Tecogen Inc (TGEN) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Tecogen Third Quarter 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Bonnie Brown, Chief Accounting Officer. We're having technical difficulties, please standby. Bonnie Brown, you're now live.

Thank you. Thank you, Omer. Good morning, and thank you all for joining our third quarter 2018 earnings call.

On the call with me today are Benjamin Locke, our CEO; and Robert Panora, our President and Chief Operating Officer.

Before we begin, I'd like to read our safe harbor statement.

This conference call and any accompanying documents contain 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 belief, 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 materially 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 operation -- 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 Ben for a business update.

Thank you, Bonnie. Moving to Slide 4, I'd like to start by reviewing the company's performance and financial results for the quarter, along with 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 before we take questions.

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

Turning to Slide 6. The third quarter of 2018 saw revenues of $7.9 million, a 6.6% decrease over the second quarter of 2017. This brings our trailing 4 quarters revenue to $37 million and resulting trailing 4 quarters gross profit to $13.7 million.

Trailing 4 quarters adjusted EBITDA, which is more representative of cash flows, was almost $250,000. ADG Energy production revenues came in at about $1.45 million for the quarter, generating approximately $616,000 of profit.

Moving on to Slide 7. In addition to the 14% increase in product sales, we achieved total gross margin of 36.3%, helped by strong product margins of 38.7%, but hindered by slightly lower installation margins for the quarter, which lowered the service margins. Our operating expenses for the quarter were also higher by 8.6% quarter-over-quarter. A number of factors drive our operational expenses. Notable increases are our R&D investment and selling expenses, which we feel are necessary to support overall business growth in the future. We also stood up our 10th service center in Florida this quarter to allow more cost effective and prompt service to our customers in Florida, Georgia, Carolinas and surrounding states. We expect the initial startup cost of this center to be quickly recouped as it will allow more economical maintenance dispatch to sites as well as propel new projects forward for Tecogen systems in the southeast United States.

Takeaways from the quarter are that overall company growth is strong as evidenced by the 14% increase in product revenues quarter-over-quarter. Our installation margins, which are really construction projects, were down for the quarter due to project-specific costs and delays but are expected to rebound. And we are carefully controlling expenses, while making calculated investments in the future such as our new service center in Florida and R&D in our Ultera emissions technology.

Moving to Slide 8, I'd like to review some of the notable achievements for the quarter. First, as discussed in the previous call, we obtained an important certification that is required by the state of California for interconnection to the utility, but ultimately is expected to be adopted by many states in the future. UL 1741 SA or smart inverter certification was developed to help meet the critical needs of the utility when large amount of distributed generation is in operation on the network.

The requirement for the smart inverter certification is staged with new requirements rolled out incrementally. We met the most recent update to the certification in August and are ready to meet the more complex requirements of the certification involving communication with the utility in 2019. Having the smart inverter certification will allow Tecogen projects to participate in additional revenue-generating utility programs such as reactive power control and frequency correction, thereby creating additional economic benefits for the system. By virtue of Tecogen's search microgrid feature, we can also integrate battery storage operated and controlled by our inverter electronics, allowing additional revenue stack to the foundational CHP economics.

Next, in terms of product development, as I mentioned in last call, we are expanding our gas engine cooling technology to reintroduce our TecoFrost product line of chillers. Unlike Tecochill, the TecoFrost product is meant for industrial ammonia refrigeration systems, typically found in manufacturing facilities where circulated refrigerant systems are more efficient and cost-effective than chilled water or air systems. Examples include dairy operations, meat packing, bottling facilities, food processing and cold storage facilities.

In this case, our current Tecochill product are not a fit as they circulate chilled water or directly chilled air, more commonly known as comfort cooling in hotels and large buildings but not for sites relying on compressor circulated refrigerants, which are almost entirely operated by electric motors.

The TecoFrost product will address these large markets and is already an established product in terms of technical performance, product manuals, marketing literature and maintenance procedures. The product line was discontinued in the early 2000s due to high gas prices, but the resurgence in gas availability combined with continued electric rate escalation, particularly on the demand component of electric rates, make the TecoFrost an excellent product to reintroduce, given the strong market pull.

As I mentioned previously, chiller sales are an excellent contributor to our business because the sales process tends to be more defined and transactional. Chiller replacements occur all the time throughout the HVAC sales and engineering community, which allows a continuous flow of opportunities through those established channels. An important aspect to this product reboot is the work with our previous compressor manufacturing partner Vilter Systems, to jointly bring the product to market.

Vilter is a leading manufacturer of compressors using these industrial refrigeration systems and was Tecogen's manufacturing partner in the 2000s for the TecoFrost product. As such, as I mentioned, all the product engineering, manufacturing data, testing, operation and maintenance are in place to minimize the time frame for product relaunch. The goal is for Tecogen and Vilter, a division of Emerson Climate, to jointly market and sell the product used in our combined sales channels.

With their help, we plan on building and selling the first new TecoFrost unit in the first half of 2019, with sales of more units expected throughout 2019. From the sales side, we are continuing to get strong market pull from the indoor growing facilities.

