TGEN - AMEX

Greetings and welcome to the Tecogen First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, that this conference is being recorded. With us on the call today are Benjamin Locke, CEO; Robert Panora, COO and President; Abinand Rangesh, CFO and Treasurer; and Jack Whiting, General Counsel and Secretary. And I'll first turn it over to Jack Whiting, General Counsel and Secretary, to begin. Thank you.

Good morning. This is Jack Whiting, General Counsel and Secretary of Tecogen. Please note this call is being recorded and will be archived on the Investors section of our website at tecogen.com for 2 weeks. The press release regarding our first quarter 2022 earnings, and the presentation provided this morning are available in the Investors section of our website. I would like to direct your attention to our Safe Harbor statement including the earnings press release and presentation. Various remarks that we 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 the quarterly reports on Form 10-Q under the caption Risk Factors, which are on file with the Securities and Exchange Commission and available in the Investors 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 on 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. And a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in the press release regarding our first quarter 2022 earnings and in Investors section of the website. I will now turn the call over to Benjamin Locke.

Thank you, Jack. So as the agenda on Slide 4 indicates, we'll start with a brief company overview, followed by a detailed review of our first quarter 2022 results. We will then discuss the key takeaways from earnings and turn the call over to the operator for questions. As a reminder, this presentation will be available for download in the presentation section of our Investor page on our website. Turning to Slide 5, I'd like to provide a short overview of Tecogen. Tecogen sells and maintains clean and efficient energy systems that provide resiliency in energy savings to customers, while reducing greenhouse gas emissions for a cleaner environmental footprint. Our solutions help industries and facilities reach their environmental goals for carbon reduction, while also providing resiliency to grid outages. As seen on this map, Tecogen has deployed thousands of these systems, and we have a steady recurring revenue stream through our 11 service centers that provide contracted maintenance to these customers. Turning to Slide 6. Many of our distributed generation systems operate as micro grids as shown on the left here with the ability to maintain operation during the grid outage. As the grid becomes increasingly burden congested and costly, this micro grid feature allows relief from peak electric rates and resiliency to outages. In addition to our distributed generation systems, Tecogen offers industrial scale chillers with lower operating cost and reduced greenhouse gas footprint than traditional electric chillers. We have had particular success with our clean cooling products for use in controlled environment agriculture. These indoor grow operations use a tremendous amount of power to maintain precise growth conditions. Our chiller substantially reduce the amount of electric capacity needed to operate the facility, while simultaneously providing heat for the facility heating and dehumidification. And lastly, our Ultera emissions technology is recognized as a cost-effective solution for reducing CO, NOX and hydrocarbon emissions across a wide range of engine platforms and sizes. The Ultera system comes standard on all of our products, whether local regulations require them or not, and further reinforces the clean environmental footprint of our systems. Slide 7 provides some relevant facts about our clean energy systems we've deployed to date. As I mentioned, with over 3,000 units shipped, we saved over 200,000 tons of CO2 generated more than 2.1 million kilowatt hours of electricity from over 52 million hours of runtime. These numbers continue to increase as we deploy more of our clean energy systems to customers, which is reflected in the continuous growth of our service O&M revenues. Before I turn the call over to Abinand for a detailed review of our fourth quarter and year-end numbers (sic) [first quarter], I'd like to remind investors of our three main revenue segments shown on Slide 8. Our product revenue consists of sales of Cogen units, microgrid systems and chillers to a range of markets and customers. Our service revenue primarily consists of our contract in O&M service with a small component of installation services. And our third revenue stream is from energy sales, whereby we sell electricity and thermal energy produced by our equipment on site at the customer's facility. With that, I'd like to turn the call over to Abinand to review our numbers in more detail. And then we'll have some additional comments and takeaways for the quarter and expectations for the rest of 2022. Abinand?

