Tecogen Inc (TGEN) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Tecogen Fourth Quarter and Year-End 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Bonnie Brown, Chief Accounting Officer. Thank you. You may begin.

Thank you, Michelle. Good morning, and thank you all for joining our Year-End 2017 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.

This conference call and any accompanying documents containing forward-looking statements, which may describe strategies, goals, outlooks or other nonhistorical matters or projected revenues, income, returns or other financial measures that may include words such as believe, expect, anticipate, intend, plan, estimate, project, target, potential, will, should, could, likely or may and similar expressions intended to identify forward-looking statements.

These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update or revise any forward-looking statements.

In addition to those factors described in our annual report on Form 10-K and our quarterly reports on Form 10-Q under Risk Factors, among the factors that could cause actual results to differ material from past and projected future results are the following: fluctuations in demand for our products and services; competing technological developments; issues relating to research and development; the availability of incentives, rebates and tax benefits relating to our products and services; changes in the regulatory environment relating to our products and services; integration of acquired business operations; and the ability to obtain financing on favorable terms to fund existing operations and anticipated growth.

In addition to GAAP financial measures, this presentation includes certain non-GAAP financial measures, including adjusted EBITDA, which excludes certain expenses as described in the presentation. We use adjusted EBITDA as an internal measure of business operating performance and believe that the presentation of non-GAAP financial measures provides a meaningful perspective of the underlying operating performance of our current business and enables investors to better understand and evaluate our historical and prospective operating performance by eliminating items that vary from period to period without correlation to our core operating performance, and highlights trends in our business that may not otherwise be apparent when relying solely on GAAP financial measures.

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

Good morning, ladies and gentlemen. As you probably know by now that this is my last conference call since I'm retiring by our annual meeting from both the board and as CEO of the company.

But I wanted to take a couple of minutes to, number one, assure you that I'm not leaving the company. I'm going to be there as we file with the SEC for the next 3 years. I have an agreement after our annual meeting to be there for next 3 years. And my job will be mostly to advise, if asked, on financial matters and also answer any questions some investors might have. So my office with Ann Marie Pacheco and myself will be there for at least another 3 years.

I also want to take 1 minute to thank the 3 teams that made this record quarter possible and, hopefully, a tremendous future for our company. Number one, our investors. As you all know, our investors suffered for a while, and there wasn't much we can do other than try and make the company a huge success that I hope will be.

The second group I want to thank is management team, headed by Ben Locke, Bonnie Brown and Bob Panora. They made it all possible. I was there to advise them and help them, but Ben and his team and the other 2 people's teams have been responsible for the success that we had.

Last, but not least, I want to thank our Board of Directors, headed by Angelina Galiteva, who's the Chairperson, for the support and tremendous amount of work that they've done in creating the stability and the future of the company.

With that, I would like to pass it onto Ben Locke, the now new -- well, he'll be Co-CEO for another few weeks, but after that, he'll be the exclusive CEO of the company, as he deserves. Thank you.

Thanks, John.

Ben?

Yes. Thank you, John. And on behalf of the company, we want to really extend our thanks to John for taking the company through the years to where we are today as successful. It really is a page out of the success of the Thermo Electron book, which is, root the company in sound engineering science, good people with strong financial acumen, and that leads to success. And I think John guiding the company to where we are today, we've demonstrated that. So for that, I think our management team and I hope the investors will thank John for that.

So turning to the earnings call. As the agenda indicates on Slide 4, I'll start by reviewing the company's performance and financial results for the quarter, along with the recent achievements and accomplishments. Bob will then give an overview of our emissions technology development, followed by Bonnie with more detail on the financials. I'll then have some final remarks on future opportunities we expect to see as we move forward into 2018. Then we'll take questions.

As always, I'd like to start off reminding those who may be new to our company about Tecogen's core business model, shown on Slide 5, heat, power and cooling that is cheaper, cleaner and more reliable. Our proprietary technology for improving efficiency, emissions and grid resiliency is truly disruptive to the traditional methods of heating, cooling and powering buildings and infrastructure.

Turning to Slide 6. 2017 was a record year for the company in terms of financial performance. Our 2017 revenue was $33.2 million, an almost 36% increase over 2016. And more importantly, our adjusted EBITDA of $533,000 in the fourth quarter was not only a record, it also marked the sixth consecutive quarter and the first full calendar year of positive operational results with adjusted EBITDA for the full year 27 -- 2017 coming in at $1.1 million.

Moving to Slide 7. You could see that the positive results carried all the way through to the bottom line. We achieved record net income for the fourth quarter of $269,000, resulting in full year net income of $47,000. This full year profitability is a major accomplishment for the company and was the result of strong performances across-the-board from product sales to our installation and services segment to our ADG fleet of on-site utility sites.

Product revenue increased 45% in the fourth quarter compared to the fourth quarter of 2016 to a record $4.6 million, bringing product revenues for the full year to $13 million, a 21% increase over 2016. The growth was a result of ongoing strong order flows from both new customers, such as the 800k WCHP orders for several New York City apartment buildings and the 150 CHP system installed at a major pharmaceutical company in New Jersey announced earlier this year and existing orders -- existing customers, such as the chiller replacement at St. John's Riverside Hospital and Bulova Corporate Center, both of which were replacements for existing TECOCHILLS.

We expect the strong order flow to continue as enthusiasm for our InVerde e+ continues to grow due to its superiority over other CHP systems in our size range, and we expect our chiller sales will continue to improve as the HVAC market increasingly recognizes the tremendous value of so-called mechanical CHP for applications such as indoor growing, ice rinks and traditional applications, such as hospitals and other industrial applications.

Service and installation revenue once again rose higher to $4.1 million for the quarter, a 5% increase over the fourth quarter of 2016 and $16.4 million for the year, up 19% versus 2016. Turnkey installation service has been a key driver in this segment as more customers recognize that Tecogen installations ensure the best quality and economic savings that can be achieved for a project.

ADG's energy production revenue of $1.5 million was steady and consistent with prior results as the fleet provides a nice baseline of revenues and cash flow for the company.

Gross margins continued to hold strong at close to 37% for the fourth quarter and 39% on a full year basis. Energy production gross margin was also in line with expectations. Our goal continues to be achieving gross margins in the 35% to 40% range. Consequently, gross profit grew 40% in the fourth quarter to $3.8 million when including ADG.

As I previously noted, EBITDA increased to a record $533,000 for the quarter, lifting full year EBITDA to $1.1 million. This is important as we prudently increase our operating costs to maintain growth while continuing to identify ways to save the company money in the long run and adjust to the consolidated company, including the implementation of new internal software systems, which will ultimately improve our operational efficiency.