In August, we announced another Tecogen sale of 2 STx chillers to a Massachusetts indoor cannabis growing facility. The order was Tecogen's 12 into the rapidly emerging cannabis growing industry in North America, with several other Tecochill systems in design and construction planning.

As such, the Tecochill product is increasingly becoming the design basis from indoor growing facilities. By first reducing the facility's electric cooling load, the overall electric capacity required by the facility is reduced, which reduces the infrastructure cost and complexity for the grow facility sometimes needing more power than utilities able to provide.

Next, we also continue to sell our cogeneration systems for projects that can only uniquely be served by Tecogen products. In September, we announced a Massachusetts school district that required a microgrid-enabled tri-generation system chose Tecogen to provide everyday savings on electricity, heating and cooling, but also provide backup power to the school due to their susceptibility to weather-related power outages.

This microgrid functionality is also the driving criteria for our 1 megawatt tri-generation system with an energy services company Aresco, which we completed engineering design for in the second quarter. The project entails multiple inverter units deployed in an existing New York City high-rise data center to provide power, heating and cooling as well as resiliency to grid outages. This project is expected to initiate with ESCO in early 2019.

A second megawatt project is also expected to start in mid-2019, involving a large New York school system. In this case, the combination of modular inverter installation, high efficiency, low noise and the Ultera emissions made Tecogen the design basis for this site.

And lastly, on the emissions side, we announced last month that our forklift partner, Mitsubishi Caterpillar Forklift of America or MCFA, had elected to move forward with the next phase of development. MCFA is a leading forklift manufacturer and their decision to proceed validates the value proposition of an Ultera forklift retrofit and/or OEM component that maintains the advantages of propane power and flexibility, while achieving near 0 emissions.

We also announced the successful permitting of the Ultera retrofit Generac generators located at a Southern California facility and continue to work on catalyst optimization with a research institution recognized for their vehicle emissions expertise. Bob Panora will talk about these developments in more detail as well as the ongoing work to develop Ultera for other vehicle applications.

Moving to Slide 9. Our backlog continues to grow as a result of our product and sales accomplishments that will ensure success in future quarters. Our backlog stood at $15.7 million at the end of the second quarter and is currently at $20.2 million as of Friday, November 9.

And as mentioned in our press release, chiller unit sales account for about $6.3 million of the backlog as the HVAC industry increasingly recognizes the tremendous value of so-called mechanical CHP with the Tecochill product and cooling using gas instead of traditional electric equipment. The chiller -- the overall backlog -- the chiller backlog, I'm sorry, does not include any expected sales from our new TecoFrost line of chillers.

As the pie chart indicates, the key markets for our products continue to be multiunit residential, particularly for our CHP systems as well as core markets like hospitality, recreation, health care, industrial and manufacturing. And as a reminder, our overall backlog consists of products and installations, but does not include our steady service revenues.

Now I'd like to turn the call over to Bob, who will describe our emissions progress in more detail, followed by Bonnie with some more detail about the financials. Bob?

Good morning, and thank you, Ben. I will update listeners today about our progress in developing commercial applications for the Ultera emissions technology.

I'll begin with the forklift truck program, which most will recall, was initiated by the U.S. propane industry group, PERC and included an industry partner, which we were not able to identify publicly previously. In our October press release announcing our presentation at the World Propane Forum in Houston, with their permission, we identified our industry partner as, Ben has said, Mitsubishi Caterpillar Forklift Company of America or MCFA, which coincidentally is based in Houston as well.

At present, we are working with the MCFA engine group in Japan to provide us with custom engine control software to maximize the performance of the Ultera system. I've discussed this custom engine tuning as being an important part of the process and one we routinely use in our Tecogen products.

I won't elaborate except to say that we're pleased that the Mitsubishi engineers readily understood our technical approach and are preparing the control software. Our plan is to test the software at Tecogen, refine it as necessary and send the prototype forklift truck to Houston, where MCFA will test the system on its test track using their standard cycles.

We are optimistic that this will lead to the successful commercialization of a near 0 emissions forklift truck, although there is still, of course, a fair amount of work to be done. We have had discussions with PERC and some of their member companies at the world forum and afterwards and they are clearly enthusiastic regarding our prospects. We have submitted our request for additional funding to help with this phase and we believe it will be approved.

The independent propane companies seem willing to offer incentives to customers to purchase the near 0 option again, if we are successful of getting to the commercialization phase.

There are 2 other Ultera activities that are ongoing that I can report on today as well. Last year, we had supplied a customer with Ultera kits for a group of natural gas generators in Southern California, that required permitting for general use well beyond the 200-hour annual exemption given to emergency generators today. As such, they needed to operate within permit limits heretofore never achieved by a commercial natural gas engine without some exemption such as the heat recovery credit that our CHP products get.

At this time, I'm pleased to report all the units, but one has been successfully tested by a third party to confirm compliance. This official test is the final step in the approval process, so very good outcome there.

