Tecogen Inc (TGEN) 2019 Q1 法說會逐字稿

Ladies and gentlemen, greetings and welcome to Tecogen First Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this program is being recorded.

It is now my pleasure to introduce your host Bonnie Brown, CAO, Treasurer and Secretary. Thank you. You may begin.

Thank you, Alan. Good morning, and thank you all for joining our first quarter 2019 earnings call. On the call with me today are Benjamin Locke, our CEO; and Robert Panora, our President and Chief Operating Officer. Please note, this call is being recorded and will be archived on the Investor section of our website following the call. A copy of the press release regarding our first quarter 2019 earnings is also available in the Investor section of our website.

Before we begin, let me briefly cover our safe harbor statement. Various remarks we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q under the caption Risk Factors, which are on file with the SEC and available in the Investor section of our website under the heading SEC filings.

While we may elect to update forward-looking statements at some point in the future. We specifically disclaim any obligation to do so. Therefore, you should not rely in any forward-looking statements as representing our views as of any date subsequent to today. During this call, we will refer to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in our earnings press release and in the Investor section of our website.

I'll now turn the call over to Ben for a business update.

Thank you, Bonnie. And the agenda on Slide 4 indicates, I'll start with a brief company overview, followed by a top-level review of the company's performance and financial results for the first quarter of 2019 along with recent achievements and accomplishments. Bonnie will then discuss the financials in more detail followed by Bob, who will give an overview of our emissions technology development efforts. I'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 first quarter of 2019 saw revenues of $8.2 million versus $10.2 million in the first quarter of 2018. During the quarter, we closed on the sale of a subset of ADG assets for $5 million cash, which allowed us to reduce debts to essentially zero and significantly improve our working capital to $16.2 million at the end of the quarter. The transaction resulted in a gain of $1.1 million from the sale and a goodwill impairment loss of $3.7 million. This non-cash impairment loss resulted in the bottom line loss for the first quarter of $3.3 million. Bonnie will discuss the accounting of the ADG asset sale in more detail during her discussion. While the goodwill impairment loss distorts the actual bottom line, we were still able to generate $678,000 of adjusted EBITDA in the quarter, further improving our cash position and strengthening our balance sheet. Our gross margin for the quarter was 36% versus 38% in the first quarter of 2018.

Moving on to Slide 7. You can see more detail on the quarter. While we are disappointed in the drop in revenues, we're being proactive to increase product sales through the reintroduction of our ammonia chiller package TecoFrost, which I will discuss later in the call. And though we were able to reduce our operating expenses versus the fourth quarter of 2018, we increased our investment in R&D and sales, as we prioritize the market roll-out of TecoFrost and continued development of our Ultera emissions technology, which Bob will discuss shortly.

Moving to Slide 8. Our backlog is a robust $26.9 million as of yesterday, May 13th. Product backlog, which consists of our equipment and associated accessories, stands at $13 million and the remaining $13.9 million of backlog is in installation services. There are few things I'd like to point out about our backlog. First, we expect at least 2/3 of this backlog to be fulfilled in 2019, giving us a good indication of solid revenues for the rest of the year. And of course, we are constantly adding to the backlog as new projects are added, which will add revenue throughout the year. Second, our backlog currently does not have any sales of our TecoFrost product that we are relaunching this year. I expect sales of TecoFrost to start later this year and we are carefully developing several projects to demonstrate key vertical markets for the product. I expect TecoFrost to add a meaningful contribution to the backlog by year-end and ultimately will be a solid product revenue contributor next year. Third, our backlog does include an Ultera engine retrofit project, that Tecogen is the design basis and sole supplier of. Bob will talk about this project in a bit more detail later in the call. And lastly, as I've said previously, our backlog consists of product and installation revenues and does not contain recurring maintenance contract revenues, which is a consistent contributor each quarter as well as our energy services revenue.

Moving to Slide 9. I want to reemphasize key achievements for the company and how they relate to our plans going forward. First as mentioned, we adjusted our sales strategy to have a renewed focus on our chiller product. Tecogen is the only natural gas engine driven chiller manufacturer and adding to TecoFrost ammonia chiller line will further our product offering for an entirely new market in industrial refrigeration. As I've mentioned, replacing an electric chiller with a Tecochill or TecoFrost accomplishes the same energy savings as co-generation but with far less competition and in most cases with lower capital outlay than an equivalently sized co-generation system. Chillers are also typically specified by engineers and manufacturer's representatives and are therefore more transactional in terms of project closing.