We are also continuing to invest in our sales team. We extended our sales-agent network considerably in 2017 and also implemented an advanced sales platform to increase our outbound sales generation and lead process, which is helping streamline lead qualification and project development. We will continue to invest in the sales team going forward as the 2017 results show it's one of the best ways to grow our business.

Moving on to Slide 8. Our exceptional results for 2017 has established Tecogen as a profitable and self-sustaining business that will allow us to continue investing in future growth. A key indicator of our ability to sustain momentum is our backlog, which stood at $15.7 million at year-end. This is a record not only a year-end basis, but also on a quarter-end basis. I will discuss the backlog a bit further shortly.

As a result of our financial success of the past few quarters, just before the end of 2017, we were able to retire the $3.15 million in convertible debt on our balance sheet. We had the opportunity to retire it a full year before it became due, which not only freed us of the debt's restrictive covenants but also enables us to better utilize the borrowing capacity on our balance sheet, should the need arise. We are currently in the process of securing a bank line of credit that will allow us access to the capital needed to continue growing our business. Our goal is to finalize this working capital line of credit in the second quarter.

And finally, in addition to achieving full year profitability, a significant accomplishment in 2017 was the completion of the American DG acquisition in May of 2017. ADG is now an important source of stable, high-margin revenue that helps balance out the volatility in our other revenue streams.

I'd like to now turn to our backlog, as shown on Slide 9. As previously mentioned, the backlog stood at a record $15.7 million at year-end, and as of this Monday, it was $17.4 million. It's important to remember that this backlog is comprised of products and installation services and does not include the steady revenue contributions of our service segment and our energy production segment. As our earnings press release indicated, we have broad and diverse customer base. While multiunit residential continues to be a big portion of our business, we are seeing increased interest in health care, the industrial and manufacturing space and in indoor growing. We continue to target sustaining the backlog at over $10 million.

Slide 10 outlines some of the key market and regulatory drivers that continue to help drive our product offering. I will touch on them briefly now and then follow up at the end of the call how they integrate into our 2018 Outlook. Indoor agriculture continues to emerge as an important driver of near-term revenue growth. In the fourth quarter, we announced 3 chillers to be installed at another Massachusetts grow facility and 2 chillers sold to a cucumber grow facility in Ontario. We are continuing to work with project developers and consulting engineers on many more grow-related applications for our TECOCHILL product and expect more orders in this segment in 2018.

Next, as I mentioned on our third quarter call, we are continuing to build high-level relationships with entities that could bring multiple projects to the table, whether it be energy service companies -- ESCOs, property management firms, engineering companies or energy efficiency consultants, Tecogen is recognized as the leader in product technology, installation engineering, service and maintenance and overall reputation as the premier CHP company in the country.

This also extends to the on-site utility partners who choose Tecogen for projects that are financed by third parties. Our product performance and long-term service reputation are key considerations when financing companies enter long-term agreements with customers.

Lastly, as we're becoming more involved with microgrid programs that require automated controls for on- and off-grid operation, we will see more projects developing in 2018. I will talk more about this at the end of the call.

Next, the situation on the regulatory front is becoming more favorable to Tecogen. The federal budget bill passed into law in February of 2018 extended the 10% investment tax credit, or ITC, for a new combined heat and power projects through the end of 2021 and retroactively back to the start of 2017. The ITC had expired at the end of 2016. In management's view, the ITC extension signals the growing appreciation, among lawmakers and regulators, for cogeneration. This appreciation extends to state level via the continuation of state-run incentives, such as New York's NYSERDA rebate program, New Jersey's Smart Start Program and the Mass Save program here in our home state.

Next, electric utilities are starting to embrace CHP as a means for supporting areas with constrained electrical capacity, as evidenced by new programs in the Con Ed territories as well as other large utilities. As distributed generation becomes a larger part of our country's overall electrical supply infrastructure, more interactive and responsive power control technologies are being required by utilities to allow distributed generation assets to play an important role in grid stabilization. I will talk more about this at the end of the call.

Lastly, one final point on regulation that provides a nice segue to Bob's discussion on emissions and was discussed in yesterday's press release, the South Coast Air Quality Management District in California has adopted our Ultera-level emissions for stationary, nonemergency internal combustion engines as Best Available Control Technology, or BACT. This validation of our Ultera emissions technology as BACT sets the stage for other states to adopt similar emission standards across the country.

Turning to emissions, Bob will outline the exciting accomplishments we have achieved in our PERC-funded fork truck development program, our continuing efforts to retrofit other stationary engines with our Ultera emissions technology and, of course, our progress with our automotive emissions technology program as we pick up where our Ultratek joint venture left off in late 2017.

With that, I'd like to turn it over to Bob. Bob?

Good morning, and thank you Ben, and thank you, John, for those kind words. It's appreciated.

My discussion today will cover our initiatives pertaining to Tecogen's Ultera emissions technology that I've been reporting on regularly. I will first review progress regarding the research grant awarded to Tecogen from the propane industry for adapting Ultera Technologies' propane-fueled fork trucks. As I will discuss in more detail in a moment, our testing was highly successful in obtaining the reduction levels that we had hoped to achieve.

Several days ago, our results were presented to our manufacturing partner in a conference call and were received positively. Upon concluding, they requested a meeting in our facility in late April to view the system in its operation, which, of course, we look forward to.

Second, I will provide the status of our automotive program since the dissolution of Ultratek in November. We are continuing our efforts utilizing outside expertise. The initial portion of this work is now underway at our subcontractor, a well-known, very respected organization. Again, more detail momentarily.

Lastly, I will provide an update in several miscellaneous areas, including will be the special generators in Southern California that were retrofitted with the Ultera emission system and the SoCal regulatory news announced yesterday in our press release, that Ben just alluded to, that establishes a new Best Available Control Technology for rich-burn engines. This follows our successful permitting of Tecogen CHP units in the South Coast District and the subsequent review of our technology.

Let's begin with the fork truck. Now as announced in late 2016, the PERC -- the Propane Education and Research Council, PERC -- has provided the company with research grant to demonstrate Ultera's emissions reduction capability in a propane-fueled fork truck. 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.

So in propane -- sorry, from the propane -- from the program outset, the industry interest was strong because of the acute importance of managing emissions in the indoor setting, but also because of new regulations, particularly in California. The national regulations require fork trucks to utilize engines certified to a single level for each pollutant with optional tiers available. In California, there is a lower mandatory base level, but there are several optional tiers that are lower still, the most stringent tier being the Near Zero category, which is [127th] of the national certification level.

We cannot find examples that list the Near Zero fork trucks, so we believe the certification yet has been -- has yet to be attained. California also requires owners to maintain average pollution levels of their fleets to be the lowest certain prescribed value. Larger fleets have stricter requirements than smaller ones. If the average is not maintained, all the trucks need to be retired and replaced with cleaner ones.