Lastly, our work with the research institute relating to Ultera applications in light vehicles is progressing. This was the first phase in their work, which relates to custom catalyst formulations and is funded by Tecogen. The researchers have identified a catalyst material unfamiliar to us, but common in other applications, which can be reformulated in order to further improve the Ultera NOx removal. Through this institute, we have contacted a leading material scientist in the field, who has confirmed the institute's assessment and we're discussing the production of samples for their evaluation.

With that, I'll turn the call over to Bonnie Brown, for a discussion of our financials.

Thank you, Bob. Moving on to the third quarter results.

Slide 11 contains some of the highlights of the year-on-year financial results. First, total product revenue for the quarter increased by 14% compared to the third quarter of 2017. Chillers alone grew 89% year-over-year.

On a trailing 4 quarters basis, total revenue growth was 23%, reaching total revenue level of $37 million compared to $30 million for the same trailing 4 quarters period a year ago. Long-term service contracts and part sales decreased by 2.1% on a year-over-year basis and continue to provide its reliable annuity-like revenue stream.

Total service and installation revenue declined by 17.8% for the quarter compared to the third quarter of 2017, however, continued to deliver more than half of our product and service revenue for the quarter.

Energy production revenue for our ADG sites contributed $1.5 million to our revenues for the quarter. This revenue stream adds an important second source of stable cash flows with its long-term service contracts.

Product gross margin was 38.7% for Q3 '18 compared to 36.6% for Q3 '17, a 6% improvement year-over-year. Service margin was 32.2% for Q3 '18 compared to 34% for Q3 '17. This margin decline is due to installation projects, which carry a lower margin bringing the overall service margin down on a comparative basis.

Energy production activities from the ADG fleet provided 42% gross margin and $617,000 in gross profit, bringing our overall consolidated gross margin to 36.3% and consolidated gross profit to $2.9 million for the third quarter of 2018 compared to 38.3% and $3.3 million for Q3 '17, a decrease of 11.5% in gross profit year-over-year.

Net loss attributable to Tecogen for the quarter was $603,000 compared to income of $27,000 for Q3 '17, a decrease of $630,000.

As discussed earlier, we have invested in research and development activities. These costs for Q3 amounted to $281,000 compared to $241,000 for the same period in 2017. Additionally, selling expenses increased by 78% -- $78,000 year-over-year as we invest in various activities. In addition, we opened our Florida service center, contributing to the increase in G&A expenses of $155,000, and the decrease in gross profit of $375,000 in Q3 '18 compared to '17, accounts for the $630,000 of additional loss year-over-year.

Slide 12 presents backlog and historical adjusted non-GAAP EBITDA. On the left is our backlog chart of product and turnkey service projects. At the end of Q3 '18, our backlog was strong at $15.7 million and has grown to $20.2 million as of November 9. Backlog at the end of Q3 was $14.5 million. As always, backlog does not include a projection of service contract or energy production revenues.

Looking at the schedule on the right, our adjusted EBITDA was negative for Q3 '18 by $259,000 compared to a positive $296,000 in Q3 '17, a difference of $554,000. As discussed previously, increased investments in selling and R&D activities and an increase in G&A expenses as well as a decrease in gross margin year-over-year accounts for the shortfall in adjusted EBITDA.

Turning to Slide 13. Let's review the charts that track our metrics using a trailing four quarters model. Starting with the chart on the left, total revenue for the trailing 4 quarter period ending September 30, 2018, reaches $37 million. This chart illustrates the trend of increasing revenues over time in all revenue categories, although the Q3 '18 service dipped slightly from the previous period. Energy revenue is represented by the yellow rightmost bars in the chart, where product revenue is green and service is blue. The chart on the right 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. We expect various sales initiatives and focused cost control efforts to improve these results going forward.

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

Thanks, Bonnie. So as we look ahead to the end of 2018 and the year ahead of us, I believe the trends and market forces that favor Tecogen's clean, reliable, natural gas generation systems will continue. First, natural gas will be an abundant and cost-effective resource in the U.S. for many years to come, while electricity generation and distribution remains expensive in many urban areas with aging infrastructure. Our natural gas generation systems, whether they be cogeneration or chillers, are in excellent position to displace electric consumption for many industrial processes in favor of cost-effective and clean natural gas systems.

By reintroducing the TecoFrost product, we can take advantage of this outlook to allow significantly more penetration into industrial operations where high electric costs make natural gas systems far more cost-effective, and ultimately, cleaner from an air quality standpoint. I'm looking forward to sharing more information about the TecoFrost rollout in the coming quarters.

Next, as more attention globally is focused on emissions, our proprietary Ultera emissions technology continues to be validated as a cost-effective and adaptable retrofit or OEM component for many gas engine systems, whether they'd be our own CHP chillers, other stationary engines, standby generators, forklifts, light vehicles, medium trucks, buses or automobiles, we have shown that the Ultera dramatically reduces CO and NOx emitted in the environment.

While the timing of emissions regulations is imprecise and certainly debatable, we feel that state-by-state, country-by-country, the Ultera near 0 emissions technology will be valued highly in both transportation vehicles and industrial engine systems.

