to have one interpretation, but the closer look, which I would ask Professor Ghoniem to expand upon, reveal something else entirely.

So with that, I will turn the discussion over to Professor Ghoniem.

Thank you, Bob. I will make my remarks brief and focused. As Bob mentioned, we have heard the announcements recently from several countries in Europe and from India, as well, about plans to ban gasoline and diesel fuel cars starting as early as 2025, 2030 as -- or late as 2040, replacing them with electric or electrified cars.

These are aggressive plans and time will tell how realistic they are. This is important because of the need to expand the charging infrastructure and to make charging fast and available everywhere. We should also qualify the statement, electrified vehicle include hybrid vehicles that use an internal combustion engine as an important part of its drive chain.

A more likely scenario is that by 2040, a significant fraction of new vehicles will be hybrid or electrified but not pure electric. By looking at the background and motivation behind these announcements, it's clear that clean air is the target. These countries suffer from poor air quality in some of their major cities and vehicle emissions are being blamed for part of it. These omissions include all criteria pollutants, that is NOx, hydrocarbon, CO and particulates.

The second motivation is meeting the goals of the Paris Agreement on CO2 reduction. But this depends on how their electricity will be generated and the well to wheel accounting for CO2 emissions. First and foremost, these countries are looking for the euro or near euro emission vehicles to replace the diesel and gasoline fee. They know that diesel vehicles have been a major source of pollution in cities, also gasoline vehicles. Regulators are looking for ways to combat this and are sending strong signals that they are willing to act in order to clean up their air. A more realistic approach to achieve the clean-air goal, at least in the near-term, is to implement after-treatment technology that significantly will reduce emissions for gasoline -- from gasoline vehicles.

Almost 2 years ago and as have been mentioned, Tecogen announced the joint venture with Ultratek to develop an (inaudible) after-treatment system for gasoline-fueled vehicles. This is part in Tecogen's successful system for natural gas-fueled engines, with the objective of significantly reducing emissions of regulated or toxic form of vehicles.

This is the same target that this countries in Europe and India have. Because Ultratek are making progress in developing this technology and earlier results are promising.

The clean-air regulations in Europe and India represent a timely opportunity for the near 0 emission after-treatment system under development, making this technology available soon and [considerately to set] find the same clean-air requirements in an economic and timely manner and in ways that does not require aggressive and probably unrealistic plans.

Serious trends for clean-air regulation has a great opportunity for the mobile Ultera system. As Bob mentioned, we published data showing the early test for the after-treatment system achieved up to 25% to 80% reduction of (inaudible) pollutant even before optimization. And we have made significant developments since then to improve the system and to integrate it better with the engine of the vehicle system. We plan to further test some of these new developments soon in partnership with some major automotive design and development organizations. And as Bob said, we are focusing on real driving emissions, a major challenge that needs robust (inaudible) solutions.

Thank you, Professor. And I'll now turn the conversation over to Bonnie Brown, our Chief Accounting Officer.

Thanks, Bob. I'd like to start with a discussion regarding the merger with ADG and how it's been presented in the financial statements of Tecogen.

Since ADG became a wholly-owned subsidiary as of May 18, ADG's operations are included in and consolidated with Tecogen's operations as of that date. Said differently, revenues and cost of sales for our new energy production revenue stream includes the operations of ADG only after May 18, essentially 6 weeks and not its full quarter.

In addition, the purchase accounting has not been finalized and balance sheet values are presented as provisional, pending completion of the necessary valuations and analyses.

Moving onto the quarter, Slide 13 contains some of the highlights of the year-on-year financial results for the second quarter.

First, total revenues increased by 33.5% compared to the same period last year. Product revenues alone grew 29% compared to the same period last year, with a 45% increase in the sales of cogeneration modules and 12% increase in chosen heat pumps.

