Good morning and welcome to the Tecogen Third 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 Thursday, November 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 10094780, followed by the pound sign. Now, I would like to introduce Ariel Babcock, Tecogen's Director of Investor Relations.

Thank you. Good day and thank you all for joining us on our third 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 Robert Panora, our President and Chief of Operations and David Garrison, Tecogen's Chief Financial Officer. During the call, we will be referencing slides posted on the Investor Relations section of our Web site 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 intent, belief or current expectations of the company and its management team. 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 herein are as of the specified date and not reaffirmed or updated at any time. I will now turn it over to John, Co-CEO, for some opening remarks. John?

Ariel, thank you very much. Ladies and gentlemen, I would like to take pride and thanks to the team headed by Ben Locke and Bob Panora, for their wonderful success they are making of Tecogen. It appears and I hope it's going to continue for years to come. And with that, Ben can give you heck of a lot of better information than I can and with that I would like Ben Locke to take over.

Thanks, John. So I would like to start off the call by reminding those who may be new to the company about Tecogen’s core business model 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 and infrastructure. Tecogen’s clean energy technology has been revolutionizing distributed generation for residential, commercial and industrial customers for over two decades. This is an exciting time for Tecogen and our shareholders. The third quarter of this year saw Tecogen achieve several important milestones that will set the stage for long-term success of the company. Turning to Slide 5. First and most significantly, we obtained not only cash flow positive results for the quarter but achieved profitability of just over $200,000 and as I will detail later in the call, we achieved this through significant margin improvements, not just through increased revenue. Second, as announced last week, we entered into an agreement to acquire American DG Energy, which subject to shareholder vote and SEC approval, will create a vertically integrated, merged company with dependable annuity type revenues from ADG assets, adding to the existing revenue streams of Tecogen. I will address the key areas of importance of the merged company in just a few minutes. And lastly, we have made great progress with regard to our Ultera emissions technology. We received research grant funding from the Propane Council to demonstrate the viability of our emissions technology in fork trucks. This program which is not part of the ULTRATEK automobile project, aims to develop a retrofit emissions system for fork trucks to reduce their emissions to levels acceptable for air quality and indoor work environments. This work will…

Good morning, and thank you, Ben. I will be updating listeners on the technology development today in three areas. First, I will discuss our progress on bringing online the special generators in the Southern California that were retrofitted with the Ultera emissions system, such that our customer could operate these units without annual hourly limitation. Second, I will discuss the research grant awarded to Tecogen last month from the propane industry for adapting Ultera technology to propane fueled fork trucks. Lastly, I have an update regarding the progress made by our subsidiary ULTRATEK in the automotive application of Ultera. In our previous earnings reports we discussed a So Cal project that concerns a customer owning equivalent natural gas fuel generators that need to be operated frequently. As the run hours exceed the maximum allowed for emergency generators, the units must the standard for continuous power generation. These are the same standards as our co-generation products where we have successfully permitted. However, the simple generator receives no heat recovery credit in sending its emissions level under the standard. As such, the emissions levels required to meet these engines are the lowest we are aware of anywhere and not have been achieved by any engine. As reported before, a sample generator was purchased in 2015 and fitted at Tecogen with the Ultera system. It worked extremely well and the customer proceeded to apply for permits for this test generator and also for their existing on site units that would be retrofitted. Last October, the phase two order was received for Tecogen to ship the test generator to the customer and complete the retrofit in the others. The PO was for about $0.5 million. The test generator and retrofit kits were shipped in Q4 of last year. Events unrelated to the project, however,…

Bob, before you do this, this is John Hatsopoulos, maybe you should mention how much cash we have in this partnership, so people don’t worry that we run out of money.

I wish I had that number in fact, but I would say it's roughly $12 million. Something like that that’s still on hand, yes.

So, we are very well capitalized.

Yes.

That’s the point I was trying to make. Thank you.