Although, we are starting TecoFrost sales slowly and carefully this year. We expect full U.S. roll-out next year and a developing sales plans to ultimately sell TecoFrost more broadly by leveraging our manufacturing partner sales networks in the Americas and Europe. Next, we increased the productivity and reliability of the sites acquired from American DG in 2017 to the point where we received significant interest to sell some or all of the assets. Ultimately, we decided to sell a portion of the assets to Sustainable Development Corporation LLC or SDCL. The sale includes an O&M agreement for Tecogen to continue servicing these sites. So despite the loss in energy revenue, we will benefit from service revenues from SDCL for the life of the contracts.

We currently do not have any plan to sell the remaining ADG sites still owned and operated by Tecogen. However, we remain alert to potential acquisition targets in our core business whose value could be increased through Tecogen ownership.

Next, as Bob will talk about in a few minutes, we have made excellent progress with our Ultera emissions technology, most notably through our partnership with Caterpillar Mitsubishi Forklifts of America or MCFA. As Bob will describe, the work we are currently doing with MCFA is focused on the Mitsubishi engine used in the forklift. The goal of the program is to make this OEM engine a certified near-zero emission engine through the Ultera retrofit. For this project, the engine will result in a certified near-zero emission MCFA forklift. But from a technology development standpoint, achieving this goal demonstrates that an Ultera retrofitting engine could be used to make other alternative field -- fuel vehicles such as propane or natural gas truck fleets certified to near-zero emissions.

And lastly with the ADG asset sale and our positive cash flows, we have achieved a degree of financial stability that allows us to execute on our growth plans with zero debt.

With that, I'd like to turn the call over to Bonnie, who will cover more detail on our financials followed by Bob, who will describe our emissions progress in more detail. Bonnie?

Thank you, Ben. Slide 10 contains some of the highlights of our Q1 2019 year-on-year financial results. Total revenue was $8.2 million for the quarter with overall gross margin of 36% and gross profit of $3 million for the first quarter of 2019 compared to 38% gross margin and $3.8 million gross profit for Q1 '18.

Since we sold a portion of our ADG assets during the quarter, the operating expense section of our P&L deserve some discussion. Our G&A expenses decreased by 5%, while selling and R&D costs increased by 3% and 14%, respectively, as we invest in our future. Operating expenses this quarter also included goodwill impairment charge and a gain on the sale of energy-producing assets. After the sale of these energy-producing assets in March of 2019, we performed a goodwill impairment test. As a result of this analysis, the company recorded a goodwill impairment loss of $3.7 million. By way of explanation of this impairment loss, let me start by saying our goodwill resulted from our stock-to-stock merger with ADG in 2017, which account -- was accounted for as an acquisition. The assets we acquired in the merger comprised our energy production reporting unit. A goodwill impairment results when the fair value of those assets become less than what we originally paid for them. In this case, that happened due primarily to the sale of assets.

We base our fair value determinations for the reporting unit primarily on the discounted cash flows from those contracts. As time passes, we recognize those cash flows and earnings. However, as the remaining terms under those contracts shorten or assets are sold, the remaining cash flows become less and accordingly so does the fair value of the reporting unit.

Since the date of the merger with ADG, we have not added enough new business of this type to offset the reduced cash flows from the remaining existing contracts, plus those that were sold. It should be noted that since the date of the merger Tecogen has recognized gross profit from energy production activities of almost $5 million.

Net loss attributable to Tecogen for the quarter was $3.280 million, which includes the goodwill impairment loss of $3.693 million. Excluding the goodwill impairment loss, the quarter maintained profitability of $413,000 compared to Q1 '18, which provided net income of $21,000, resulting in an increase of $397,000 year-over-year.

We also realized gain on the sale of the energy systems at $1.1 million in this quarter, which resides in the Operating Expense section. As Ben discussed earlier, our backlog has remained sizable at $27 million as of yesterday, positioning the company for long-term growth.