On the positive side, the state currently incentivizes both electric fork trucks and over-the-road trucks meeting their own Near Zero standard. This strongly suggests the potential for incentivizing the Ultera technology, if Near Zero status is attained.

Given these regulatory and market drivers, we were able to secure a commitment from a major fork trucks company to support the Tecogen engineering team and to supply a fork truck for testing. The truck was received a year ago, and we have progressed through -- from -- through fabrication to testing, which is just about complete. Slide 13 depicts a representative test run for our fork truck under heavy use. In this heavy lift test, the truck is subjected to 20 repeated lifts in a 12-minute period. This is a strenuous duty cycle as the weight, 4,300 pounds, is close to the 5,000 pound rating of the truck.

The chart shows the emissions from the truck associated with these heavy lifts on top, in blue on the measured carbon monoxide emissions while below, in red, the concurrent measurements for nitrogen oxides, or NOx. The solid lines in each chart depict the concentrations before entering the Ultera stage, that is after the factory-supplied after-treatment systems, while the dash lines are post-Ultera emissions, the final emissions exiting into the atmosphere.

Beginning with CO, measurements pre-Ultera, represented by the solid blue lines, you can see familiar [excursions] in the 800 to 900 parts per million range as engine loading is cycled. However, in looking at the dashed blue line, the amount of CO leaving the Ultera is very close to 0 with 99% of what would've been expelled from the factory-equipped truck being limited -- being eliminated on a corrected mass basis. NOx removal, shown on the bottom chart by comparing the red -- the 2 red lines, solid and dashed, is 24% over the cycle. This is in line with our gasoline vehicle test performed at AVL.

We are also able to report on the Ultera removal efficiency of total hydrocarbons, or THC. Although we were unable to prepare a chart for today's call, we just completed these tests. We can say approximately 58% of the hydrocarbons leaving the primary after-treatment system was eliminated by Ultera. We note the regulations treat total hydrocarbons and NOx as a single pollutant. Their emitted weights are added together and required to be below a single prescribed limit. As such, the hydrocarbon removal is very significant.

In the next slide, our strategy to reduce NOx to Near Zero values is shown. Here, we alter the engine tuning [test], that the factory after-treatment is highly effective in eliminating -- in the elimination of NOx. As shown in the lower graph, NOx concentrations are very low from the first stage of the factory after-treatment process. They're completely eliminated by Ultera. The detrimental side effect of this tuning is the factory system is less effective in treating CO, as shown in the solid blue line. However, the dashed blue line showing the post-Ultera emissions shows that the CO is effectively eliminated in the Ultera process. Hence, tailpipe emissions for both NOx and CO are very Near Zero. While this test was done at low load, this tuning strategy has been successfully utilized to great effect in our Tecogen CHP products under all operating conditions.

In summary, these results, while expected, are still exceptional in their effectiveness. Moreover, we see a direct path to a Near Zero propane-fueled truck -- fueled fork truck. As mentioned, we have presented this data in detail to senior staff at the fork truck company via teleconference. As they found the results compelling, they visit -- they plan to visit Tecogen in late April.

Moving on to our gasoline automotive work. As discussed in our last earnings call, we -- it was agreed by all parties to dissolve the Ultratek joint venture. It was further approved that Tecogen would obtain ownership of the portfolio of intellectual property for $400,000, which was -- which, deducted from our portion of cash on hand, netted Tecogen $1.6 million. The dissolution process is complete, and we have initiated the next chapter of the program.

Our goal is to upgrade one or more vehicles with Ultera that show full implementation of the technology with specialized automotive grade components. This will enable potential partners to have confidence in their evaluation, especially regarding cost, space and reliability. We have funded the initial phase of this work to a highly respected subcontractor that is expert in automotive powertrain and after-treatment development. Their initial work will require about 4 months and focus on optimizing our catalyst formulations. Later phases will focus on component development, followed by completion and testing of the refined prototype.

I want to add that we recently submitted a new paper to the SAE International for their World Congress exhibition in April. After peer review, it was accepted for presentation at the Congress on Tuesday, April 10. The full paper will be published in the SAE Journal, which is a distinction reserved for those considered to be of higher significance.

In our -- in our stationary Ultera market, we have completed our engine generator retrofit project. Recall that this customer had a number of generators needing to be permitted. However, they were not qualified for the typical 200-hour standby generator exemption, as they would operate for several thousand hours annually. As was mentioned in our last call, the units are fully operational and meeting the required emissions levels from both our measurements and the customer's. We do not have an update on the final step in the process and official third-party tests. It is our understanding that they have managed to postpone this test while they work out some unrelated issues.

As mentioned earlier in the call, we announced today that the air regulator from Southern California have reset Best Available Control Technology, or BACT, for engine generators powered by engines, in our case, rich-burn engines. To do so, air quality experts at the South Coast Air Quality Management District needed to complete a lengthy review process to determine that a reliable cost-effective technology was available. That technology was Ultera, and their review was based on CHP units that we have permitted in their district.

Once this Best Available Technology is listed in the BACT Clearinghouse, it may be utilized by other districts and other areas of the country with air quality mitigation concerns. As stated in our press release, BACT rule change validates the Ultera technology while giving products an important market advantages -- our products an important market advantage that we expect to migrate from Southern California.

Finally, we were pleased to hear from one of our original customers for Ultera in the stationary market. They reached out to us last month after several years and told us they are very pleased with their experience and requested price and delivery information for Ultera kits in new larger sizes. These quotations, which were quite substantial, were submitted about a week ago, and we await their feedback.

With that, I will turn the call to Bonnie Brown.

Thank you, Bob.

I'd like to start with the discussion regarding the acquisition of ADG and how it's been presented in the financial statements of Tecogen for those of you who may not have joined our previous calls.

Since ADG became a wholly owned subsidiary of Tecogen in May of 2017, ADG's operations are included in and consolidated with Tecogen's operations as of that date. Therefore, the revenues and cost of sales for our new energy production revenue stream includes the operations of ADG only after May 18th, essentially 7 months. Also, the necessary valuations and analyses have been completed, and the purchase accounting has been finalized as of year-end.

Moving on to the year-end results. Slide 16 contains some of the highlights of the year-on-year financial results. First, total revenues for the year increased by 35.6% compared to 2016, bringing annual revenues to a record $33 million. Product revenues alone grew 21.2% compared to 2016 with a 5% increase in sales of cogeneration modules and 64% increase in chiller sales.

Total service revenue grew 19% for the year compared to 2016 and continued its steady growth, delivering well over half of our products and service revenue for the year. Long-term service contracts and parts revenue grew 1.8% on a year-over-year basis and continue to provide a reliable annuity-like revenue stream. We also have our new energy production revenue from our ADG sites, which added $3.8 million to our total revenues for the year. This revenue stream adds an important second source of annuity-like revenue with its long-term contracts.