Well, thanks, Bob. Here is some highlights from the year on year financial results. Total revenues increased 41% compared to the same prior year period and 16% on a sequential basis. Product revenues grew 53% compared to the same prior year period and 18% on a sequential basis. The volume of the co-generation modules showed steady growth with a special increase in the new InVerde e+ modules. Total service revenue continued its steady growth delivering well over half of our revenues for the quarter. The company posted a 10% increase in service contract and parts revenues on a year-over-year basis. This increase was the 15th consecutive quarter of year-over-year quarterly contracts service revenue growth. Year-over-year comparisons, adjusted for the seasonality of that cogen service revenue. These long-term contracted maintenance and service agreements accounts for nearly one-third of the total company's revenue providing a reliable annuity like revenue stream. Cost of sales in products realized many benefits from the improvement implemented with the e+ line of InVerde. The new product has cost effective manufacturing processes that will further reduce costs with the continued growth in volume. Service costs continued improvement as the installation group focused on higher value added services coupled with operational efficiencies from our maintenance and service experts. With combined gross margins of over 40% and product margins at 40%, management is at the high point of our target range and the highest quarterly gross margin achieved since the start of public reporting in 2013. Gross margin improvement and expense reduction programs continue as management focuses on maintaining these strong margins in the future. And of course, to note, we were profitable for the first quarter since public reporting began in 2013 as well. Looking at the graphic charts that we track our metrics. Starting with the chart in…

Thanks, Dave. In closing, I would like to thank Tecogen's shareholders for their dedication and patience as we shape the company for future success. I am encouraged by the accomplishments we have all achieved in all aspects of our business. We have a great team of engineers, service technicians, sales professionals and business leaders that have contributed to reaching the success our shareholders expect. Going forward, we expect to build on the achievements of the third quarter. Our relationship with strategic partners for CHP projects are strong and will continue to contribute repeat sales. No other CHP products can provide the technological innovation and economic savings of our products. Our reputation and history as a provider of reliable power and turnkey installation and service of CHP systems is unmatched. Our addressable markets quadrupled with the addition of TTcogen equipment and additional chiller market applications. We have substantially improved our operating expenses and cost of goods sales which has improved our product margins. We have reached an agreement with the American DG to acquire a fleet of assets that provide a steady reliable stream of cash generation for many years going forward. And lastly, we are positioning Tecogen to maximize the potential of our Ultera emissions technology. Whether it be through our stationary engine retrofit projects, as evidenced by or south coast air permit success, our PERC funded fork truck program which had cleared the fine channel to commercialization, or our ULTRATEK automotive joint venture with game changing economic and environmental impacts. It is clear that our patented emissions technology will ultimately contribute substantial financial gains for the company going forward. And as I stated at the beginning of our call, it's a great time to be a Tecogen shareholder. I am excited to welcome American DG shareholders to our family when we finalize the merger approval process. Lastly, we owe much of our success to the vision and insightfulness of our founders, John and George Hatsopoulos, who have personally invested and guided us so we can reach this point. Without their perseverance, we would not have reached the milestones that we outlined today. With that, I would like to turn over to the operator for questions.

[Operator Instructions] Our first question comes from Sameer Joshi of Rodman & Renshaw. Please go ahead.

Congratulations on a great quarter. As far as the American DG merger goes, do you expect any regulatory challenges for ultimately closing the deal?

We really don’t. We haven't had any pushback from anybody up to now and we think, unfortunately, it's a 40 page filing with the SEC. But after that, hopefully we will be well on our way.

Okay. And in terms of revenues, should we expect chiller revenues to be lumpy or do you expect them to be low going forward because it has been lumpy as you know, but going forward do we expect them to be at this level.

Yes. The chiller revenues, they follow a seasonal cycle. Most folks want to get their chillers replaced before the cooling season starts in April-May timeframe. So the smart ones get their orders in the fourth quarter and then the guys that drag their heel get their orders in the first quarter and then, of course, for us to get them in. So it's lumpy in that aspect, Sameer. You know we see the trickle of orders start to come in in the third quarter. We typically see a fair amount in the fourth quarter. As I mentioned, we have got a bunch in the backlog already. And then the intent is to get them built, tested and delivered, so they could be installed by the cooling season. That’s for the northeast. California, it is a little more steady but that’s generally your answer there.