Slide 11 presents the reconciliation of adjusted non-GAAP EBITDA for the first quarter of 2019 compared to 2018, which has been referenced to other presentation in our earnings release. After adding back interest, taxes, depreciation and amortization to net income and loss attributable to Tecogen, we come to the standard EBITDA which for the first quarter of 2019 was negative $3.1 million compared to positive $234,000 for the first quarter of 2018, with the goodwill impairment accounting for substantially all the difference. After adding back the adjustments of stock-based compensation and mark-to-market adjustment creating unrealized loss on investment security, the goodwill impairment charge and non-recurring merger related expenses from the prior year, we reached adjusted EBITDA, the non-GAAP measure that management uses as an important metric.

For Q1 2019 adjusted EBITDA was positive $678,000 compared to $304,000 for the first quarter of '18, an improvement of $374,000.

Now I'll turn the call over to Bob for technology updates.

Good morning, and thank you, Bonnie. Let me begin with the forklift truck program. And by way of background, we received our initial funding from the Propane Education and Research Council, PERC, whose members are keenly interested in the technology as being important in maintaining market share relative to battery powered competition.

Central to the issue is criteria emissions whose -- those pollutants directly relating to human health and which are of heightened concern in indoor operation. We are working with MCFA as Ben said, Mitsubishi Caterpillar Forklift America, a well-known manufacturer in North and South American markets of both electric and propane fork trucks. MCFA agreed to provide custom engine tuning for the test truck, which we would utilize to maximize the effectiveness of the Ultera process especially in reducing NOx.

Engine tuning is an important part of the process and one we routinely use in our Tecogen product line to enhance Ultera performance. Once this software was finalized to Tecogen, MCFA would receive the test truck for evaluation at their facility in Texas.

Since our last call, we completed our testing with the second batch of engine control software and reviewed the results with MCFA. With the second batch, which was an improvement over the first, the tail pipe NOx and CO emissions were improved significantly from our baseline tests of the truck as received from MCFA. NOx and CO emissions in the final tuning setup were 1/5th and 1/8th respectively of the standard baseline testing. If we extrapolate this relative improvement to the certification, it appears that we are where we need to be for near-zero certification.

Let me explain what I mean by that. The certification test involves a prescribed dynamic load being imposed on a bare engine in a dynamometer. There is no forklift involved. However, if we obtain the same relative improvement in the certification tests that we obtained in the driving test, we would achieve our near-zero goal. As such, we believe that the demonstration phase of our project is complete and we can move forward. Our recommendation to MCFA is that we focus on 2 next steps. The first, would be to return the prototype to their factory facility in Texas for their further evaluation. The other step would be to confirm that the Ultera equipped engine does meet the near-zero certification requirement by performing the test per the certification process, that is on a dynamometer in a properly equipped laboratory. We believe the system with perhaps some additional fine-tuning would successfully achieve the near-zero certification.

From this point, the program really has a clear path to commercialization. And as an aside, the certification, because it's done on the dynamometer and so forth, would apply to any off-road application of that engine such as an airport towing vehicle, for example. There are several other Ultera activity -- I'm sorry, I skipped ahead. MCFA is planning to review our recommendation with the management in Japan.

First going on to these other activities. I want to add a footnote concerning our program whereby we retrofitted a group of standby generators in Southern California with the Ultera system. As I reported in our last call, the program concluded successfully. All the generators were permitted to the 2010 regulation, limits until now never achieved by a commercial natural gas engine without some exemption, such as the heat recovery credit our CHP products are granted. So as the footnote, I want to describe the application. I have not discussed this previously, but I believe it's worth mentioning considering what's happening in California.

The units are applied to a group of dispersed loads in a train that is vulnerable to woodland and brush fires. The hazard is most acute when high winds sever overhead power lines. The generators they use to mitigate this problem, during windy periods the wires are deenergized and the dispersed loads are powered by the generators which are located next to these loads. The annual operating hours turns out to well exceed the 200-hour limit where the strict emission standard is waived.

In the last call, the question was asked about the relevance of our achievement in permitting these generators. Today, I just want to mention that this application does had relevance given the increased recognition of fire hazards that exist throughout the state in locations that might consider a similar strategy. Ultera equipped generators could cost effectively serve this need if utilities find themselves with this requirement. The Ultera process works particularly well in this application as it relative -- it's relatively inexpensive and requires no onsite chemical storage. Other low emissions technologies, however, are not well suited to this role. Fuel cells and micro turbines, for example, are slow to come online when needed and are not able to quickly adjust power output in response load swings unless supported by battery storage. A standalone battery system would be difficult to implement as the operational requirement would be quite lengthy.