Product gross margin was 38.3% for 2017 compared to 33% for 2016. This improvement is due to the implementation of production efficiencies and material labor and factory utilization efforts.

Service margin declined to 37.7% for 2017 compared to 41.9% in '16. Installation projects, which carry a lower margin than service maintenance contracts, were a higher percentage of the product mix as compared to last year, bringing the overall service margin down on a comparative basis.

Energy production activities from the ADG fleet provided a 46.9% gross margin and $1.8 million in gross profit, bringing our consolidated gross margin to 39% for the year and consolidated gross profit to $13 million for 2017 compared to $9.3 million for 2016, an increase of $3.7 million or 39.3% in gross profit year-over-year.

Net income attributable to Tecogen for the year was $47,000 compared to a loss of $1.1 million in 2016. Net income per share, both basic and diluted, was at breakeven for 2017 versus a loss of $0.06 per share in the prior year.

Other comprehensive loss of $165,000 represents an unrealized loss due to market fluctuations of the shares of EuroSite Power owned by our subsidiary, ADG. This loss represents the fluctuation of market price from period to period 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.

Slide 17 presents backlog and historical adjusted EBITDA trends. Our weekly backlog chart of product and turnkey service revenues, currently at $17.4 million as of Monday, is consistently well ahead of management's goal to exceed $10 million. As always, backlog does not include a projection of service contract or energy production revenues.

Looking at the adjusted EBITDA schedule, we achieved positive adjusted EBITDA for the year of 2017 $1.1 million compared to an adjusted EBITDA loss of $503,000 in 2016, a significant improvement of $1.6 million. Adjusted EBITDA for the fourth quarter of 2017 was $533,000 compared to $160,000 for Q4 of 2016, an improvement of $373,000. At the same time, we continue to invest heavily in the company's future through increased investments in selling and R&D activities throughout the year.

Turning to Slide 18, let's review the chart that track our metrics using a trailing 4 quarters' model. Starting with the chart on the left, total revenue for the trailing 4 quarter period reached $33.2 million, including energy production revenue, and $29.4 million without the energy production revenue. This chart illustrates the trend of increasing revenues over time in all revenue categories. The energy revenue is represented by the small gray rightmost bars in the chart, circled in green, which includes approximately 7 months of ADG's earnings.

The chart on the right side illustrates the growth trend of our gross margin in blue, along with the decreasing trend line of G&A and selling costs as a percentage of revenues over time in green. On an annual basis, the company delivered an overall gross margin of 39% at the top of management's targeted range of 35% to 40%. Expect the cost controls and sales initiatives to continue to produce these results.

Operational expenses, although higher in absolute terms, have improved 8.8% year-over-year, as a percentage of revenue, dropping to 38.3% of revenue for the year of 2017 compared to 42% for 2016. Overhead cost control efforts continue to remain a focus in 2018. There are, however, 3 components affecting the dollar rise in expenses that warrant mentioning. First is the consolidation within Tecogen's financials of the costs associated with ADG's operations. Second is our increased investment in selling and R&D activities, investing in our future. And third, are the onetime costs associated with the ADG merger.

In addition, we are happy to report that in 2017, we repaid the convertible note held by Michaelson of $3.150 million, plus its accrued interest, fully discharging our obligations under this agreement. As of year-end 2017, the only debt remaining on our balance sheet is the loan due to a related party of $850,000, plus its associated accrued interest.

The targets of the company remain the same: management works to consistently exceed goals and deliver gross margins and backlog levels that we have continued to maintain throughout the year.

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

Thank you, Bonnie.

So as we look forward to the rest of 2018, the trends towards Tecogen's clean, reliable distributed generation systems continue to be in our favor. Each year, the Century Utility model is changing to be more inclusive of a -- of distributed generation, to the point where it's being regarded as an essential part of our country's grid infrastructure. Tecogen is uniquely positioned to take advantage of these trends, which represent significant untapped potential of our CHP technology.

Our InVerde e+ CHP system has supplemental inputs to accept other distributed generation inputs, such as battery storage and solar, and our onboard CERTS microgrid controllers are the most cost-effective way to provide customers and project owners with both low cost on-site electricity and energy production as well as lucrative grid support services, such as demand response, reactive power support and frequency response, all with Near Zero criteria emissions for our Ultera emission system.

Often times, solar and -- or storage alone does not have sufficient economics to provide the necessary financial returns needed for widespread adoption. However, with the foundational economics of combined heat and power, these additional revenue streams supplement the financials to reduce the ROI of projects, which will lead them to more widespread adoption. The recent determination of the Ultera technology as Best Available Control Technology further solidifies the role of Tecogen systems in the broader distributed generation model.

In 2018, we expect to embark on microgrid projects featuring the InVerde e+ technology as the centerpiece of a microgrid system that provides compelling economics and return on investment, vital grid stabilization services, resiliency to grid outages and disruptions and Near Zero criteria emissions. There are already significant examples of this taking place, particularly in California and in New York, which both represent the large utility perspective and the need for distributed generation technology to support grid stability.

And finally, there is a need for resiliency that, in this age of real-time information availability, is core to every business, institution and individual. Whether it's weather-related outages, as we're all too familiar with here in the Northeast recently, or other types of events, such as cyber attacks that can interrupt the grid, the need for electric stability and reliability to maintain connection with the outside world is essential to our way of life.

The outlook for Tecogen has never been more promising. Our core business, selling, installing and servicing cogeneration and chiller systems is profitable, scalable and provides a fundamental revenue and profit stream that will allow Tecogen to continue growth in our core markets as well as new markets.

Our advanced microgrid controls technologies are already in place to take advantage of grid stabilization needs and support strategies, and our Ultera emissions technology has been accepted as the best available approach for engine generation. And our emissions technology, whether it's upgrading existing stationary engine systems, retrofitting fork trucks to be Near Zero emission or improving gasoline vehicle emissions to meet emerging, stringent air regulations, promises tremendous upside for the company. As I stated before, it is a great time to be a Tecogen shareholder, and I hope to continue our tremendous achievements throughout 2018.

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

(Operator Instructions) Our first question comes from the line of James Jang with Maxim Group.

So you guys were ahead of our estimates, which is always a good news. So I want to ask about, I guess, the growth in sales and the backlog. How have you been achieving this? Have you built out larger sales force? Or is the sales force now segmented for each, I guess, customer type? Or what have you been doing differently?