And as far as the fork truck opportunity goes, how close are you to revenues. I mean I know it is just the beginning for you given the PERC funding, but after nine months do you think you will actually have one of these partners that you are working with, like receive orders from them.

Yes. I think that certainly is too soon to tell. Bob and his team are looking forward to getting the project done with PERC. And one aspect of the project that is exciting, as Bob mentioned, we did receive letters of support for two fork truck manufacturers and we are going to get a fork truck from one of them. So that allows us for a lot of interaction with them as the testing goes one. And if we are successful, presumably we will be able to talk with them about some type of business arrangement. But what that might look like is too early to tell right now.

And one last one from me. As far as European regulatory market for RDE is concerned, how quickly do you think, 2017 to 2020, but when do you see yourself being a player in that sector.

I think, this is Bob Panora, thanks for the question. I think it's a little too early to tell as well it has to really unfold with dealer conversations, with suppliers, and we are not there yet. But I think the fact that they want to be faced with this problem I think will help a lot with the interest. And then we will see where they have the biggest problems. But we really haven't got to that point so [early] [ph] to say.

And I would say that it's been the stated objective of ULTRATEK to get the data and have an unassailable compilation of that data. And working with AVL is part of that strategy. They are a very reputable automotive testing facility. The SAE paper is a significant validation that our data will be accepted because the most important aspect as you might imagine in approaching any type of business arrangement with this, whether it's with a automobile manufacturer or component supplier, the most important thing is to make sure our data is unassailable and verified by all accounts. So that’s the task I had hand for Bob and they have done an admirable job getting there thus far. And I think 2017 is going to be an exciting time as we start to consider the business arrangements for ULTRATEK.

One thing I want to add to this is that this, and I know that we have said it before but I am repeating it to remind everybody that this technology is fully patented and insured by Lloyd's of London. So it's not as if companies can go and copy and tell us like they did years ago at [Thermoelectron] [ph]. Sue us, you will run out of money. In this case, it's Lloyd's of London to run out of money. So we are fully protected on our patents and our technology.

Our next question comes from Amit Dayal of Rodman & Renshaw. Please go ahead.

Congrats on all the progress. It looks like a lot of interesting catalyst building up over here. I will just limit myself to one question and a follow up with you after. On the gross margin improvement, you look really impressive. My question is, are these sustainable and then what does the American DG merger do to the gross margin?

Sure. I would start to answer that and I will ask Dave to fill in areas that need more detail. But achieving this margin, it wasn’t a fluke. I will tell you that. We have had a lot of product improvements. We have done a lot of work with the supply chain, with our vendors, with our manufacturing process. All of which are geared towards the margins higher on our products. So I think these margins are sustainable. Of course they are going to vary from time to time but I think this is the range of margins that we have been shooting for and we hope to going forward. Now turning to the ADG margins. The ADG margins are quite healthy. The work that ADG had done in the past few quarters to improve each of their sites performance and get more run time, has done a lot towards getting good margins. Where ADG just had a trouble financially is the depreciation associated with those sites was quite high. So once you included depreciation, the gross margin was very low. But on a pure cash flow basis, on a non-EBITDA, a non-GAAP EBITDA cash flow basis, very good margins. And I think they are going to be consistent with the margins that we are already having here at Tecogen.

Great. Just one more from my side. Any TTcogen sales in the third quarter?

Any TTcogen sales?

Yes.