Okay. On a different topic. I mentioned in the last call that we have been notified by Southern California water district that approval has been granted for the -- for an Ultera water pumping project. The plant will utilize the Ultera kits for emissions after-treatment applied to a couple of 800-horsepower Caterpillar engines. These will be the largest Ultera kits we have produced and for the first time involve a new installation, not a retrofit.

On another topic -- oh, we have submitted our formal proposal several weeks ago which is a sole source with terms and conditions already pre-negotiated. We have a high confidence level that this award will be forthcoming in the next few months for the engineering portion of the project.

Lastly, our work with the research institute relating to Ultera applications in light vehicles is progressing. This was the first phase of their work, which relates to custom catalyst formulations and is funded by Tecogen. The testing, which I believe is underway, should be completed this quarter.

With that, I'll turn the call over to Ben for his final words.

Thanks, Bob. So moving to Slide 14, I want to give a little more color on our core business outlook and how we intend to pick up growth in our product segment. First, we will continue to closely follow the permitting of new cannabis grow facilities in New York, New Jersey and other states. As we anticipate substantial new production due to recreational use legalization.

We have had excellent success demonstrating the value proposition of Tecochill for indoor growing in Massachusetts, Florida, Canada and Colorado, and we'll continue working with greenhouse designers and consulting engineers to show the long-term operational savings of natural gas cooling versus electric. Next, we are expanding our chiller product portfolio through the reintroduction of the TecoFrost ammonia system. In this case, we are modernizing the old TecoFrost system to include more advanced controls and engine technology as well as the inclusion of our Ultera emissions on the system, which will enable the product to be sold in areas with strict stationary engine emission requirements such as California.

Furthering the discussion of expanding our chiller portfolio, it's worth mentioning for the first time, our legacy Roof-Top or RT chiller product, which is currently our only air cool chiller. Air cool chillers represent the majority of chillers in operation globally, given their relatively low first cost in simple installation. A simple window air conditioning unit is an air cool system. In the past, air cooled chillers were limited to small and midsize buildings with cooling loads typically under 300 tons where the added cost and maintenance of cooling towers for a water source chiller are cost or space prohibitive.

However, increases in air source chiller efficiencies and advances in compressor technology have expanded air cool system sizing to over 300 tons. Modern air sourced chillers are more compact and efficient these days and represent a tremendous opportunity for a gas engine equivalent. And as the chart on Slide 14 indicates, global chiller sales are expected to grow consistently in the coming years. Our legacy RT 50 ton air source chiller is a possible alternative in some cases, but the system is technology antiquated and has not been updated in many years. We are now exploring a similar product reboot as we're doing with the TecoFrost. But in this case with a novel design that will allow use of modern day chiller technology such as variable frequency drives, sealed magnetic bearing compressors and any future refrigerant changes. While I do not expect this development to occur this year, it would be the final piece of our gas engine chiller portfolio and the one with the most growth potential. So worth mentioning as we focus more on gas cooling in the future.

Next we have developed relationships with several energy service companies that provide third-party financing for project development and subsequent ownership of the asset. As mentioned, we now have a relationship with SDCL for project finance and the data center project mentioned earlier this quarter is with a different financial product -- partner. The financial sophistication of these companies provide the necessary capital for large turnkey projects that would be difficult to finance directly with the building owner. We have a pipeline of additional opportunities with a few of these financial companies and we hope to announce them in the coming quarters.

And lastly as I mentioned last quarter, our microgrid enabled inverter system has obtained UL 1741SA or the smart inverter certification, as required for utility interconnected co-generation systems in California. Having this smart inverter certification will allow Tecogen projects to further assist the utility from a resiliency perspective offering reactive power control, demand response and frequency correction. As other states examine resiliency concerns whether they be utility related, weather related or as Bob mentioned in recent example in California, forest fire related. We expect a smart inverter certification to be acquired by other states.