Total service revenue grew 13% compared to the same period last year and continued its steady growth, delivering well over half of our product and service revenue for the quarter. The company posted a 7% increase in service contract and parts revenue on a year-over-year basis. This increase was the 18th consecutive quarter of year-over-year quarterly contract service revenue growth. For year-over-year comparisons adjusted to the seasonality of Tecogen service revenue, these long-term contracted maintenance and service agreements account for a substantial piece of the company's total revenue providing an annuity-like revenue stream.

We also have our energy production revenue stream from our merger with ADG, which added $774,000 to our total revenues. Again, this only represents the portion of ADG's revenues that were earned over the 6-week period after the merger date. This revenue stream has another source of annuity-like revenue along with its long-term contract.

With product gross margin of 37% for Q2 of 2017 compared to 27% for Q2 of 2016, cost of sales of products continue to benefit from the improvement implemented in the e+ line of InVerde. The new product has cost-effective manufacturing processes and will continue to reduce with continued volume and growth.

Service margin declined to 38% compared to 45% for the same period last year. Cost of certain installation projects were higher than originally anticipated, bringing the service margin down as a whole.

Combined product and service gross margin of 37.3% can be used as a comparable to Tecogen's historical premerger business of 37% year-over-year.

Energy production activities from the ADG fleet provided 57% margin, bringing our consolidated gross margin to 39.5% for the quarter and consolidated gross profit to $3 million compared to a $2.1 million for the same quarter last year. Gross margin improvement and expense reduction programs continue as management focuses on maintaining a strong margin in the future.

Net loss per share, basic and diluted, was $0.01 for the second quarter of 2017 versus $0.02 reported in the same period of the prior year. We achieved positive non-GAAP adjusted EBITDA for the quarter as been discussed earlier of approximately $64,000 as compared to a negative $212,000 to the same period in 2016, an improvement of $276,000.

The other comprehensive loss of $224,000 represents unrealized loss due to the market valuation fluctuation of the shares of EuroSite Power Inc., owned by ADG. This loss represents the fluctuation market price from quarter-to-quarter, with an unrealized gain or loss recorded as other comprehensive income or loss at the end of the period in accordance with GAAP's mark-to-market rules.

Turning to Slide 14, let's review the graphic charts that track our metrics.

Starting with the chart in the upper left-hand corner, total revenue for the trailing 4-quarter period is at $28.2 million, including the energy production revenue and $27.4 million without energy productions.

Energy revenue is the small, gray, rightmost line in the chart. We've circled it in red. Because energy revenue only represents earnings of a 6-week period, and this chart represents annual revenues of the trailing 4 quarters metric, the revenue appears insignificant. This is the introduction of ADG's revenue contribution, which will continue to grow with time. We expect steady growth in all revenue segments to continue.

The chart in the upper right corner illustrates results of our gross margin. As you can see on a trailing 4-quarter basis, management delivered a growth margin of 40% at the top of margin -- excuse me, management's targeted range. We expect cost controls and sales initiatives to continue to deliver these margins.

In the lower right corner is a chart of operational expenses. Management's efforts to lower operating expenses continues and remains a focus going forward. This past quarter, we carried additional onetime or nonrecurring legal and other professional fee costs related to the merger with ADG of approximately $100,000 as well as additional costs associated with ADG's operations, which are now consolidated with Tecogen.

As a percentage of revenue, operating expenses were 4-point -- 42.6% for Q2 2017 compared to 43.8% for Q2 of 2016, a 2.7% improvement year-over-year.

And finally, in the lower left corner is our weekly backlog chart, currently at $16.1 million as of Friday, August 11. This backlog is well ahead of management's goal to achieve $10 million in product and turnkey service revenue. Additionally, ADG's estimated undiscounted future energy production revenues, which are not included in our backlog figures, exceed $50 million, stretching out over the next 15 years.

Likewise, backlog does not include service contract revenues or sales of the TEDOM projects -- products by the TTcogen team. The targets of the company remain the same, management works to meet these goals and deliver these gross margins and the backlog targets that we have continued to maintain through this period.

Now I'll turn the call back to Ben to conclude our discussion.

Bonnie, you want to mention something about the cash available in the company?

Yes, it's in the press release.

Yes, but I think maybe you should.