And lastly, simply put, our goal is to return to profitability next quarter. We will do this by continuing to grow our product sales, particularly in the chiller segment, managing our turnkey construction projects better to improve margins and controlling our expenses in a way that builds for the future, but is pragmatic and efficient to maintain profitability. So while I'm not happy we did not have a profitable quarter, I'm happy with how we are positioning ourselves for the coming years. Our fundamental business is strong and growing. Our product advantages are well understood and embraced by the industry and our emissions technology offers tremendous upside and value creation for our shareholders.

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

(Operator Instructions) Our first question comes from Amit Dayal, Rodman & Renshaw.

So in regards to say, looking into '19, cogeneration versus chiller, it looks like you guys are getting more traction on the chiller side. It's been discussed a bit more extensively in the last 2 earnings calls. Where is cogeneration sort of sitting in terms of your growth outlook? Is that market softening a little bit? Like, how are you seeing what is happening on the cogeneration side versus chiller side?

Yes, I think cogeneration market is still very strong. What we're starting to realize, Amit, is some of these facilities that are seeking cogeneration, upon further reflection and careful engineering, are understanding that a chiller is a more cost-effective way to accomplish their goals in terms of reducing how much energy they use. So that the drop in -- that there are many reasons why cogeneration sales have dipped. There is certainly timing issues. We have projects that are ongoing. But in some cases, Amit, a cogeneration project may change into a chiller project because it makes more economical sense for the site in terms of their overall infrastructure and we encourage that. I mean, that is our advantage because if we are going into a cogeneration bid with other cogeneration suppliers, we, of course, have our differentiating advantages. But when we come in with chillers, we are really by ourselves in terms of savings and that's a great place to be. So that's my long way of saying, Amit, that cogeneration market is still very strong. It's certainly competitive and we have our advantages, but I'm appreciating our ability to take advantage of some of those opportunities and switching to Tecogen sale -- to Tecochill sales, which sometimes have more benefit to the customer and certainly from our standpoint, I'm happy to sell them a Tecochill as well as a cogen unit.

Understood. It makes sense. Could you talk about this TecoFrost offering? You're saying it's going to be reintroduced. Could you give us some history about when it was previously launched and why it may not have been continued?

Yes. Yes, sure. And I'll start, but I'll quickly handover to Bob, who was around during those days and understood quite more. But yes, essentially, Amit, as I said, a lot of these industrial processes, food processing, et cetera, they have many, many pumps that pump ammonia refrigeration throughout the facility for their cooling needs, whether it's cold storage or whatever, and again, those pumps are all mostly electric. Back in the 2000s, we had this TecoFrost product, which would basically put a natural gas engine to drive that compressor to accomplish the same thing. But when gas prices went up in the 2000s, it didn't become a very good product to market and we kind of shuttered it. But now given all the market forces that I mentioned before, a lot of natural gas inexpensive, but still very high electric rates, it's a perfect opportunity for us to reintroduce it. The market's right. All the literature is there. I mean, new product rollouts are sometimes a little scary, but this isn't a new product rollout because we have all the manuals written. We have all the service protocols. Bob, do you want to talk a little about our extensive history with Tecochill -- TecoFrost?

Yes. The TecoFrost was actually quite popular in the early 2000s, late '90s. We sold a fair number of them and many still are running today and it's a different market. But when gas prices spiked, 2007, I think, that was -- then we just couldn't keep all those balls in the air. So we said we've got to pull back on TecoFrost because let's keep Tecochill going. And frankly, I'm still amazed how strong the chillers have come back. They've come roaring back. And it's obvious that the TecoFrost, which was its cousin would have a similar market. And the customers, just so everybody knows, they're really marquee customers. They were like Kraft Foods and so on, and so forth. I can name a whole bunch, but it's a different market, but it's -- it has the same economics with customers that are generally industrial in nature though, but it's -- we had -- it had a good history. And I think the machines that we sold are still running many of them and running quite well and we service them. So we even have the institutional knowledge, pretty current because we visit them and we work on them. So it isn't like we have to reeducate everybody either, our salesmen know how to sell it.

Yes. Thanks, Bob. And I think I've mentioned this before and I'm sure I'm going to continue to mention it, chillers are a lot more transactional sale. They have -- chiller sales happen all the time. People write checks for them, they do it. Cogeneration sometimes is transactional. Sometimes cogeneration is contemplated and thought about and not actually transacted sometimes because sometimes they don't have to transact cogeneration. They can continue as they are. Companies, food processing, meatpacking, all these places have to have refrigerant chiller systems and in some cases, paying a lot of money for them. So as Bob said, it's the perfect time for us to reintroduce it. Very little effort needed in terms of getting it back out there. So much so as I said, I think, we'll be back in action in early 2019.

And TecoFrost versus Tecochill, is there any cannibalization that may occur between these products?

No, actually not at all. The Chiller, when you circulate chilled water, that's what you do in a building that's occupied by people. You don't do that in a -- you don't put ammonia in a hotel or a place like that, just would be not typical.