Moving to Slide 15 and closing. I would like to reiterate the key value proposition of Tecogen's clean reliable distributed generation systems. Our systems use clean and abundant natural gas to produce heating, cooling and energy that is cheaper, cleaner and more reliable. Our co-generation systems are designed with the U.S. utility structure in mind in terms of interconnect certifications, microgrid functionality, in a corporation of other distributed generation assets, such as battery storage.

As we are seeing in California, this functionality is becoming mandatory and the economic benefits of providing these grid services with clean emissions will ultimately benefit the economics of using Tecogen technology. Next, Tecogen has no competitors in the gas engine chiller market. We are focusing our efforts on new and existing markets for Tecochill such as indoor growing and we will begin selling the TecoFrost into ammonia refrigeration markets later this year, expanding further next year. And we are exploring the development of a gas engine air source chiller.

And last, but most consequential in terms of investor upside, we have shown the scalability and effectiveness of our Ultera emissions technology on many engine platforms from General Motors engines to Ford engines, Generac generator engines, Caterpillar engines and more recently our work with MCFA on the Mitsubishi engine. The result of our retrofit is the same, near-zero emissions on par with the fuel cell. We think our message is reaching a larger investor audience and I look forward to sharing other updates in our second quarter earnings call later this summer.

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

(Operator Instructions) Our first question comes on the line of Amit Dayal from H.C. Wainwright.

Can you talk about a little bit in this -- the revenue decline in the first quarter that impacted results a little bit? Another backlog has been a little weaker as well. Just trying to get a sense of how we are scaling relative to the rest of the year in terms of putting up sort of a year-over-year improvement?

Yes. Sure, Amit. I understand the question. I certainly -- we understood -- we expected a little bit of revenue drops by the sale of the ADG assets. But more broadly growth occurs in spurts and we've seen some good spurts and while we didn't have as much as a growth spurt as me might have hoped this quarter, I don't think it's representative of any other trend. We are continuing to focus on our -- on this product roll-out. I think having a third substantial product revenue contributor and the TecoFrost is going to go a long way to get our revenues back up. So I'm feeling pretty good about where we are. The backlog drop-off wasn't it too much, I mean our backlog last quarter was almost $30 million and that was very high, it dropped to $26.9 million not so much of a drop. If you recall our guidance was always to have our backlog over $10 million. So we're well above that. I'm pretty comfortable with our backlog. As I mentioned, the majority of it is going to be realized this year. So we see that our revenues for the rest of the year have a very good basis and we continuing adding to that backlog as new projects come along. So I'm feeling quite good about where we are and where we're going. But with that said, understanding that we did have this drop in revenue trying to proactively look at the future and get more product revenue going to make up for it. So I hope that helps to answer your question.

Yes, yes. Just excluding TecoFrost and are there any other catalysts that could help the backlog bounce back? I mean, we know you're at a pretty strong level, but just trying to see what other drivers there are that could help you to bounce in backlog?

Yes, sure. Well, I think, certainly, this smart inverter certification, I think is going to yield a lot for us. And I don't think I mentioned in my remarks, I should have, that there is a last stage of this inverter certification, Bob. It's going to occur this summer.

That's right.

And the final piece of this smart inverter certification is the utility, it's establishing communications with that ADG asset with our co-gen equipment. And then that would enable these revenue streams I mentioned of doing this power factor correction to take place. So I think certainly what's happening in California is it fits right in with our core technology and being inverter-based and having our smart inverter that bodes well for us. Absolutely in terms of the opportunity for that Bob has been talking on retrofitting generators. I'm not sure if you've been following the news about the wildfires, and the liability thereof and the concerns that exist in communities in California of the utility, the utility electric utilities is...

That's right.

Yes, the shutting of power when the winds get to above a certain rate. Rather than risk a down power line and a resulting $1 billion forest fire, they're making plans that just terminate power on those lines and leave those communities affected potentially without power. And so certainly this Generac program that's why Bob kind of gave you the extra detail on that because that's when these generators could be dispatched to provide power during these high wind storms. And if you had the Ultera on that, you can do so in compliance with all these the stationary engine requirements for emission. So I think there are a lot of drivers working for us, but absolutely in my opinion getting a little bit further behind the meter with our products, with our chillers is going to be a very successful way to grow our revenues going forward. And those installations, as I've repeated constantly, just a little bit more transactional when you talk about chiller sales as opposed to co-generation sales which can sometimes go sideways from a project development standpoint. So I think there is a lot of trends in our favor not just on co-generation, but on the chiller side and on the emission side.