Sure. Sure. Our cash grew -- as Ben mentioned, I believe our cash grew by $42,000, so we had positive increase from March -- the number in March of, I think, it was 3-point -- it was $42,000 less $3.2 million to the $3.3 million that it is on June 30.

The first time it's gone up and not down.

Yes.

Good.

Good, good thing.

Thanks very much, Bonnie. So as I mentioned earlier in the call, this second quarter was really a transformational quarter for Tecogen in many ways. First and foremost, obviously, we're completing the American DG acquisition, took many months of effort, but now that it's completed, we're immediately starting to see the benefits of the transaction. The ADG fleet is producing steady annuity-type revenues for the company and due to the efforts of Bob and his engineering team over the past year, the fleet has demonstrated better margins and profitability.

We expect additional efforts by Bob's team to illicit even more revenues and profits from the fleet with minimal capital outlay. We are looking forward to seeing a complete quarter of revenue contribution from ADG in the coming months so that the full impact of the margin contributions and expense controls can be more fully seen.

Next, we'll continue to grow our revenues and margins through our core business of product sales and service. Our CHP systems are becoming increasingly knowledged and specified as the best technical choice for CHP in our size range. Our chillers are becoming the standard of design for indoor growing facilities. Our relationships with key partners continue to grow and expand, and environmental pressures and grid resiliency concerns still continue to support the trend towards Tecogen products.

We have demonstrated tremendous financial growth over the past few quarters. After 3 straight quarters of profitability, the second quarter of 2017 was also a financial success, when taking into account the onetime merger-related expenses, the ADG fleet depreciation and other noncash expenses. As a result, our cash balance is beginning to grow and we expect further success in the rest of the year.

It is truly an exciting time for Tecogen, and we hope that our new and existing investors will realize the full potential of our technology and success going forward.

With that, I'd like to turn it over to the operator for questions.

(Operator Instructions) Our first question comes from the line of Amit Dayal with Rodman & Renshaw.

(inaudible) ADG, first of all. I have a few questions on that, maybe I can start with those. What is the plan to integrate ADGE and Tecogen's offerings from a marketing and sales perspective?

So we have been implementing that. Speaking of marketing and sales, obviously, American DG has a brand, that the American DG brand is out there, so we're continuing in that. That's why we're maintaining American DG as a wholly-owned subsidiary so we can maintain continuity with the marketing of it, with the website, for example, with our existing customers, et cetera. From the sales standpoint, they had a CRM sales tool, that we took over and are integrating that into Tecogen's sales -- Tecogen's own CRM. ADG did not have any sales folks at the time of the merger, so there was no integration on that side of thing. But I think we've gone pretty far in getting all the sales and marketing of American DG integrated to Tecogen.

Do you see any upselling opportunities in the near term? Or is this something that might happen longer term?

What type of opportunities, Amit?

Cross-selling opportunities between your Tecogen's portfolio and ADG's offerings.

Oh sure, sure. So American DG has its fleet, of course, we're maintaining, and various -- parts of that fleet are in various stages of the OSU, of the long-term agreement. Some of those agreements are coming up to expiration, or in some cases, they might have already expired. And the work that Bob and his team has put and they're really rejuvenating these assets and making them run well puts us in a great position to get them to re-up the OSU for another term, so that extends the backlog of ADG, number one. Number two, just kind of getting much more familiar with the fleet owners, the owners of the buildings, et cetera, is starting to reveal that they have other buildings that could possibly be prospects for systems, whether it be another OSU or perhaps it could be just a direct install. And having the ability to give the customer both options now is tremendously beneficial. So yes, there's a lot of opportunity that we're starting to open up just interacting more with the existing fleet and the project owners.

Understood. You mentioned you have 400-kilowatt systems in backlog for ADG. Could you clarify how much that translates into dollar terms?

I don't think we have at our fingertips what the estimated full 15-year OSU contract value is.

Right we -- it's -- I don't have at my fingertips, but obviously, those units will run many hours in the year and every hour they run, they'll generate revenues for the company, but I would think it would be -- I don't want to put a guess in there, I'm sorry, but they'll be significant.

