Good morning and welcome to the Tecogen Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] For your information, this conference is being recorded. A recording of this conference call will be available for playback approximately one hour after the end of the call and will remain available until Wednesday, August 17, 2016. Individuals may access the recording by dialing 877-344-7529 from inside the U.S., 855-669-9658 from Canada, or 412-317-0088 from outside the U.S. Enter the replay conference number which is 10090426 followed by the pound sign. Now, I would like to introduce Ariel Babcock, Tecogen's Director of Investor Relations. Ms. Babcock, please go ahead.

Good day. And thank you all for joining us on our second quarter earnings conference call. Speaking on the call today are John Hatsopoulos and Benjamin Locke, our Co-CEOs. Also joining us today with prepared remarks are David Garrison, Tecogen's Chief Financial Officer, and Robert Panora, our President and Chief of Operations. During the call, we will be referencing slides posted on the Investor Relations section of our website at Tecogen.com. Before we begin, I would like to remind you that this presentation includes forward-looking statements within the meaning of Section 27A of the Securities and Exchange Act of 1933, and Section 21E of the Securities and Exchange Act of 1934. Such statements include declarations regarding the intents, belief or current expectations of the company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that can materially and adversely affect the actual results as identified from time to time in the company's SEC filings. Forward-looking statements provided are as of the specified date and not reaffirmed or updated at any time. I will now turn it over to John Hatsopoulos, Co-CEO, for some opening remarks. John?

Good morning, ladies and gentlemen. As you noticed from our press release, our backlog continues to grow dramatically. Last year, at the end of the second quarter, the backlog of orders was 9.3 million. At the end of this quarter that we are reporting, the backlog was 14.1 million, which is something like better than 50% and right now it stands at 15.9 million, which is an increase of 70% over a year ago. The second major event that is taking place right now is the technology on emissions. We put out a release yesterday, giving an update to our partnership on emissions and this is a group that has funded at least in the beginning outside of Tecogen quite a bit of money for us to do the studies and we are grateful to our friends at Volkswagen, they are brining to the attention of the world the problems of automobiles. It was weird that yesterday, we put up this press release and I guess nobody cared. I don’t think anybody read it but Robert Panora, when his turn comes will give you an update. With that, I’d like to ask Ben Locke who is my partner and Ben, as you all know is in charge of operations of sales and whatever else is involved in running the company. Ben?

Thanks, John. So, I’d like to start off our call, just to remind those who might be new to the company about Tecogen's core business model, as shown on slide 4 -- heat, power and cooling that is cheaper, cleaner and more reliable. Our proprietary technology for improving efficiency, emissions and great resiliency is truly disruptive to the traditional methods of heating, cooling, and powering buildings infrastructure. Tecogen’s clean energy technology has been revolutionizing distributed generation for residential, commercial and industrial customers for over two decades. Technology development and product innovation are our most valuable assets, offering significant competitive advantages and product differentiation. We’ve made tremendous achievements so far this year on this front. I strongly encourage anyone who missed our first quarter conference call in May to look back at those remarks for more complete picture of our newest product, the InVerde e+. So, turning to slide 5. Before I go into the actual earning results for the quarter, I’d like to take a few minutes to highlight our year-to-date progress and describe the very important and strategic steps we’ve taken to set the stage for future growth. First, we continue to strengthen our core product offering with the introduction of the new InVerde e+ and the implementation of the GE Equipment Insight mobile remote monitoring system in the first quarter. It is importantly that we continue to improve on our products in order to maintain our competitive advantage in the CHP market. The new e+ with improved efficiency, better economics, quieter operation, lower turned down and rapid black-start for emergency standby capability along with other improvements reinforces our goal of providing our customers with the most advanced clean energy technology available. With regard to our GE partnership, the GE Equipment Insight system is now available to all new…