Not safe either.

It's not tremendous safety thing but it is a gas that you smell, and you're going to get the heck out of there fast. But the -- it is absolutely a standard for, as I said, food processing like Kraft Foods, it's what you will find in wineries, breweries, any large -- food processing is probably the biggest, ice cream. So we sold into all these markets with the product, meatpacking, if you will, chicken processing, all companies you would know the name of if I name them and they don't overlap with chilled water. Those places do not want chilled water in their system. They want to use the ammonia, it's much more efficient. It has no global warming issues and it is very inexpensive. It's 1/10 of cost of a refrigerant. So that's what everybody who does it in a large-scale, industrial scale would want to do. Every once in a while, they'll -- you will see a ice-skating rink that has ammonia, but even most of them these days are water chillers. So there's really no overlap there.

And I'll go on to say that, what's been happening is, we've been trying to sell our Tecochill into some of these markets, trying to squeeze that round Tecochill peg into the square TecoFrost hole, and that's where we're getting a lot of the feedback saying, we really want the TecoFrost back, so they're truly complimentary.

Interesting. Just maybe one more from me on the Ultera side of things. So is this the last permit you are waiting on? And you've mentioned 2019 as sort of the time line, but is it first half or first quarter or maybe later in the year? And then also more secure, so can you talk about maybe the opportunity implications for the company?

Yes, sure. So the -- so this customer has a bunch of these engines. We sent them a bunch of kits that work with several different models of engine. They finally got around to doing their official source test with the third party and they have one left. I called them up a week or 2 ago. Where the heck are you guys? He said, well, we're done but we've got one more to do. I said, terrific and they all passed. So we confirmed that and the levels that they had to achieve are really, really low. I mean, there is no heat recovery credit to rely and none of that. So I think, the opportunity would be that we can now look at applications involving demand management, where a customer would put a generator into a site and would run it during certain seasons, certain times of the year, certain times of the day to shave his peak load, which is very expensive electricity indeed. So that would be the logical next step for the technology, but we haven't taken it any further than that at this time. We got our hands full. But that would be the implication. You could sell a simple generator, deal with all the difficult issues with all the alternative energy that disrupts the grid, creates these weird peaks during times of the day and you could push back against the high prices that electricity would cost during those times of the day with your own generation and just, the very small number of hours they are running. So that's, I think, the main possibility here.

And the time line, is this first half of 2019, do you think?

No, I don't think we have any prospects right now. There's -- we have to refocus ourselves on that to really getting them. We've got...

So I'm talking about the permit. Do you think you can get it?

Oh, there is 1 more unit. They'll probably do that within the month. They were just knocking them all off and this one was the last one to do.

Yes. Well, likely put out an announcement. When that final one is done, Amit, we'll likely put something out just to let investors know that it's completed.

Our next question comes from James Jang, Maxim Group.

So just a couple of quick ones. Can you talk a little bit more about the TecoFrost? Like what kind of competitive advantage that offers compared to what's on the market right now? Or if is there anything comparable on the market right now?

Yes. I turned to Bob, I don't think there's any other product out there. We're kind of all alone with our natural gas engine driven, not just with Tecochill, but with TecoFrost. So not any competition out there. An important nuance to this is I mentioned our -- the compressor manufacturer that we're working with the Vilter, and a very long-standing great compressor manufacturer. When -- they sell good compressors, so when they sell a compressor, they won't go back to that customer for another 20 years, right, because you don't need to sell them another one for 20 years. Well now, Vilter can see the opportunity to come back to those customers that maybe they only sell to a few years back to say, hey, we have a more efficient, cost-effective system for you, your electric rates are this. And so it really opens up Pandora's box for us in terms of market opportunity, not just for sites that are looking to replace their existing ones, because of end-of-life, but also looking to replace existing systems, that maybe have not reached their end of life, simply because the economics are so compelling using gas instead of electric. So as Bob mentioned, a lot of really good reasons to bring this back and we're kind of looking forward to it.

All right. And going on to Ultera, so it's great you guys are advancing ahead with MCFA, but they sell a lot of electric forklifts right now. So have they indicated to you that there is a pain point on the consumer side looking for gas-powered lower-emission fork trucks? Or is this just a complementary thing like what's the rationale behind working with you guys?

Yes. So the -- in the discussions I had with them, of course, first of all, the propane industry, if they sell electric fork truck, they get nothing, so they're really motivated. So now if you're a MCFA, what's your motivation? It's -- I think, they -- as a company, they do make electric fork trucks, but the predominant moneymaker for them and their biggest sellers are the natural -- not natural gas, propane fork trucks and they definitely have an advantage there. They prefer to sell those, I think. I shouldn't speak for them, but that's the impression I got. And so customer would say, if I can get an electric fork truck that cost more perhaps, it doesn't make it through the whole day or it doesn't have as long -- the charge doesn't last, and so forth. The propane gives me a week of operation, I don't have to think about it. And so that's what we're hoping for. And again, the competition will be the electric fork truck, but we think all things being equal, you get a fair number of customers who don't want to go electric because of the battery issues and so forth.