Okay, just maybe another way to ask it is, does the backlog number include any from ADGE or not?

Yes, that backlog -- no, it is not. It is not.

Okay, okay. Understood. In regards to the California environment testing that's coming up, what happens once this is approved, et cetera, from a marketing and sales perspective what are you planning to kind of -- how you're planning to leverage these going forward.

Right. We have -- once we've got that under our belt, we can show it to other ESCOs, other owners of equipment and begin to market it as a tool. We can also go to the manufacturer of the generators and speak to them about these real results that could transform their products into a different role, not just an emergency generator, but a generator that can save by running a few hours a month as the demand tool. But it's -- that's a whole initiative that I think we'll have to get started.

Just maybe one last one for me. Sales margins are down mainly due to some onetime expenses you guys talked about. Do you expect those margins to bounce back going forward?

Yes, sure, yes. I can take that on, Amit. Yes, so the -- those margins are our service, our maintenance as well as our installations. We -- I think, as you know, we sell our units and sometime we sell our units and do the full turnkey installation and obviously, a much higher revenue number by doing a full turnkey installation than if we sold the unit alone. But that -- it's an installation, which requires mechanical, electrical, plumbing. It's construction, it's construction. And margins in construction are -- can be up and down, depending on the job. And in this past quarter, we had a few jobs that the margins just weren't as healthy as we would like them to be. That could be a number of factors, they can be just -- again, the construction came in a little more expensive. It could be, I know in the case of a few projects here, as being competitive in the marketplace, if there's other proposals and it comes down to a cost competition, sometimes, we have to take a little bit of a haircut, and we do solo with full knowledge of the consequences. So we had a few projects that we made a little bit of a concession on price on, but much longer long-term gain from that because I think as you notice, when they do a construction project, even the construction margins aren't that great, we get our full margin of the unit that we sold with that, but more importantly, we're lining up 5, 10 years of good, solid margin service revenues going forward. So I think that's the reason you saw that drop a little bit is we decided we'll shoot a few projects that weren't -- margins on the installations weren't as strong as others.

Our next question comes from the line of James Jang with Maxim Group.

So I know Bob mentioned this -- for the Ultera technology. So proof of concept should be at the end of '17. Have you guys had any more increase from other fork truck manufacturers? Or are you still just working with the one?

We contacted 2 at the outset of the program when we initially fund it and we've got interest from both. And we have given budget to work with for the program, so we selected the one that we thought would have the most interest and to deliver trucks fast, and so forth, but we -- I believe we could have gotten either one fleet, if we wanted to.

Okay, and with your conversation with them, are they looking for something exclusive? Or are they just happy with getting the technology retrofitted on their trucks?

I'm -- we have not -- I have not had that discussion with them directly, I would suspect they would want sort of advantage in the marketplace, but we have not made any agreement one way or the other.

Okay. The last question about that is, what about, I guess, bringing that in-house? I guess if you guys are able to -- I don't know if it's feasible, but if you're able to create fork truck engines so that in the market, is that something -- is that an option on the table? Or are you kind of just looking to license the tech out?

We haven't decided one way or another, but I'll tell you this, the fork truck manufacturers, they buy their engines from a few suppliers, okay? So these third-party companies supply the engines. And one likely scenario I would think would be once the manufacturer of the fork trucks says, I want this engine as a -- in my vehicle, then we would work with the engine manufacturer to get the engine certified with those -- with that device added to it. That's a likely scenario.

Okay. And one last one. So Bob, I know you have done this for a long time so maybe you can answer this. Can you scale this up to larger engines? I know fork trucks are a little smaller, but, let's say, ship engines that run on LNG with this...

Yes, yes. Of course, the engine size we can scale it up. But the real issue with the larger engines when they get very, very large, I'm not sure about ships, to be honest with you. But...

I just took one to -- I just wanted to think of.