I'd say, James, it's a combination of things. It's taking a look at where we've had success in sales in the past and, more importantly, where we've not had success, different sales techniques and approaches and, obviously, focusing on the ones that are most productive. Our sales team is very effective, and it's a combination of sales and engineering. As I've mentioned previously and even in this call, it's very important to have sound engineering when customers contemplate putting in these systems. And I think our team is nothing but professional and equipped for that challenge. And so I'd say that's probably one of our strongest points is our ability to conduct sales in a way that provides security in our customers, whether it be the engineering companies, ESCOs, et cetera, that we really know what we're talking about and we're not just trying to sell them a piece of equipment. So...

Yes. I know your sales force is a little -- it's really specialized. Are you basically -- essentially, you have engineers that are out selling these systems, correct?

It -- yes, in addition to kind of PR sales approaches of outreach, trade shows, et cetera, et cetera. So there's really no one thing. It's the combination of things that we focused on that have shown the best success.

Okay. So can you -- so in terms of, I guess, revenue growth, can you achieve further growth with the current sales force? Or would you need to kind of grow that team out more?

Sure. Well, we're -- I'm always thinking of growing the sales team. I mentioned Thermo Electron. George Hatsopoulos had a model, which is you hire good people whether you need them or not, if they're good people, and in the long run, you'll get what you need out of them. And I think that holds true with our outlook. We have good people on our staff, and we're -- we'll grow that as need be.

We also have, I think I've mentioned this before, James, outside sales tools at our disposal, whether it be manufacturer's representatives or sales agents. Increasing those has the concurrent effect of increasing sales. And I think the last thing I'd say, James, that is relevant to this, and I mentioned, of course, is developing these relationships with customers that have large portfolios of projects available to them. Of course, that's a better way to do things. And if you're able to get into a REIT or property management company and show success, you are just going to -- success breeds success. And I think we have shown ourselves to be quite successful in the past few years and that's leading to more projects.

Okay, great. So shifting to my favorite topic, Ultera emissions. It seems the project is doing well. It's hitting the targets, I guess, that you guys have laid out previously. Have you reached out to, I guess, end users or warehouses or some of the bigger places like Amazon or Walmart to see what their interest would be in some of these -- in this technology for their fork trucks?

This is Bob Panora. Thanks for the question. It's a good question.

The fact is we haven't yet, and we have to be coordinated with our partners, namely the propane industry and also the manufacturer, depending on how he would like -- we have to coordinate with them.

I -- from my past experience, the gas companies and, in this case, propane companies have very substantial marketing capabilities and money, and they could be a very key ally. Several days ago -- I didn't talk about this in my story I just gave -- they invited us to present before their committee, their big technical committee, the results, which is very positive, and I think that ends up pushing to the -- to all the individual companies that are members.

Then they also asked us to prepare a technical paper for their world technical conference, which I think -- I don't know if it's a national or global, what it is exactly, but it is an opportunity for us to prepare a scientific paper. And of course, what you want to have happen is that people looking at that data say, "Wow! I've got to talk to my local customers about this technology and begin to promote it." So that's the opportunities there.

But we're just really at the cusp of now looking outside the lab and saying, "Wow! We have something here. Let's (inaudible) and promote it." So that'll be happening soon, I imagine.

Okay, great. So I just have one more -- I have one more on Ultera. So...

Yes.

I know you're aware the IMO 2020 rule right now for all oceangoing vessels to limit their particulate matter and carbon and NOx and everything. Have you guys explored anything on that side, on the maritime side? Have you guys had any inquiries about the Ultera possibly working there?

We have, but from a different angle. The ports are extremely worried about the pollution from the incoming ships. And so they can tell the ships to turn the diesel engines off and switch to electric power from the local source, might be natural gas turbine. It's on the pier or something. But where they really are hurting as well, and this is from talking to people associated with the LA area, is that these fork trucks, these big trucks all going in and out, there's tremendous activity there, and that's an area they really have to do a lot -- do some work on. And I think that's an opportunity for us at some point with Ultera, maybe sooner with the fork trucks than other trucks, but that's definitely something that I was made aware of.

Our next question comes from Amit Dayal with Rodman & Renshaw (sic) [H. C. Wainwright].

In regards to the backlog, how much of ESCO-related projects are in the backlog? Could you provide any color on that?

How many of what type of projects? Sorry, I didn't catch you there.

The ESCO projects, the energy service company.

The ESCOs, yes, I don't have that broken out in front of me. It's a meaningful number, to be sure. It's not inconsequential. But I don't have it in front of me, so I'm sorry I can't answer you precisely on that.

The question was probably driven more around just trying to see how much -- how this is evolving for you guys as a channel for getting the products out there. So any granularity on how this -- these partnerships can contribute in the future and what role they will play in terms of your overall strategy would be helpful.

Yes. Well, I can give you a little bit of color but it's a much more long and thoughtful discussion that maybe we can have a cup of coffee sometime. But in general, these ESCOs enter long-term agreements with the customers, 15, sometimes 20 years. In fact, CHP can sometimes extend the length of the agreement that the ESCO was able to establish with a municipality or school district or et cetera. And so because they're long-term agreements, they need to know that the equipment is going to last that long, number one, be maintained and, most importantly, deliver the prescribed ROI that's been promised to the customer but -- and relied upon by the financial folks at the ESCO. And I'd say that's probably the biggest concern with ESCOs is that they do business with a company that is able to ensure those things, and I think that's where Tecogen's reputation and our excellence has really shown the light to the ESCOs that we can be relied upon for that. And that's growing.

There's more and more companies out there, Amit, that are looking at the financial benefits of this, and they -- I don't say they won't care. But if it's distributed generation, it's just a financial asset to them, and it's just another portfolio, if you will, of stock that they maintain. And that's important because they turn to us for all the technical details, for all the service, for all the run time and everything. As long as we deliver the numbers that we say we're going to deliver, they're happy, and then they kind of rinse and repeat, if you will. So I think we've demonstrated that tremendously, and we're going to see more projects with ESCOs going forward. Again, sorry, I can't break out the number in backlog, but it is meaningful in there.

That's great. Appreciate the color. And in regards to these ITC extensions, has that sort of accelerated any conversations or negotiations that you were having and how has that sort of added to the pipeline? Or do you see that happening maybe later in the year for you?

Yes, absolutely. I mean we're very -- in a lot of communication with our customers, to indicate, hey, look, if you've got a tax liability and if you talk with your tax professionals and you're able to take advantage of this, it can knock a couple of years off your ROI. And a project that might have a middling ROI of 4 or 5 years suddenly becomes a very achievable ROI of maybe 2 or 3 years. So indeed, we are reaching back, even the customer that we already sold in 2017, because as we indicated, it's retroactive to January 1. But more importantly, to all of our customers that we have not closed deals with, this could be the decision-maker on them making the decision to proceed.