Yes. We have sold a few units. Some are in the stages of, and as you can imagine, we don’t build them here, they are built by our European partner. So we had some sales orders in the third quarter. They arrived here and now they are going to be dispatched to the sites to be installed. And we have an additional backlog, again we have not disclosed the backlog of TTcogen yet. It's still kind of in the early stages. As I mentioned, most of the orders in the near-term are going to be these 35 kw units. And there was a natural pent up demand for those things because as we in our natural course of Tecogen sales come across buildings or 100 kilowatt unit is oversized, would only run 3,000-4,000 hours a year, perfect for these 35 kw. So it was a natural built up market for 35 kws. It was kind of the first areas for us to investigate and we are having a lot of traction there. And I expect in the coming quarters, I will probably be giving more color to what the sales volume is for TTcogen and the backlog, just not quite there yet.

Our next question comes from Alex Blanton of Clear Harbor Asset Management. Please go ahead.

Just a comment at the beginning, I don’t know it's my equipment of yours but the sound keeps cutting out every couple of minutes for a brief second, so you miss numbers and things like that when that happens. I don’t know why that’s happening.

We will talk with our call service and make sure that is fixed.

Cool. Now you mentioned that OpEx was down and of course this effected your margin and your profits. So what's the limitation on that? New sales, product sales are at 53%, [indiscernible] about 10% but operating expenses down. How long can you keep that going before you have to raise that operating expense and what's the target on the percent of sales for that item.

Alex, this is Dave Garrison. Right we don’t measure or think about operational expenses that way. We have a team right now that is not at what we would consider a capacity problem looking forward. So we don’t expect that to rise in the near term. Obviously, if other areas of the company accelerate dramatically we would consider expanding those rolls and that would possibly increase the operational expenses. But again at this time and in the near term, we are very focused on keeping those costs at that level.

I understand that but eventually it will have to go up. So I was wondering what is your target percent of sales for that.

Yes. We are not going to provide any projections on that.

Okay. All right. Secondly, the merger American DG, is that going to be accretive?

Yes.

Will be accretive, how much can we look at there?

Alex, it's too early to tell. As you might know the process, reaching the deal was an important milestone. Now it becomes the kind of climb of Everest to get the SEC approvals, to get the necessary documentation together. And I don’t think we want to be putting anything out there until that’s all done.

Okay. What kind of revenue did they have? What's going to add to revenue?

Their revenues -- you can look at their filing this morning, but it's around $1.5 million per quarter. I think it was a little over 1.5 this quarter.

What's this filing you are talking about?

Oh, ADG released their earnings this morning.

Okay.

Yes. We are not giving you inside information because it's public already and at 1 o'clock we have an ADG conference call, which you are more than welcome to participate and we will cover a lot of these questions at that time.

Do you have the dial in number for that?

You can look at the press release, Alex. It's all in there. I mean we are going to [indiscernible] Tecogen stuff here.

Alex, this is John Hatsopoulos. Maybe we don’t have you on the ADG mailing list, we will make sure as soon as I leave this room to send that to you right away.

Okay. Thank you. Now the margin, the gross margin you mentioned, I wasn’t quite clear on what you said. After you have combined, the gross margin will be consistent, looks like you have?

I think so. I can't say within exact points but, yes, we don’t expect any substantial deviation.

Okay. I kind of [indiscernible] alluded it all, okay. And what do you feel is a longer term -- I mean you have reduced cost now and talked about more efficient processes for manufacturing. Do you have a target for gross margin? What's possible there?

Yes. Alex, we have consistently given our guidance on what our target is for gross margin between 35% and 40%...

No, but you are above that now because you have improved your processes. So obviously that target is out the window. Isn't that...

I wouldn’t say it's out the window.

You have said for the mix. Mix could affect it. But aside from that, I mean you are above that now. So where are you going?

Well, at this point we are not going to change our outlook for margin. I think we are comfortable with what we have stated and if we feel it's time to change our outlook, we will do that.

Okay. It's kind of like your backlog target. You are way about it but you are still maintaining the same target. So it's kind of out of date. The other thing, on ULTRATEK you mentioned major developments in the last week and then you mentioned something, a Reuters news story. Is that what you are talking about, the major development or is there something else?