Okay. So there still is that kind of push back on using electric, right, just because utility wise, they don't think it's going to last the whole day?

They plug them in, they get through 6 hours, they get 2 more hours in a shift. They got to swap the batteries and move the battery to the charging station and come back and that's kind of a -- that's a bit of a problem. Batteries are getting better, but they're still not necessarily the best thing to have for all situations. We prefer in our factory, we don't use our electric fork truck ever. We just use our gas ones because you just jump in, turn the key, go. And so you're going to have customers who prefer electric, some customers who prefer the propane. You've got to take away the emissions issue off the table, get that off the table, saying this thing is as clean as the electric, which one do you want now? And oh -- and the propane dealer will give me a special deal on propane or he will buy down the cost. So you can...

You get a near 0 emissions vehicle credit.

Yes. You'll be getting near 0. Yes, so there's -- so that's a dynamic that we're working with. And certainly, the propane industry is going to help us a lot, I think, if we get to the commercialization phase. They have everything to lose. They don't want to lose that market.

Okay. So in terms of the time line, so I know you guys kind of laid out the next step. So are you currently testing at the facility now? Or is that something that's going to be ongoing until maybe the first quarter of next year?

We're doing some refinements testing, getting the instrumentation tidied up. So when it does shift to Houston for the testing, that they have a nice clean, no wires hanging out and looks good and all that. And we repeated the test over and over. We've done different drive cycles, driven it outdoors, driven it with medium weights, heavy weights, 3 left-hand turns, 2 right-hand turns, all the combinations just to look at every possible driving cycle and it's working great. We just have to now get the software from the folks in Japan and get that last bit of performance, and I think it's off to the races.

Okay. So did they give you a time line of from once they complete their evaluation to when they could possibly start working with you?

I can tell you we've talked about things, I don't want to say anything more than that. It certainly is something we're not blind to, sure.

Okay. Got you. And anything else you can share on further testing on Ultera on, I guess, automobiles?

Yes, as I said, we're really -- we went down the road with this multiphased program with this research institute. And what they advised us looking at the chemistry, and they know a lot more about the chemistry than I do and people here, they said we get your concept, it's really unique, but it has -- because of the temperatures you're operating in, you can really do some things that normal catalysts cannot do. And they have led us down the path of, did you know about this particular composite material? No, I haven't heard of that. So they've put us in touch with this research guy. And what we're going to do is test the samples of this composite material, see how it does and then we go to scaling up further phases of the program. But we're in this catalyst development stage, which is really good because we needed some -- we're really benefiting from expertise of this institute in the chemistry that could take it to the level.

Yes. And I think, it's important to remember too, and I think we've mentioned this that this development work that we're doing with the fork truck program -- with the forklift program is similar development work that would be occurring for the adaptation of Ultera for vehicles. And so we're making progress on both fronts by virtue of this program we're doing with the forklift, number one. And number two, there is a strong market for a medium vehicle retrofit to natural gas. I mean, there's many companies out there that will do retrofits of OEM vehicles to natural gas for various reasons. And that's a market where Ultera would be ideal for in terms of a near-term goal. I mean, I guess, long-term, we want to be on the hood of every car, right? But in the near term, you could certainly envision us being part of that retrofit exercise where they put on the e-carburetors, Bob, or whatever it is for the natural gas conversion and at the same time, put on our -- the Ultera emissions package. And now, what comes out is sometimes factory OEM vehicle, natural gas with near 0 emissions. And that's something -- that's not tying this guy 5 years in a Hail Mary pass to an automobile manufacturer, that's something real and practical that we're shooting for.

Okay, great. One final one. There is a lot of news around the IMO 2020 regulation on the shipping side, on the marine side. Have you guys done any outbound work or try to see what this -- what Ultera could do for the marine industry?

Well, that would be largely diesel-based engines and that's spark ignited, as far as I know; my next...

I mean, well, they have LNG and LPG-powered vessels, right? So I don't know if you guys have...

Oh, I guess, you're right. I haven't thought of that. I'm not -- we're not plugged into that right now. I hadn't even known that they were seriously considering LPG fueled ones, but I don't know anything about that. What we have discussed and waded into a little bit is the problem at the ports where you have trucks coming in and out. You have fork trucks driving around.

And they are just idling around, right? Yes.

Yes, that's what I'm most familiar with and that we made some outreach into that area, but not vessels themselves.

All right. We'll talk off-line.

Our next question comes from [Richard Molinsky, MAX Ventures].

First of all, I'm not going to go into the whole business part. I'm more interested, I mean, I think, you're in the right business at the right time. There is a need for what you guys have. You could see by the contracts and I like the backlog is growing. And then the thing that drives me crazy is I'm looking at Bloom Energy, right, they showed a loss of $75 million, $190 million in revenues, whatever it was last quarter. Their profit margins are down. They got a $400 million market cap company with debt of -- quite a bit of debt also in the company, long-term debt. How do we get Wall Street to recognize that we don't -- we're not big like they are, but we also want to make money and we're moving in the right direction. How are we going to change that perception of this company? Do you think over the next -- 2019 because it just drives me crazy what they have as a valuation even though they are down from where they -- from where it was?