Understood. And then from a margin perspective, is there any chance service margins bounce back? Or should we assume the 4Q '17 that was sort of a good indicator for the next at least few quarters?

Sure. Well, the -- that segment is a combination of our service as well as our installations, and the service margins are usually pretty reliable, some small fluctuations. The installation margins change quarter-to-quarter because that's just the nature of doing construction, if you will. I know you try to aim for as best margins as you can, and sometimes, your margins are eroded as projects maybe have some slight overruns or maybe you decided to be cost-competitive with a bid, for example. So those margins change, and I think that is, generally, what is driving the changes in that segment's margins from quarter-to-quarter.

Suffice to say that we sometimes tolerate these lower installation margins because from my perspective, I would rather have taken maybe a little bit of a cut on the installation margin but knowing that I'm going to have 15 years of really solid service revenue because I took the extra time with an installation, that's something that I'm embracing of.

The ADG margins as well, they've generally -- Bob, (inaudible)...

Well, I want to -- I should make a point about what happened in the merger is that a fraction of our service contracts, I don't know if it was say 10% or thereabouts, were to this separate company, ADG, that is no longer a separate company. So in terms of the cost and the margins of the service department they are absolutely the same and very good. It's just that in the elimination step, when you combine the financials of ADG into one company, you lose their revenue, basically. So that's...

That's a good point. Thank you.

That confused me, too, that's why when I was looking at it, I said, what the heck happened here, it was because of the ADG change in the accounting.

Got it. And just one last one for me. At the -- on the emissions front, it seems that we continue to make a lot of good technical progress. We kind of meet all the requirements, I guess, in terms of what our regulators are looking for, et cetera. How does this, from a time line point of view, start getting more with the industry or sort of commercial level deployments? And where are the bottlenecks in terms of how -- is it more just regulation? Or is it customer sort of hesitancy to move forward with these things in a more meaningful way? Like how does this sort of start contributing in a larger fashion to overall growth of the company?

Good question. This is Bob Panora.

It is a -- it's a long process, for sure, to get into these larger industries that are very conservative. But I -- one strategy, I think, that'll help us a lot is I see the fork truck as being rather near term comparatively. And you have to -- perhaps, you have to move up the food chain a little bit in this -- in the industry to get acceptance.

So part of our strategy is to go into the smaller markets, the ones that aren't super sensitive about cost and huge complicated organizations to move and go up through there. So it's going to be a fairly long process to really make serious penetration into these big companies, but I think ultimately, we'll get there. But it's not trivial to get their attention or to get their buy in on change.

Our next question comes from Roger Liddell with Clear Harbor Asset Management.

I'd like to probe a little further on the trajectory of adoption among utilities and large-scale customers. You touched on it earlier. I recognize that.

But it -- I'm taking the example of Con Ed. My recollection is that there was perhaps a 5-year period from willing acceptance or wary acceptance of the Tecogen offering to nowadays supportive, welcoming, partnering. These are my terms, not yours. You can characterize it as you wish. But it's taken a long time to get here.

How should we think about New Jersey incentives that have been in place and yet I can recall, only a handful of announcements regarding New Jersey contracts, yet one would have thought that there'd be a more Con Ed-like acceptance and demonstrable contract wins. Similarly, you had a sale in Boston, call it, a year ago, and there's a first -- to my knowledge, I should think, with pipeline constraints into Massachusetts, there would be a frenzy of trying to get efficient equipment in place. Could you help me understand?

Sure, Roger. Good question.

New Jersey is -- indeed, there's a -- the Smart Start Program is very good there. Electric rates aren't as expensive in New Jersey as we see in New York, to be sure. Electric rates are a little more modest. Certainly, some of the more punitive demand charges are much less in New Jersey. And therefore, when you do an economic analysis, your ROI -- they just tend to be a little bit longer, the incentives notwithstanding.

With that said though, Roger, we're seeing those rates creep up. We're also seeing more of a demand component. And we look at utility bills all the time, day in, day out, week to week. And we're seeing, in New Jersey, some of these electric rates slowly start to creep up, not quite to the levels of Manhattan and New York but getting up there.

And then the last thing I'll say on that is I think the resiliency piece and this microgrid piece that I've been talking about, I think that's really starting to get recognized now. And the -- again, the value stacking model, where it's not just the ROI of the electricity and the power you're delivering, but also the ability to potentially participate in demand response or (inaudible) support or some of these other things. That's now slowly starting to get understood, and I'm hoping that'll lead us to get new -- more activity in New Jersey.

Now Boston is a little bit of a different story, Roger. Boston is unusual in that the electrical network in downtown Boston is very restrictive due to distributed generation as a whole, not just CHP, but solar and battery storage and everything. It's what's called a spot network. And they're very restrictive into how much DG they can put in a spot network. I think it's 1/15th of the building's minimum import or something like that. So just the actual regulations of putting DG into Boston is tricky, and that's something that we've talked with the Massachusetts regulators about. And the solar folks have fought the good fight as well, to no avail thus far. Hopefully, that's something we can slowly start to pull down and get more distributed generation in Boston because the electric rates are very compelling in Boston. And again, all these power -- all these snowstorms, people need to keep their lights on. And I'm hoping that, that additional benefit will outweigh the concerns the utility has about putting DG in a spot network.

Good. That's useful, and I think the cyber vulnerability is something -- look at the publicity, front pages of newspaper in the past week or 2. That's a huge threat. Second question then is California, Best Available Control Technology. I'm not an expert on the Clean Air Act, but BACT really means something that a new applicant, a competitor, would have to meet or exceed your equipment's capability to comply with the strictures of the Clean Air Act. Am I getting this correctly? Isn't this a much more significant development than might be apparent from just the press release?

Yes, you're getting it correctly. But I'll put in a caveat. If -- for example, if you are in the Southern California district that made it BACT for that district, certainly, that's the case. Now if I'm in another district in California, I have a new engine, I want to get it permitted, that permitting officer in that other district could and should, in fact, go to the clearinghouse of what is the latest technology for that class of equipment, in this case, natural gas engine. They could very well and they should -- look at that -- look at the permit and say, "Well, I'm going to apply this new standard that just popped up in California." And that's within their purview to do that. And it doesn't just mean California either. It would be -- that clearinghouse would be available to somebody in Massachusetts, a permitting officer in Massachusetts. So nothing changes overnight, but our expectation is it'll migrate, as things do, as districts become aware of it to other places. And I -- as we said -- I think I said in my presentation, we're very hopeful that, that will become a competitive advantage to Tecogen, in other areas of the country, as it has been, but it'll become more so.

Our next question comes from [George Sim] with Trilogy Capital.

Really good year here. I'm seeing very many positive things, and I want to compliment you on your presentation today. It was just...

Thank you.