Let me, I will try to answer questions, it's Bob Panora. Hi, Alex. We were thinking or hoping that from the industry, people we talk to, that there would be added pressure on regulators to make the testing more difficult. In other words by including driving on real roads where you couldn’t really prepared the test, which would make the emissions of vehicles less good and perhaps lead to problems. And the major development that’s happened Alex is that the Europeans, as we had rumors, they actually have adopted what they call RDE, which is real driving experience, whatever it was to RDE. And that will be phased in over the next three where vehicle manufactures will have requirement of a on-road test with portable equipment in the trunk, so to speak, where they will have to show the performance. And they have publicly, these three vehicle manufacturers have publically expressed their concern through that Reuters news article on October 14 where they are saying, if our trend has been to very small, high density, power density engines that are turbocharged, so on and so forth to get very, very good gas mileage. They are saying that’s going to reverse that. We are not going to be able to use those type of engines anymore. We are going to have to go back to bigger displacement, naturally aspirated engines that will not pollute as much but they are going to use a lot more fuel on the road. So that’s a great news for us because our anticipation of that has happened with this, real driving requirement has been put into the regulation. And that’s an opportunity for us because that’s where we shine. I hope I answered your question, Alex.

Alex, if you don’t mind we are going to take -- since we are getting close to the top of the hour here, we are going to move on and I would be happy to follow up with you offline if you have further questions. Operator, next question, please.

Our next question comes from [Michael Cook] [ph] of Oppenheimer. Please go ahead.

This question is, I guess directed to you, Ben. What's the current status of the Ilios project? What are we doing there and what plans do you have to expand that effort?

Sure. Ilios is doing quite well. In Ilios, it's kind of fallen into the sales channel, very similar to our chiller sales. Because the water source unit that we have talked about in the past, I am sure you know, provides chilling to the building as well as the heat. It ends up being a candidate for buildings that are looking to supplement their chilling. So we are having good success with that. Sometimes in Ilios lead with lead to a chiller lead, which is good. Sometimes a chiller lead can lead to an Ilios application if they need something undersized. So that’s my long way of saying that Ilios product sales are doing well. The fleet is absolutely growing. I would like it to grow a little quicker but being somewhat of a new product there, you meet with a little bit of more work on the engineering community to accept and spec it in. So that’s my long answer of saying, Mike, that the Ilios is still doing quite well.

I should add that it's now part of Tecogen.. it's not a separate company anymore. So we have merged it in the revenues of Tecogen.

And one follow up on Ilios. What's the mix between power sources? Between natural gas and propane. And are you emphasizing one over the other?

Yes. I think it's mostly propane because, again, the value proposition for it is, you tell them that we are going to put this unit here and you are going to use two-thirds less propane that what we are using before. If that was two-thirds less gas, that would be an okay number, but natural gas is under $1/therm typically, propane is upwards of $3/therm. So you are telling these folks that they are going to reduce their propane build from $80,000 a year down to $30,000 a year. So it finds itself in markets where propane costs are very high and that leads you to all sorts of great places to travel otherwise I don’t get to go there. Like the Caribbean Islands and places where propane costs are very high.

[Operator Instructions]

We have to move on pretty soon, we have the ADG conference call. If there is one more question we will do it over the next three or four minutes and that’s about it.

[Operator Instructions] Our next question is a follow up from Alex Blanton. Please go ahead.

I just wanted to mention on that Reuters news story, you might want to put that on your Web site so it's available to everybody because it sounds like that’s a major development.

Yes, I agree with you. I thought about that as I was doing the script last night and we will look to do that.

Yes. Right. We expect, Alex -- it's a good comment. We expect to have several updates to our Web site in the near future. So we will absolutely make sure that gets up there.

Thank you, everyone.

Thank you, everybody. Thank you very much. I apologize for shutting it off at this point because we got to get moving for our next meeting.

Thank you very much, everyone. I would like to thank everyone for participating. This concludes today's conference call. You may now disconnect.