Yes, that's the -- no, the engines that are -- that we run into that are large of that technology uses a lean burn technology where they add a lot of extra air into combustion process to keep the NOx down. It doesn't do as well as we do, but it does well enough with some ammonia injection and exhaust to meet the emissions. That's not practical under a megawatt really, but so we can go up easily to the megawatt size and stationaries, but with really, really large engines, I don't think we're a good fit because of that, but I don't know about ship engines, to be honest with you.

(inaudible) Bob, I can say a couple of words about that, the regulations, the maritime regulations are getting tighter and tighter, and it's not unlikely that there will be a move towards spark ignition, so kinetic engine for some of these applications. And so if that does happen, then the technology will be compatible with making generation ship engines as well.

Okay, great. Yes, because I know the IMO they had a regulation in 2020 and there's a lot of options on the table, nobody's actually, I guess, nailed down the tech they're going to use. So...

And they are getting different, different like it's -- it's likely that they will get even more so and it's sort of the historical precedent for diesel engine or for compression ignition engine to be implemented in them may not survive. And with sort of the switch towards gasoline [spark-less] engine, it's not unlikely that, that could present itself as an opportunity for these manufacturers as well.

Okay. Good. And I just have one thing. I don't know if you guys had any discussions with I guess the European environmental agency, but I know they're trying to do away -- I know France is trying to do away with diesel engines. Have you heard anything in regards to that?

That's what Ahmed was speaking about, I think about all engines now being under consideration. Ahmed, you want to add something to that?

Yes, yes, sure. So actually, the direct answer to you is we have had discussions with a major auto manufacturer in Europe. We haven't yet had discussions with the regulators, but we've had discussions with an auto manufacturer, and there was obviously interest although again, the auto industry is conservative and tends to take careful steps before adopting any new technology. So with regard to the diesel, I'm sure you heard about announcements near-term than on vehicle cars getting into downtown tariffs and one of them among a few other cities. So in the near term, seems like the big cities are going to take up kind of local initiatives to ban -- either ban or completely or impose very strong levies on diesel cars being driven. In fact, we had a discussion with a senior executive in one of those companies who said that he cannot drive his car downtown that is because he has brand new diesel, while his wise-old gasoline can be driven anywhere, and he wasn't too happy about that. But the upshot of it is diesel is clearly facing a huge uphill battle in Europe and that will continue in the near term. In the longer term, the announcement that came out from Europe, in particular France and the U.K, about banning both gasoline and diesel cars by 2040 was clearly motivated by concerns of air quality. You just have to be in one of those cities in the summer to know what people breathe. So they are concerned, first and foremost, about air quality, about emissions coming from the vehicles and we think that this produces an incredible opportunity for a technology that can reduce the emissions by a significant amounts similar to technology or development because that will meet existing vehicle technology internal combustion engines last a lot longer than people have anticipated so long.

Yes, it's -- so, let's say -- I know 2040 is probably not going to be the heart date, but let's say 2040 is the date. If that's the case, how long do you think it'll take before automobile manufacturers will start to look at the Ultratek technology in earnest?

I'm sorry, can you repeat that?

I'm sorry to happen, sorry.

No, so I think I got the question, although maybe in our bucket (inaudible) I mean, typically, auto manufacturers look at next generation 3 to 5 years from now, so implementation of new technology doesn't happen in next year's model, it happens on models that are being planned for somewhere between 3 to 5 years because they need to design the systems and implement them and get the assembly lines ready, and so on before they can produce new technologies. So if they are now under the balance so to speak, to look at extremely low emissions technology by 2040, I can see them getting very anxious and getting ready to start scouring the landscape for technologies that will allow them to do that.

I just want to take this. James, I would like to answer you more, but I know that there's a queue of callers that I think that out of respect we should get to. We are going to take your questions off-line.

Ben, excuse me, I have a flight to catch. This is John Hatsopoulos. Thank you, everybody. Everybody else is going to stay here for a few more minutes, but I apologize that I have to leave. Thank you.

(Operator Instructions) Our next question comes from the line of Michael Zuk with Oppenheimer.