Outstanding and having -- and especially in the financial sections, having the key things kind of highlighted so we knew what to look at. I really appreciate that. I wish more companies would do that. I do have one question about your SG&A. It has been on a decline with the exception of the bump in '16. But what's kind of your target for SG&A going forward?

Yes. George, I don't think we're giving any targets going forward. We're trying to stay out of making those type of arrangements. Suffice to say, as I said in my comments, we're going to continue to grow the business and adding on to SG&A, particularly the S part, in my thinking is an important part. But rest assured, we are absolutely laser-focused on cost controls and making sure that our spending, despite this great result, doesn't get out of control. So again, I'm not going to give any guidance to what our SG&A is going forward. But suffice to say, we are going to be growing the team but try to maintain our cost controls.

All right. That gives me a little bit of perspective here that I can kind of put into what I'm going to model. I wondered, too, if you could comment on the unfavorable contract liability. It's a big number, and I'm not sure I understand it completely.

Okay. I'll take that one. So that -- that's a result of the acquisition of American DG Energy. So we -- in acquiring that company, we acquired a bunch of contracts that go along with the sites, and those contracts need to produce a certain margin in order for them to be exciting to any purchaser of the company. So because we buy them as they are, they may not produce a 35% margin, which is what we were -- our goal, Tecogen's goal was in buying that company. The unfavorable contract liability allows it to produce that 35% margin by putting a number on the balance sheet that is amortized over the life of the contract, and it's all noncash. It's similar to depreciation but works in the opposite direction, so that the assets will produce the -- or should produce the margins of 35% or better.

All right. And the -- but some of these contracts go out 12, 15 years, right?

Right.

So this is going to be carried for a long time?

Right. It'll be amortized out over the life of each contract, contract by contract.

All right. And if I'm understanding correctly, the total amount of long-term debt is about $850,000.

That's right, the short term.

Okay, that's short term?

Yes.

Your next question comes from Michael Zuk with Oppenheimer & Co.

I want to turn the attention to indoor farming. Right now, of course, indoor farming has one high profile product that may or may not be long term, and I'm sure that there's lots of short-term opportunities. But I'm most interested in the cucumber operation in Canada. Could that be a beta test for expanding our long-term farming marketing and effort into, should we say, the vegetable-growing arena across North America?

Yes. Mike, that's our hope, particularly with high-value crops, where the threat of having the crop spoil or something because of a utility outage or some such thing is just too much for them to bear. So that particular location, that cucumber, was CHP, traditional electric CHP, as I mentioned, a more thoughtful approach to a lot of these indoor growers. They tend to go to the chillers because the thinking being why, why go through all this effort to generate these precious electrons with CHP only to have them be consumed by a giant electric chiller, right? So why not just take care of the electric chilling component directly with natural gas engine-driven chillers. And that notion, it just takes a little while for engineering consultants and project advisers to understand. But again, through the efforts, I think, of our team, of spending time with these engineers, explaining how mechanical CHP works, they're starting to understand it and that we're starting to see ourselves get spec-ed into it more and more. So absolutely, Mike. I think this is scalable. Whether it be the chillers or fundamental CHP, I think you're going to see a lot more of it as these crops -- particularly as this kind of farm-to-table initiative really starts to take hold, where people want locally grown produce that they can get quickly, not something that's traveled across country frozen in a truck.

Ben, this is John Hatsopoulos. May interrupt you for 1 second?

Yes, of course, John.

Ben, they just opened -- this a surprising comment from Mike, which is great news. Here, in the Bahamas, they just opened the first cucumber plant, which is air-conditioned and selling throughout the Bohemian Islands, cucumbers that are made in Nassau, Bahamas. This is the first commercial food product that the Caribbean that I know of, of that kind of level, not mangoes and papayas and whatever. Anyway, I was just amazed that they just opened it up. It's only about 3 miles from my house.

Good to know. Ben, a follow-up question on one of my favorite subsidiaries. What's going on with Ilios, if anything?

Yes. So we're still marketing the Ilios product. Ultimately, I make decisions on where I want our sales team focused. And when I find a vein of activity, particularly these grow things with our chillers, I put all of our resources on -- not all of our resources, but I focus our resources on that. So the Ilios still absolutely has a play in our portfolio. It becomes a product that we're -- that we try to specify, in some cases. But sometime, it just ends up being the one that lags behind in favor of a chiller or a CHP system. And while I'd love to have Ilios' sales, be just as much as chillers, I'll take the sales where they make the most sense from an ROI standpoint. So you'll still be seeing more of Ilios, Mike. It's just that these other products are -- fit so much better in our core markets.

And then one final follow-up. I know that we have a prison facility, I believe it's in Maine, and I think it's been operational for 3 or 4 years, if I'm not mistaken. Can we use that facility as a beta test example to move into that market? Because it seems to me that we have a perfect product, and cost and efficiency in that arena is an important factor to politicians.

Yes, Mike. It's Bob Panora. I've been to that site actually, but as a guest, at a sports event actually. But anyway that the -- that's actually not the first prison. We've done other prisons, and I think -- and I'm not up to speed as much Ben would be on -- we're doing prisons as well elsewhere now.

Yes, we're doing the one in Brooklyn, the MDC prison in Brooklyn. There's one in Arizona, Pima County, I want to (inaudible). In general, Mike, and this is maybe a not pleasant way to look at it, but any facility that has beds, as I talked to you Mike, is a good fit for CHP. But more importantly, if you can schedule when the hot water use occurs in those facilities, so much the better. And prisons fit that bill perfectly, where they can control the use of hot water throughout the day. And so prison's absolutely a -- one thing a little bit downside of prisons is, typically, they're located in areas that don't have commensurate very high electric rates. They're kind of off in the distance, somewhere in a -- with a utility that doesn't have very high electric rates, of course, the Brooklyn MDC being the exception. But in general, you're correct. Prisons are indeed a great market for us. It's something that we are constantly pursuing. Oftentimes, they end up in bidding processes. Here in Massachusetts, they sent them all out to bid, and you do the best you can with other efficiency measures. But they are a good market for us.

Well, again, congratulations. I'm looking forward to a successful 2018. And specifically to John Hatsopoulos, congratulations on all of your efforts over the years to bring the company to fruition. I think we have a wonderful opportunity going forward.

Our final question will come from the line of Alex Blanton with Clear Harbor Asset Management.