Yes. Yes, sure. The technology that we're working with, it's -- you all understand it, and of course, our investors understand it, but it's not -- a lot of people don't know that fuel cells use natural gas. They think of a fuel cell as something that's oh, it's using renewable energy, I suppose if you use biogas, but ultimately, fuel cells use natural gas. And so it's a perception thing with fuel cells in particular that it's equally frustrating for me to break through because if you really break through that, you say, okay, a unit of natural gas comes out and a unit of electricity comes out and a unit of heat comes out and how much that goes into, comes out and we're more efficient than that. And many pragmatic reasons why you would not choose a fuel cell over us. Yet, as you say, there is a perception and they do have this market cap that would make it seem that they are the future. I don't -- I would not want to purport to say what the viability of the business plan is and what the foundational, or their economics are, except to say that, we are absolutely more efficient on a project in terms of overall efficiency consumption of gas in almost all the time in terms of cost of installation. So for an intelligent consumer, we're able to quickly make those things understood and get our product specified. It's just that sometimes -- again, as you know, people just want the product that's more -- that's got more appeal, that seems more sexier and fuel cells happen to be in that realm right now. I'm not sure how long it will last. Bob, do you have anything to add on that?

Well, I think, if you read what they're going into the business for, I would say, we agree, it's a terrific business you're getting into and we're in the same -- we're in a similar business. Not quite exactly, but I think, rather than try to knock them, I think what I would say is, that we should be valued higher, that's how our opinion is. That's how I look at. If I read their perspective, I say, yes, I agree with that, I agree with this, I agree with this and they are a different technology, but basically, we have something similar that should be valued as well. That's how I look at it.

And, are you doing more -- are you going to be doing more roadshows? Or pretty much just wait for Wall Street to wake up, for next year I'm saying?

Yes, I think, as you know, we're -- I'll tell you myself, I'm very much focused on getting our strategy and path set for the next coming quarters and years, with the emphasis on Tecochill, the reboot of TecoFrost, getting some of these relationship ESCOs, that are driving much larger projects that move the needle. So that's what I've been focused on. I think they're starting to come together now and I certainly can see myself getting more out in The Street to start conveying this message. Maybe I won't shout as loud as Bloom will, but certainly, as Bob said, a lot of those things that they mention as foundational economic drivers for them are the same for us and I'll make sure I reiterate that.

Our next question comes from Michael Zuk, Oppenheimer & Company Inc.

I want to bring up the Florida service center. Now that it's up and running and going, will you be adding a dedicated sales engineers to that Florida office? Or how are you going to expand revenue opportunities out of that office?

Sure. It's a great question. And in fact, we have a very thoughtful and prescribed way that these things move forward as we've gone through our standing up service centers. Typically, you start off with a -- you reach some critical point of engines, an engine count, where you need a guy down there and that's of course, the point that we reached and we started up the service center. As that engine count increases and this guy gets busier, he'll hire a tech. And then, as we go on, it eventually will get to the point, where that, that the person that we selected to run this office is, of course, a service tech and very good at it, but he's also a little bit of a salesman. All of my -- all of the engineers that work here and are effective are kind of good people and can do a little bit of sales. So the idea that he would be able to do some business development himself, supplemented, of course, by our own sales people here in Waltham. And as that office grows, over time, absolutely, I can envision having a dedicated sales engineer down there, just like I have a dedicated sales engineer in New Jersey and I have a dedicated sales engineer in New York and California. Over time, I can see that happening. It's just that we kind of stage it slowly as the engine count -- as our metric increases.

Because revenue eventually will be the driver of this company, I think, we are on the cusp now of really developing a series of products across an array of technologies. I would encourage us to add 2 or 3 more sales engineers now, understanding that it's going to be a little bit of upfront cost. But if you can add good people now and develop the products that we have coming on stream, that will drive the revenue. And so, I would encourage adding some staff now even if it is a little bit of a cost strain immediately. The bottom line is to drive revenue and to drive revenue, you've got to have the people in place that can sell the systems and help design the systems. So I'm encouraged. And I would like us to go forward on that tack. That's all I have.

I couldn't agree more there, Mike. I mean, that was kind of one of the fundamentals of Thermo Electron with John and George, which is when you get a new engineer, you hire him because good engineers are hard to come by. So absolutely -- when I come across a good engineer that can be an asset for the company, I'll hire him because they're really hard to come by and they really -- you know some of our engineers, Mike, they're top-notch. They're really hard to come by. So you want to get the good ones while you can.

Our next question comes from Alex Blanton, Clear Harbor Asset Management.

Most of my questions have been answered, but I wanted to say I like Slide 7. I think the way you presented the summary there was very good. And I think that's the first time you've really done it that way with all the calculations done, so people don't have to do that. I have a question on Slide 9. What is backlog-related revenue, the smaller line?