Good morning and thank you, Ben. In our last call, I discussed several important product introductions, which Ben has talked about briefly. I will elaborate a little bit more. The first was an Internet based communication system, the GE Insight system that Ben reviewed a few slides with. The GE Insight technology allows us to upgrade our existing communication systems that’s one having many advantages that one would expect to see in the state-of-the-art Internet tool. For example machine operating parameters can be viewed as Ben said in real time historically but on multiple devices, not just the PC but also smartphones and tablets through apps. These data records can be manipulated in various way for analyzing trends in the performance of the system in organized and standard, or custom reports that the user may want to one make themselves. Our service personnel and customers can utilize the information demand to Tecogen products operating at their peak efficiency and utilization. Over the past few months, we’ve been refining the system features and creating a dashboard, which will include feedback relative to the systems financial benefit to the whole facility. This will be highly valuable feed -- this is a highly valuable feature for our customers, providing assurance of the system's fundamental value [Indiscernible] In the last call, I’ve discussed the introduction of our updated InVerde 100 kW CHP module. This unit is branded the InVerde e+ and has a number of important features that distinguish it in the CHP market. As I discussed in our last call, the e+ is more efficient and significantly higher than its predecessor. In addition, the e+ has an advanced InVerde that will enhance its utilization in Microgrid and demand response applications. I want to elaborate on the Microgrid and demand response features in more…

Thanks, Bob. Reviewing the highlights from the year-over-year financial results, total revenues declined compared to the prior year period, although on a sequential basis the company posted modest improvement over the first quarter 2016 revenue results. While chiller sales continue to their rebound, cogeneration sales fell short of last year's mark. Total service revenue continued its steady growth, delivering well over half of our total company revenues in the quarter. Service revenue was helped by a pickup in install activity. We expect this pickup in activity to continue. Revenue from the long-term contracted maintenance and service agreements accounts for over one-third of the total company’s revenues, providing a reliable annuity like revenue stream. This stable revenue should only continue to grow as the installed base and fleet of operating hours grows, helping to smooth the impact of the cyclical sales, resulting that are typical in our industry. Cost of sales was helped by the product mix, although this benefit was offset by various charges related to the close-out of old supplier contracts and inventory write-down, both items related to the elimination of the first generation InVerde product line and the shift towards the new e+. Service costs also showed improvement, primarily benefiting from improved and experience in our insulation group and continued focus on operational effectiveness with our maintenance and service experts. Combined gross margins posted a 350 basis points of improvement over last year's second quarter, benefiting from the improvements in service gross margin which more than offset the impact of lower product gross margins. Gross margins and expense reduction programs continue as management focuses on using cash resources in a thoughtful manner. Starting with the chart in the upper left corner, total revenue for the trailing four quarter period is $19.7 million, a year-over-year decline. While the quarter…

Thanks, Dave. So in closing, we are responding aggressively to the changing market conditions that we've seen that drive our product sales and our efforts to build long-term relationships with key customers is starting to pay off as evidenced by our strong backlog. We expected this backlog to result in compelling topline revenue results in the coming quarters. We are continuously working on new and innovative products to improve our competitive advantages as evidenced by the new InVerde e+. The e+ provides customers with superior economics and operation compared to any other CHP product in its class. Any additional functionality of the GE system, not only enhances our service capability but allow customers the ability to see how the equipment is performing and the savings associated with it. We expect to introduce additional product improvements in the coming quarters that will further differentiate us as the best CHP system in our class. We believe some of the delays in product orders have gradually relented in the restarting of various incentive programs has helped alleviate some of these issues and eventually we expect to bring topline revenues back where we want them. Similar to the Ilios gas company partnership, we will continue to look at strategic partnerships that can help enhance sales of our products and as our installed base continues to grow, we expect to see our service revenues continue trending upward. We also expect rapid growth of the TTcogen sales efforts, starting with the smaller 35 kW units. But eventually leading to sales of large units and taking advantage of the expanding biogas markets. We will also continue our concerted efforts to reduce our operating expenses to establish a baseline for achieving profitability in the coming quarters. Lastly, we are very excited about the technology development Bob mentioned about ULTRATEK and expect to have more developments on the emissions systems in the coming quarters. With that, I’d like to turn it over to the operator for any questions.

[Operator Instructions] Our first question is from Alex Blanton with Clear Harbor AM. Please go ahead.