I'd like to focus on the gross margin. You have said that your target is 35% to 40%. And I just refer quickly to the fact that you have a backlog target of $10 billion -- $10 million, and you're 70% over that now and you haven't changed that. Could it be that the gross margin target is like that? Because I know that your service gross margin will depend on the mix, and you discussed that. But if you look at the incremental profit margin on the gross -- on the product side, it was 64% for 2017. In other words, gross profit went up $1.446 million, and sales went up $2.269 million on the product side. So that 64% of the sales dollars fell to the gross profit line in 2017. I'm not sure how much of that is due to mix. But could you discuss the possibility that those incremental profit margins, high ones, will continue so that the product gross margin would rise considerably out of the target range? It would seem likely to me based on the fact that you have disruptive technology, and therefore, you should have superior pricing power for that product.

Yes, you'd think. But this is a -- it is a bit of a competitive landscape, Alex, there. I'm not going to ignore that there's competitors out there. In fact, I'm quite aware of them. And technology superiority aside, sometimes customers look at first costs, and I can explain the (inaudible) and the Ultera emissions technology and the need and, et cetera, et cetera. But ultimately, sometimes projects are first-cost oriented, and other technologies can creep in. And in those situations, we will be as aggressive as we need to be to get the project. Obviously, we're not in the business of losing money. But there are cases where we need to be more aggressive at the expense of margin, and that's a delicate balance that we face quarter-to-quarter. In general, I think that's why we kind of give that range because, indeed, we're able to get good margin on some projects and situations like I just described, not as good in others. They all tend to bring us into that range of 35% to 40%, and that's why we put our guidance there.

But could you just focus on the product side? The -- as I said, the incremental profit margin on the product side -- well, your margins went from 33% to 38%, so what's the possibility that they continue to rise on the product side? (inaudible) in the operation. That's what I'm saying. In the manufacturing operation, there is leverage, you have fixed costs. And so therefore, as volume rises, you should have some increase in the margin then.

Yes -- no, I absolutely hear what you're saying, Alex, and understand it. Indeed, we're -- producing these InVerde e+s. We've got to the point where it's very lean, very fast. They go down the line, they go out the door, and it's a nice good margin process for doing that. We're here in Waltham, Massachusetts. I look around me, all the buildings around me, and there are very well-paid people paying high rents. Could we produce these things elsewhere and make a little bit margin? Quite possibly. So I understand exactly what you're asking, Alex. And can we leverage our ability, our manufacturing ability to get better margins? Quite possibly. It's something that we're looking at as we think of expanding our business and what potential we have for more manufacturing here in Waltham versus someplace else. It's just too early for any -- to concretely put any kind of prediction on that, of how we'll do it, except to say that you're on the right path. We do have a lot of manufacturing leverage to get our margins up.

Our next question comes from Joe Vidich with Manalapan Oracle Capital.

I have a few questions actually, the first being -- so your backlog is $17.4 million. My assumption is that you should be able to deliver that within the next 12 months. Is that a correct assumption?

No, not so much, and I'll tell you why. The backlog consists of projects that could have any number of time horizons. They could have a time horizon of just a few months because maybe we're selling it to a manufacturer's rep who's got a customer lined up and we deliver the unit and it gets installed quite quickly. And then on the other extreme, Joe, it could be a full turnkey installation where we're supplying the product and the installation labor and it just takes a longer time with all the other things going on in that building to go. So that backlog could stretch out for more -- a longer time frame. And then there's the third part too, and this is -- and again, I can't give you exact precision on this, but there's a portion of the backlog that's new construction, and that new construction has its own timetable. And it's great that we're part of the blueprints and part of the plan to put CHP in there, but we're behind every other milestone and project schedule of that new construction building, therefore, it's in the backlog. Maybe they have 3 CHP units that's in our backlog, but construction is not going to be ready to accept it to some point later in the future. So with all of that kind of hedging, you're right, the majority of our backlog does probably get achieved within a year's time frame, but there is a -- an amount of it that can extend longer because of those reasons I just mentioned.

Okay. Okay, that's great. That clarifies that. The other question I have is with regard to Ultera. You talked about there being incentives in California when you do achieve -- when you get certification for the emissions. I was wondering what those incentives are. And then a little more detail on Ultera. It's my assumption, and maybe I'm wrong, that the biggest markets for emissions controls are in places like India and China. And I was just wondering what your -- the company's focus is in terms of looking into those markets.

Okay. The first question is -- you asked about the incentives, and so forth. So what I was talking about was incentives in California specifically for fork trucks that might be available. Now what I said was, the Zero fork trucks that is electric-operated, they essentially get a very, very healthy rebate when customer goes to buy one. So they'll incentivize it and I've heard -- and I can't say that I know this for sure, but it's tens of thousands of dollars. It's not a little rebate that they get, and -- I don't know what part of the state offers that. It's probably the (inaudible) regulation district, but it's very healthy. And also if you have a normal truck, like a big truck that would be a garbage truck or something like that, if they have a Near Zero technology, they would also qualify for healthy incentive, not zero, Near Zero. So what I believe is possible, and with a little bit of pushing a little bit, is if you have a Near Zero fork truck, you should -- by logic, you should be able to and there is a category Near Zero in California. If we attain that level, then we would qualify to -- for rebate as well, which we'll have to work with the gas company, work with regulators and work something out. But I think we can follow the path that's already been set by the other technologies. And then as far as looking elsewhere, we have not been oblivious to what's going on, particularly in India. And we -- I can't say much about what we know and what we've done there, but we're not unaware of those opportunities, and we'll pursue them as they become available.

Okay. That sounds great. And just in terms of what the next few milestones are for Ultera, how would you categorize what the 2 or 3 next milestones you're looking for?

Yes. What we want to do is we want to move forward with this fork truck. That's -- and we hope that's fairly near term, and that could be based on what we -- well, we really engaged with the propane industry. I would presume if they like what they see, I don't know why they wouldn't. They would begin to discuss how their marketing groups would get this thing out there. And we've gone down that path with the natural gas industry for our chillers, for our cogen, and generally, what they would want is something like demonstrations, showcases of it and so forth. And again, this has to be coordinated with the manufacturer. Again, we have to consummate that deal. So that, I think, is fairly -- I hope is fairly near term, if not, full production-type stuff but maybe fleets that get modified or field tests or demonstrations and that sort of thing. But that's from my past experience. Now the -- what was the other -- the other near-term thing that we're very focused on is we have got to get a working prototype for the automotive sector. And we know what we need to do. We need to show that it's a very low-cost feature. It fits well into the space that we have, and it's made with components that the automakers are familiar with and they're not afraid of reliability and so forth. And that's the goal, and we want to be there with that within about 1.5 years or something like that. And once we've done that and have all our ducks in a row, then we can play our card to go speak to people. That's our plan anyway.

We've run out of time for today's call. I would like to turn the call back over to management for any closing remarks.

Hi. Well, once again, thank you all for participating in our conference call. We're quite pleased with our results, and we expect to share more good news as it happens.

And with that, we'd like to sign off. Have a nice day, everyone.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.