Understood. Just one last one from me maybe on these DG asset sales. Was this primarily to eliminate debt and you clarified, I guess, there's no more sales of those assets expected. But just wanted to see if that debt elimination was the primary driver behind this if there was any other reason?

Well, it was part of the reason, certainly, I don't like owing people money and that is costly. So, I -- eliminating that debt was certainly up there, but really, Amit, I'm looking at the future of growing Tecogen and growing that product base and taking advantage of our competitive advantage, which is we are the only gas engine driven chiller out there. I think using that those resources to develop that is probably, the main driver I had for that asset sale, but eliminating debt of course was weighing on my mind as well.

Our next question comes from the line of Craig Irwin with ROTH Capital Partners.

So Ben, I just wanted to ask a couple of questions about the backlog. So $27 million is still very healthy, miles above that $10 million level that you want to maintain. Can you maybe break down the backlog as far as, when we look at the products what the mix of chillers versus DG systems is. Is there anything on the product side in there for the Ultera emission system, that's a piece of that $13 million?

Yes. Sure. So as I mentioned that backlog about $13 million of it is products. And as I said last quarter, I wanted to point that out because products tend to get out the door more quickly whereas the installation services can last a little bit longer, it takes a long time to do some of these installations. The product mix, I did not give any color on the chillers versus co-gen. It's a good healthy mix. I don't think there's anything notable in there. Certainly, we've seen particularly last quarter, a bump up in our chiller sales, this quarter we saw a bump up in our co-gen sales. We're going to see these bumps of each of these segments in different proportions. So I think giving any color on what the backlog particular proportion is of that day wouldn't be helpful, but except to say, that it is co-gen, it's chillers and sprinkling in of what we call kind of engineered accessories that go with it. Other good high margin products that have control skids with pumps, and expansion tanks, and heat exchangers on it. Any piece of equipment that ships specifically for an installation is in that equipment, dominated by co-gen and chillers, but with a smattering of these engineered accessories.

Understood, understood. And then I don't know if you're able to share this with us, but can you maybe give us some color on what portion of the backlog, you would expect to ship over the remainder of the calendar year. Should we see the vast majority of this backlog shipped? Or is some of it potentially extending into the next fiscal year?

Sure. Yes. I'm expecting about 2/3 of it to go this quarter, 2/3 of the entirety of the backlog...

This year.

This year, well, did I say this quarter, not this quarter, this year. So about 2/3 of it, Craig, to go this year. The remainder of it, yes, it does go into next year and if you can believe it a little bit if it goes in beyond because we have some new construction projects which is nice that we're the basis of design for, but they've got to dig a big hole in New York City before our equipment can get in there. So some of the backlog [expands] out. But to answer your question directly the majority of it is going to go this year.

Understood, understood. And then last question is really a clarification. So we see the year-over-year revenue trend, right? I noticed that product margin is actually up fairly nicely couple of 100 basis points and that's with the absence of the chiller revenue that was there last year. I always thought that chillers were pretty high margin product. Was there anything sort of on the ancillary products side that maybe lifted margins a little bit this quarter? Or is this something more in line that we you should look at as a natural margin on the DG side for the next few quarters?

Yes. I think the margins, we're going to see a little bit. In general our product margins are generally about the same that the co-gen, the inverter, the 75, the chillers. They're all -- the goal is to have around the same margin on all of them. Some jobs you're going to get a little bit better margin than others. But in general, I think, the margins are all kind of equally weighted and I don't think there's any particular factor that would lead us to say one product is going to consistently have higher margins than the other.

Our next question comes from the line of Michael Zuk from Oppenheimer & Company Inc.

Two question. First of all, what's the breakdown on the agricultural systems between cannabis and vegetables?

That's a good question. I don't have that at my fingertips. Anyways, Mike, I can tell you what's dominated by cannabis almost by far. We do have some other crops without being mentioning any specific customers, lettuce and cucumbers and some such things and other high value crops. But certainly the majority is on the cannabis.

Are we going to be focusing additionally on the vegetable side because that seems to be long term?