Ben and Bob, congratulations on a real turnaround quarter going forward. A couple of questions. Are we considering a dedicated sales force for the indoor farming, vertical farming marketplace? And then a follow-up, what's going on with Ilios?

Sure. I'll take the first question. We kind of have -- we have a -- and just so you know, the sales to these indoor grow facilities are very technical engineering sales, which I like, because you're dealing with professionals that understand the equipment, understand HVAC systems, refrigerants, economics and all that kind of thing. So we have, in fact, an engineering team that we've kind of focused, not all the time, but with a lion's share of their time working with these engineering companies that design the grow facilities. And indeed, as I mentioned before, it's getting their mindset off of CHP -- CHP makes sense in some cases, but the chillers require a little bit more thought on these individuals' part but I think they're understanding it and once they start to specify it, once you become the basis of specification, then it just carries you through. It's not really selling anymore because you've become the basis of specification. So we are indeed focusing people on that, but it's not so much that the traditional salespeople as it is, our engineers working with the engineering companies that do the specifications. With regards to Ilios, we're still, of course, moving on in earnest with that. There are geographies that make more sense than others. Finding the right sales approach for that is a little tricky. Hiring a direct salesperson in some remote geography has a risk/reward to it, whereas hiring sales agents -- I've talked about sales agents before and reps for that matter make a little more sense. So we are continuing to grow our network of agents and reps that carry the Ilios line. You just can't beat up on these guys as much as you can if they were a direct hire. But that's kind of the trade off, so Ilios is still spinning a lot of attention to it.

And then one follow-up question. We have a line entry called unfavorable contract liability. Is that a liability that will be amortized over a period of years? Or is it a stable amount?

It will be amortized over period of years. It represents...

So eventually then, it will fall to 0, and that'll be a positive impact on the balance sheet?

That's right.

Well, that's good to know. Any estimate? Is that like a 5-year, 10-year? Or is it tied to contract life with ADGE?

It's tied to contract of ADGE. So we'll be tied to the life of each contract.

But nevertheless, a positive development going forward?

Yes, definitely.

Our next question comes from the line of Alex Balanton (sic) [Alex Blanton] with Clear Harbor.

It's Alex Blanton. All right. The cover of your slide presentation for several quarters, including this quarter, is I believe the Westin Hotel in New Jersey, looking toward Manhattan and shows the roof of the hotel with 3 InVerde installations, correct?

Yes, that's right. It's a lovely view up there. I've been up there myself. You got a nice view over the Manhattan skyline.

So that brings up the question of what the market is for these large hotel chains. If the Western hotel in New Jersey can justify this installation and get a payback on it, why not all the other Westin hotels? And what is being done about pursuing the hotel chain market in general?

Sure, yes. You're exactly right, Alex. I mean that -- I spent all my days thinking about these things and hotel ownership groups instead of just doing the one, of course you want to do a fleet. Now that particular hotel is owned by a hotel ownership group, I'm not going to mention its name, but we are indeed talking with them about multiple other facilities, and this ownership group doesn't just have hotels, they have residential buildings. So that's exactly what I'm doing here, is not just focusing on the onesies, twosies, but getting behind the actual ownership and going through their portfolio. So we've got several groups, hotel groups, property management companies, et cetera, that we go systematically through a -- of course, you show success with the first couple, but then you systematically go through their profile and find the buildings that make more sense. Now not everyone makes sense. There could be installation. You might have to cord you up 40 floors, which make the ROI go to 12 years. Okay, well maybe that one is not good, but you're exactly right. You end up with the opportunity to go through their whole portfolio and find the subset, and you basically categorize them by ROI. And you find the ones that have really good quick ROIs and of course, they pay very fast attention to those and then you start going through the list and they prioritize their own CapEx in the years going forward to do more of these projects. So yes, we are doing just that with not just the hotel and the REITs, but also the property management companies.

You're saying the high end of the building makes a difference?