Bonnie, do you want to address that?

That number is the revenue that came out of the previous backlog.

Okay. So what are the other revenues then?

So there's service...

If they were not in backlog, what are they?

There is service and there's energy production as well. I mean, yes service and energy production are also in our numbers.

But not in the backlog.

But not in the backlog, right.

Okay. So that's kind of encouraging, that backlog, what is the average delivery time in that November backlog for $20 million?

Oh, it's real hard to say, Mike, because -- it's a good thing -- it's a good point to make and I'll address that. So the backlog, of course, has installations in it and those installations can go out over some time, and of course, it has got product in it, which goes much quicker. So kind of part and parcel with this kind of decision to focus on chillers means that backlog number has got a lot more product in it than installation, if you understand what I'm saying. Because there is more product and chillers in it. So we don't break out the installation versus the product piece of the backlog, which is why I can't give you an average time for it to turn over, but I can say that there is more product in it these days because we're moving more chillers and they tend to turn over much quicker than our turnkey installation backlog.

Then, are those mega projects that you mentioned for January quarter in there, the data center and there's lot of school system.

One of them is, one of them is not.

Which one is not?

They're both megawatt projects. One of them is it, one of them is in because we're already -- and one of them is not. And just as a note for you and our investors as well, we're very careful about what we put in the backlog, it is not a salesman thinking he has something. This is something where we've been specified, it is in documents. And in some cases, it is just simply awaiting signature. So that first one qualifies that criteria and is in our backlog. The second one is just so very close, that I didn't want to put it in backlog until we meet that full criteria for including it into our formal backlog number.

That second one being the school system?

Correct.

Okay. How long did it take you to sell those 2? What is the sales cycle time on that?

Tough to say, Mike. It's tough to say when it originated versus when it picks up in earnest. It probably originated over a year ago, but picking up in earnest certainly over the past year for both of those projects.

Okay. Well, how many of those are -- can you say or give us an idea of what's in the pipeline, let's say, it's not in the backlog, but it is in the pipeline of those kinds of projects?

Yes. I'd rather not, simply because I'm very comfortable with the things I put in the backlog and I'm happy to talk about those as I just did, but things that are more speculative I think might lead investors to conclusions that I'm not quite ready for them to make yet.

I didn't want you to give me specifics, but just in general, how is the pipeline?

In general, I'll tell you, it's very good. We're not -- put it this way. Our CRM is not decreasing in size, it's increasing in size. We are seeing plenty of leads. I think I mentioned last quarter, we invested in kind of an advanced sales tool to help us using analytics determine sites that may be good fits for us, and therefore, make our sales outreach efforts more cost-effective. That's yielding fruit. So our pipeline is still very strong, and yes, our pipeline is still strong, Mike.

What did you say, RC, you used an acronym there?

Well, we are using advanced -- CRM, that's a contract related, it's a sales management tool. Salesforce, Salesnet. There's all sorts of CRMs out there. We have our own CRM for managing sales. And as I said, ours it's growing. Our backlog -- since our backlog, our sales prospects continue to be very strong.

Okay. Fine. Could you just briefly describe Mitsubishi Caterpillar, is that a joint venture? 50-50 joint venture? Or what is it? I looked on their website, but I couldn't find it.

Go to MCFA and just type forklift or fork truck and you go right to it. And I can send you the link if you would like.

I looked on their website and I could not find a description of what the company is financially?

We can send you the link off-line, Alex.

No, I think Alex was saying, he found the same place, I directed him to but he doesn't understand the structure of the company. And I don't feel comfortable that I should describe it. It is some sort of a joint venture that I don't want to misspeak on their behalf, but it's largely -- I think, of what I see is a lot Mitsubishi content there, actually.

Can you give us an idea of their share of the market?

They told me, but I don't know if I have permission to speak to that, but it's in the top several companies of fork trucks. And they supply -- just so I'm clear, this particular joint venture does North America, South America and Central America. So there are other entities within the Mitsubishi world that do other parts of the world.

Okay. Finally, I think, since your last earnings report, Canada has approved use of marijuana throughout the country. How does that expand your market?

Yes. Yes, sure. Absolutely. We've been selling some of our equipment to grow facilities in Canada as well, not just our -- yes, we've sold some cogen and chillers into that growing market. A little bit different when it's nationally. When it's national, they can pick any place to set up that grow facility, where it's most cost-effective in terms of utility rates, et cetera. Whereas, in the United States, when it's state-by-state, they have a lot less options where to locate it and sometimes have to suffer with the high electric rates and that's the story of Massachusetts. You're trying to put 50,000 square feet grow facility in some municipality, electric that doesn't have that much capacity. So there is opportunity in Canada. We're making very good progress there. We have a rep there that's doing quite well for us. Because it's nationalized, I'm not quite so sure we'll see as much traction as we're seeing here in the U.S., but it absolutely is as we're already there.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Ben Locke for closing remarks.

So thank you all for joining the call, and we look forward to talking with you again to share our results in the fourth quarter at the beginning of 2019. Good afternoon, everyone.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.