Good morning. I wanted to ask questions about ULTRATEK because as you mentioned in the press release, it didn’t result in any movement in the cycle. In that press release you say vastly improving emissions performance when compared to currently available emissions control technologies. You are talking about the pollution control devices on automobiles currently, correct?

That’s right.

So, your device improves on that vastly. Correct?

Yes. Yes.

All right. And miles per gallon are not negatively impacted. It did not increase the fuel usage. So there is no penalty in terms of the efficiency from using this device. Correct?

That’s correct.

All right. Now, does this mean that if a -- let's say Volkswagen or some other automobile company were to put this, use this device, they would install it in addition to what they have?

That’s correct.

It will be an additional device hung on the car. Correct?

That’s right. That’s right.

And this would cost how much?

We haven’t projected that yet. We believe it will be relatively inexpensive as it involves nothing exotic other than the stuff that vehicles have in them today such as radiator type heat exchangers and catalyst elements. So it’s very familiar stuff that gets added, sheet metal and so forth. So, I don’t think the class is going to be significant relative to the benefit. Certainly, it’s not like a fuel cell or something that’s really whole different ball game as far as cost goes.

Okay. So the cost benefit equation is relatively good is what you are saying?

That’s right.

It is not something that David say, well, it would be nice but it will cost too much. Now, do you envision that ULTRATEK making this product?

-- :

Could you be a little more clear there? Are you saying that ULTRATEK would license the technology?

I think, what we are saying, Alex is there are number of directions this could go as you could imagine. And certainly one of the possibilities could be ULTRATEK making them. And what Bob was saying is another possibility that’s being considered, strongly considered is a partnership with the folks that are in there in the industry that doesn’t necessary have to be with an automotive group. There is of course many supporting industries that support the automotive industries, especially in the exhaust emissions area that could be a potential partnership. So, it’s a topic of discussion which way to go as you can imagine. Each has their pluses and minuses and it’s something that we haven’t decided that but certainly, we are giving it more consideration as the results are coming back very encouraging.

This is John Hatsopoulos. Let me add something that I don’t think we’ve expressed in the past. Because of our experienced at Thermo Electron where people would try to install some patents from Thermo Electron and then challenge us to sue them. It’s a long story but it’s not worth reporting right now. But what we’ve done is we have patented. We have ensured these patents with Lloyds of London and even though it costs us quite a bit of money. Lloyds of London is committed to defend our patents worldwide without us having to pay for it because as you know, legal fees on defending patents are extremely expensive.

I accept that. But what I would like to ask next is, is there a compelling reason in terms of emission requirements that cannot be met by current technology for automobile companies to be forced in effect to adopt your equipment in order to meet these requirements?

Yes. Let me explain. What happened with the Volkswagen scandal and I mentioned this in my talk is it really exposed the testing method, which is an old drive cycle that’s seemly is driving on a flat surface relatively softer acceleration perhaps when you and I would do driving. And therefore, people who measure emissions in vehicles that are actually moving about in the city and driving around so forth with onboard systems measure significantly higher emissions than these tests did. So that’s -- what’s really happened here is Volkswagen handled that’s how they had caught in fact was that type of system. It really put a pressure now on the regulators to make a test protocol that cleans up this shortcoming where their designing a test is repeated for over 30 years that they know exactly at 32.2 seconds the engine is going to accelerate and so on and so forth. So that’s the problem that the vehicle manufacturers have that what they thought they have was technology that could easily pass the test. The test might change and many in the industry think that’s a certainty.

Okay. So, what you are saying is that the current emissions requirements are not being met by the current technology?

Yes. The automakers will say, we have to pass that specific test that you saw on my graph until we do meet it and that’s technically true, legally true. But the effect is that the pollution cities today should be much lower than it is and this has always been the criticism of people, environmentalists that you’ve got to test there but it really isn’t doing what it is supposed to. The other thing that’s happening, Alex is that in 2017 through 2025 that the standards are changing and they are changing in two respects. One is that the certification for different types of vehicles, how they are classified is more strict. But the thing that’s really going to drive the problem is that the vehicles have to meet a fleet average that’s getting, going down, down, down, down, down every year. So today, you can sell 80% of our vehicles in the ordinary emissions class but in 2025, actually sooner, it’s closer to 90% you are going to have meet this, be classified as super clean. And so the vehicles today are the ones I described can meet the ordinary emission standard and be sold as an ordinary low emission vehicle. But you can only sell 10% of our product in that category in 2025. So, all those vehicles that couldn’t be upgraded into the new, the better categories will be left behind. So those are the two issues.