Well, again, I don't want to spend too much time, Alex, but picture that unit -- that building that you saw on the cover of our presentation, those units are up on the top floor. If the switch gear, the electrical switch gear is in the basement and the boilers are in the basement, that's a whole lot of copper that's going to be run -- to connect it to. I mean, again, you have to -- the things that all that have to be interconnected here are gas, so it's gases coming in on the street and it's got to go up to the top of the building, bathroom expense. So to all of those things and again, I'm -- I know I'm getting very specific on these things, but it basically comes down to ROI. And some buildings have really good ROIs for CHP because of economics, installation, they all come together nicely. Others, not so much because maybe their rates are a little bit different, maybe the constructions are little bit different, and so on.

So there is a realistic possibility that with a hotel chain, you could get quarters for multiple installations all at once and some kind of a capital improvement program that they might begin? Renovating a whole bunch of their hotels all at once? Is that possible.

Sure, sure. Sure. And I think what you end up happening is -- and this is sometimes a hindrance, but you have to deal with that. If CHP installation becomes a part of a much larger renovation in the building. It's kind of the while you're in their mentality, right? While you're putting in CHP, hey, you might as well replace the entire boiler system with this CapEx project. So we become a cog in a much larger wheel, the construction wheel that goes on with these things. But similarly, you're exactly right. If they have a portfolio of 5 or 10 buildings that they assign a capital budget for, then we can knock them down sequentially. That's great. I love it when that happens. One sales call results in 5 orders. But it doesn't always happen that way. But, of course, that's something that we look towards all the time.

We reached the end of our question-and-answer session. I'd like to turn the floor back for closing comments.

Sure. Operator, I see one more question in the queue. If you don't mind, I'd like to take this one last question.

Our next question comes from the line of Roger Liddell with Clear Harbor.

I'll make it brief. I took note of the Washington Gas Light, WGL Energy contract you referred to earlier in the presentation. There must have been considerable investment in bringing that relationship to fruition. Is there anything that you're at liberty to say in terms of the ability to deleverage the WGL opportunity?

Sure. It's -- you're right to recognize that. It is a very valuable relationship. It did take a long time to develop, and we're very happy to get this project announced in May. They're a great group, very financially sophisticated. They were able to put together, for this particular project, the financial package that no other -- I mean, there was competition for this particular site. It wasn't just us going into the Washington Gas, there were many other vendors in there. And we were far and away, obviously, the best equipment. But obviously, the best finances as well package being offered by Washington Gas to get in there. They are, again, a great organization. They are looking to do more projects. I want to do more projects. We're hoping that we can get more projects in the future with them.

Great. And the last question is, I also took particular note of the recent announcement about the Boston office building and the opportunity you've opened up there. What changed? What made it happen that there was a win in Boston? I don't recall one in a number of years. So I take it, this was a big deal potentially, and could you elaborate on that?

Sure. And again, good observation because I've mentioned this to you before, and maybe our audience doesn't know, but Boston is very restrictive, well, is restrictive, totally restrictive to CHP because the type of electrical network they have on there doesn't permit distributed generation in general, not just CHP, but you can't get even get a fair amount of solar panels on a building in Boston because of the electrical network that they're in. And we've tried to have that discussion with Boston and solar guys have and not gotten too far, but -- so it's kind of a no-fly zone, if you will, for CHP. But it isn't a no-fly zone for chillers, and the order that you saw was for some chillers. And that's our way to still -- to be able to penetrate the Boston market, not with CHP but chillers, but, of course, that accomplishes the same thing, you're reducing -- you're increasing their electrical savings, decreasing their electrical demand. In some cases, you can get the hot water as well. So it's a nice way to be able to get into these cities like Boston, I think San Francisco, Bob, is another one, right?

Right.

That has the spot network, a spot electrical network that do not allow CHP but we can skirt that by putting in the chillers.

Okay, operator. I think we're all set.

Okay. Are there any closing comments you'd like to make?

No. Except again, thank you all for joining the call, particularly investors, and American DG that might have heard our presentation for the first time. And we're looking forward to the third quarter when we'll have a full quarter of American DG financials integrated to look at. So thank you all for joining us.

Okay, thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.