Yes. Absolutely, Mike. In fact, it's -- this work that we're doing on the cannabis stuff which is all happening quite quickly, as I think you know it certainly happened very quickly in Massachusetts and we're trying to keep pace with activities in New York and New Jersey et cetera. But what it's allowing us to do is interact with these greenhouse designers that -- they are sometimes ambivalent about the crop. The greenhouse designers. And therefore, are indeed opening up other leads for some of these higher value crops. But the only a little bit of downside of that and the upside of cannabis is, the cannabis crops got to be located in the state if -- and therefore, they're subject to the electric and utility rates of that state, where the these higher value crops can seek out locations that have good utility rates were perhaps the value proposition of gas cooling isn't as strong. Yet still, I mean, I think, you're exactly right on a trend there, Mike, these folks are looking at long-term operational costs. Certainly that's what's driving the cannabis industry is not what they can make cannabis for today, it's what they can make cannabis for 2 years down the road when there's 5 more competitors and it's been fully recreational use permitted and they have very established metrics in terms of volume, per unit, square foot that they need to make. And so the Tecogen becomes a very important part of that when they look at their long-term operational costs. So I say that because that is indeed playing out as some of these other crops are starting to be become (inaudible) higher value crops. So again, as not as much (inaudible) again working with these greenhouse designers is helping us to find some of them.

As a follow up on the ag side, is our technology applicable to fish farming?

Interesting question. I think fish farm (inaudible) industrial equipment, I believe (inaudible). Hey, Mike, can you hear me okay?

And then a final follow-up with regards to New York City and all of the regulations that are coming in place. How are we addressing our increased sales efforts in New York City?

I'm sorry, Mike. Can you repeat the question.

With the New York City regulations tightening. How are we expanding our sales efforts in New York City?

Yes, sure. New York is an interesting place and (inaudible) as well. (inaudible) the building requirements for coverage et cetera. Those are all to (inaudible) come with a little bit of reality check. How much do you build practically, excuse me, do this upgrade. So there is an opportunity for us (inaudible). Okay. Thank you, Mike.

Operator, can you confirm that we're coming in okay with the audio?

Gentleman, I'm not quite sure. I can personally not hear you too well. You are coming in very choppy.

Okay. Well maybe (inaudible).

I'm sorry gentlemen, would you mind repeating that?

Operator, if you can [put] the next caller, I can handle the next question.

Our next question comes from the line of Hadyn Cole from Banshee Holdings.

Hi. Most importantly, can you hear me okay?

You are breaking up a little bit, Ben. Can you hear me all right?

Yes, I can hear you just fine. I think (inaudible).

I just wanted to get a little bit more granular -- maybe this is a better question for Bob then on what's happening with the MCFA fork truck project next. If he can talk about it? And just give us sense for the parts per million improvements and what he kind of thinks is next in commercialization?

Right, if I just go back to what I said a few minutes ago, the profit was initially to demonstrate the feasibility of it on a -- on this MCFA fork truck, and we did it, and it worked the way we wanted it to. So we've said to MCFA and that was only about a week ago, we talk to them, we said look, we think the next step we should -- that should be done to the program is we should certify the engine and once it certified, it certified, we can recertify it if there's any changes that's not hard to do and that requires them really to do that work. And at the same time, we're going to send the truck back to them and their intent is not so much to focus on the emissions, but I think they want to drive it around, make sure it doesn't break, that kind of thing. So that's the next step, I think. In terms of the PPM values, I honestly don't have them at my fingertips, but they're probably in the range of low tens for NOx and maybe a little something similar for [CL], but don't quote me on that too much, because I only have the converted values that I showed.

Okay, great. And I guess otherwise with this program on the other -- on the adjacent sort of parallel side with the medium trucks and I guess like -- you've mentioned the towing unit like at an airport. Has there been any discussions yet that you can comment on alternative vehicles using the same engine?

No, not with that engine. We have had talks with some of the companies that are in this business and they're just preliminary stage discussions about our technology. but in terms of this engine, I'm fairly certain it's used for other fork truck manufacturers and probably in some of these other vehicles and that could be a follow up. But I have not had any discussions like that with MCFA.

Thank you.

(Operator Instructions) Our next question comes from the line of Alex Blanton from Clear Harbor Asset Management.