One more question. You said reading from a slide, 94% reduction and 81% reduction, I assume that the -- it said on the slide from what but I could not find the slides on your website. So, I’m not sure it was from what.

Yes. Let me explain. So if you look what we’ve done in that experiment where we are showing in the left-hand chart exactly the COs that would have come out of that vehicle into the environment with its own primary battery installed system. All those red lines that are on the left, those are all the COs that goes out into the atmosphere.

Exactly.

Come out of the tailpipe.

Thank you. I can’t see that because I can’t find the slides.

The slides are on the website, Alex. They are on it now.

I was not able to find them.

They are in the investor relations department.

So the slide on the left is exactly what would have been expelled to the atmosphere from that vehicle. However, the tail pipe is now instead of going to the atmosphere goes into the ULTRATEK device. So if you measure what actually escapes through the ULTRATEK device, it goes from say a 100 using a base number of a 100, 100% to 6%. So that improvement is -- that’s the improvement, the same with the NMOGs. So, we are actually improving the vehicle, not the engine, the vehicles’ after-treatment process over 90%.

Thank you.

Does that make sense at all?

Thank you.

Yes.

Thanks, Alex.

[Operator Instructions] Our next question is from Michael Zuk with Oppenheimer. Please go ahead.

Good morning, gentlemen.

Hi, Mark. How are you?

Pretty good. A technical question regarding the installed InVerde fleet. What potential is there to upgrade the installed InVerde fleet to the new InVerde + fleet? I mean is that a big potential market, or you looking at that or where do you stand?

There are hundreds of ULTRATEK -- I'm sorry there are hundreds of InVerdes that are out there that are the old style. There is no reason to touch them. They work fine. They were installed with the understanding they are not going to have a battery of solar input so that’s fine. So there is no reason to touch them. In 10 years, they wear out or 15 years that they wear out. Whatever their lifecycle is you can put the InVerde e+ cap in place, the green box. So there is no reason to touch them. They work fine.

So that potential replacement market that is based on obsolescence or wear out of the unit and not because it’s a better technology?

That’s right. I mean the efficiency is better. The sound levels are better, all that sort of thing but these customers brought the units knowing the efficiency was what it was and they are not going to run out and buy new ones just because it’s burn out 5%, fewer than 5%. That will be great if they did but they… --

Yes. There might be some opportunities where some of them are more sophisticated customers that maybe have had some of the original InVerde. They have already paid themselves up. There could be some opportunities, Mike. I believe the ammo is trying to be opportunistic about these things. But as Bob says there is no compelling reason for them from a technology standpoint. The old InVerde has run great. They are great products, are very reliable. It’s just that we’ve got this better product now that we are going to start rolling out.

If a customer expands their facility, will the new InVerde + integrate with the old InVerdes?

Absolutely. Absolutely. Very important part when we developed this product that to be able -- to be integrated with the existing product line.

Okay. And then one question for Dave. How much was the write-down on the obsolete inventory?

Well, we don’t disclose that exact number but I can tell you that it did make our product margins fall to where they ended up from the normal range that we expected to be in.

Yes. As you know, it’s a one-time thing. I didn’t like having to do it but I think I will take the benefit of that, absolutely if there is better product that we think is going to give real good margins going forward. So, we had to do it. We got our over width and now we are on with the new product that’s going to do quite well for us.

So in actuality, the quarter was a little bit better because we had this one-off write-down. So from an operating standpoint, we are heading in the right direction and on the right track and we should just, should we say put aside the one-off charge?

Yes. Going forward, it’s just going to be the e+.

Very good. That’s very helpful. Thanks.

Thanks, Mike. Nice talking to you.

Thank you, Mike.

[Operator Instructions] If there are no more questions, I would like to thank everyone for participating. This concludes today’s conference call. You may now disconnect. Have a great day.