Yes. I want to clarify something that was said earlier, earlier questioner on the backlog, he said, the backlog is now, I don't believe that's correct except if you look at March 25th, because the December 31st backlog you listed as $16.6 million, which was slightly above the prior year of $15.7 million. And then you said on March 25th, the backlog was $29.9 million and then March 31st the end of the quarter it was $26 million and then on May 14th $26.9 million. So it's not really down, it's up.

Yes, absolutely. I'm very happy about our backlog to be quite honest with you, Alex. It's got a really good mix of product and installations and while it's not where it was as you said in March whenever it was at 29...

March 31st -- March 25th, when you go in the fourth quarter you gave us the March 25th backlog was $29.9 million, but a few days later at the end of the quarter it was only $26 million. So you shipped out some stuff in that week. So it's not really correct to say the backlog is down, if you look at quarter ending, it's up substantially, very substantially.

Yes.

All right. And also I wanted you to on Slide 14, there is a very interesting chart there of the worldwide sales of the chiller market, which the site says is in 2015 was $8.8 million. Is that correct?

Yes, yes, it's a big market, Alex. AC systems globally is huge. And as you've probably followed commentary yourself, it's mostly -- a lot of is in Asia Pacific areas where the people don't expect cooling, but now they want cooling. They want to work in an environment that's got temperature control. So it's a pretty impressive growth.

What is included in these numbers. What kinds of -- I mean is this all air conditioning units combined?

Yes. Those 3 segments that I was alluding to on that slide which is ammonia refrigeration, these water sourced -- these water cooled chillers and these air cooled chillers of which air cooled chillers are really dominate that market. I think, I saw maybe 70% of it, it was air cool, but I don't want to be held to that, except to say, the air cooled segment of those 3 products I think dominates a lot of what you're seeing on this chart.

Yes. But what -- who are the end users of these? Does it include residential?

This -- I believe, this is industrial. I don't think this includes your window units. This is industrial chilling.

Yes, we recall commercial.

Commercial, yes.

We recall commercial, Alex.

This is commercial air conditioners for companies, or factories, or whatever.

Yes. Buildings that are office buildings, hotels, hospitals, anything that's larger -- that's larger than home.

Yes. And what is the main technology here that's used. I mean that you are competing with?

By far it's vapor compression which is a compressor turning like a new refrigerator or your air conditioning at home. It's a compressor being turned by an electric motor. And we are doing the same thing except we are powering that compressor with an engine.

Yes, okay. Well, I just wanted to clarify that exactly what that was because effectively what portion of this market can you address with your...

Yes. Alex, it's a good question. I see what you're circling around and I'll just go into very small technical diversion here which is, our engine is in our Tecochill product that we've been selling, our engine turns a shaft. And so that requires the compressor that we use for our Tecochill have a shaft, which mean it can't be one of these field bearings, hermetically sealed compress super, duper fancy compressor technology that you can buy there today because they don't have a shaft sticking out of it.

We're limited to shaft driven compressor technology of which it's out there and of which that's good and obviously we're working with it, but it's not allowing us to get our hands on these advances and these MagLev compressors that are super efficient, whereas if we were able to develop an air source unit and use our electrical advantage, our proprietary generator inverter technology Alex to power that compressor. Now we're not. Now we don't need a shaft drive, now we can power these electric compressors with our own package. So that's my long way of saying, Alex, what this could potentially do for us is open up a whole entire new range of modern refrigeration technology available to us commercially and made it up to our proprietary engine generator set to make an air source chiller, which could be a real competitor to electric incumbents.

Again in areas where electric prices a spark spread fits that's a pretty powerful thing. I mean, again, you look at these areas in New York City and worldwide where electric prices are real high and they all have electrics. I mean everybody has electrics and be able to potentially offer a gas driven air source chiller that has all the the VFD technology and seal bearing technology that exists today, would be pretty compelling. So maybe that's where you are heading with your question, but I wanted to point out that that's exactly the way I'm thinking Alex, is that chart represents a huge volume of chillers some of which we have available today, but some of which I want to develop in the future.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing.

Well, we thank you all for joining the call. And as always, we'll keep you updated as more events happen, otherwise, we'll talk again at the end of the second quarter. Thank you.

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation, and have a wonderful day.