Tecogen had another profitable quarter with net income of $89,000. We also finished the quarter with cash and equivalents of $5.5 million. Q1 revenue was $7.44 million compared to $6.06 million during the same period in 2021. This 22.8% increase was mostly due to the increase in product revenue. I will discuss the revenue by segment in more detail in a later slide. Gross margin decreased to 42% from 49% due to the higher cost of materials. We instituted price increases in January, which hasn't been reflected in the orders that shipped in Q1 and have instituted a further increase recently. Operational expenses were 2.6% lower compared to Q1 2021 at $3.01 million. The decrease in expenses was primarily due to lower external commissions, as many of the sales in Q1 were through internal channels. In addition, we had a onetime gain due to the reversal of the unfavorable contract liability associated with certain energy producing assets. Therefore, we made an operating profit of $81,000 compared to an operating loss of $139,000 in the same period in 21. Net income was $89,000 compared to $1.76 million in Q1 '21. The higher net income in Q1 '21 was due to the forgiveness of the paycheck protection loans. EBITDA. EBITDA was positive $201,000 and adjusted EBITDA was a positive $154,000. In Q1 '21 EBITDA was positive $1.9 million and adjusted EBITDA was $20,000. This significant increase in adjusted EBITDA [technical difficulty] is 670% increase in adjusted EBITDA quarter-to-quarter. Performance by segments. Products revenue increased by 86%, in particular, the cogeneration revenue increased significantly due to low volume of Cogen sales in Q1 '21. Chiller revenue increased 10% quarter-to-quarter. Our product margin decreased from 45% to 33% in Q1 '22 due to the increase in material costs. Service revenue declined 11% compared to Q1 2021, primarily due to the decreased installation activities. We've already covered this in previous calls. But our service contracts increased by 5% compared to Q1 '21, helped by our service contract escalations and increased units coming online. Our service margin remained constant at 53%. Energy production revenue decreased by 11%. This reduction was primarily due to seasonality and some permanent closures of sites since Q1 '21. However, energy production margin increased from 40% to 42%. I will now hand the call back to Ben to talk about the backlog.

Thanks, Abinand. So turning to Slide 12, I'd like to discuss what I feel are important takeaways from the quarter. First, we're glad to see product sales continue to rebound. Our Q1 product revenue of $3.9 million confirms the value of our systems in our core market segments. Product backlog at the end of the first quarter was strong at $9.4 million. Since then, we've shipped a number of systems and receive new orders, which brings our backlog as of yesterday May 11 to $9.2 million. Going forward, we expect to continue making progress in our core markets shown here. In particular, we continue to see strong demand for our systems in controlled environment agriculture space. As I've mentioned previously, our systems provide compelling benefits for the indoor cultivation in terms of operational cost savings, resiliency, and grid supply constraints. And we feel there may be additional opportunity in this space for the company. I'll talk more about this in just a moment. Next, we are glad that our service O&M business continues to grow each quarter and each year. We were up 5% versus Q1 of 2021, while maintaining gross margins over 50%. Our energy production revenues, while a smaller component overall, showed improvement mostly based on increased energy prices. I will talk about the effect of increased energy prices on our business segments in the next slide. Lastly, we continue to make improvements to our overall business. Industry-wide supply chain delays and price increases created an additional imperative to find alternative vendors and competitive supply agreements. It has been challenging for us and many other manufacturers to be sure, but we are confident that we have adjusted our supply relationships to overcome these challenges. All of these factors were integral to achieve a strong cash position of $5.5 million at the end of Q1. I would like to add that we still expect to receive around $712,000 of cash once our finally -- final employee retention credit is received. Turning to Slide 13, I'd like to spend a few minutes talking about the impact of natural gas prices increasing recently. Since our systems operate on natural gas, it's a common question how recent price increases impact our value proposition. The chart here shows how higher gas prices in fact improve the savings from our systems. There are three reasons for this. First, the predominant fuel source for much of electricity generation in the U.S is from natural gas. Therefore any increase in natural gas prices will eventually be reflected in electric rates. There is sometimes a bit of a time lag since commodity electric prices may have a price term. But when it comes time to reset contracted rates, the increases will occur. We are seeing this firsthand with our energy as a service lead, where we saw improved margins because of higher electric rates. Next, as natural gas prices increase, the cogenerated heat of our systems becomes more valuable, since the heat that would have required a similar amount of natural gas in a traditional heating system. Finally, the cost of expanding and upgrading the nation's decade-old electric grid to accommodate the massive increases in demand for things like electric vehicles is significant. These infrastructure costs ultimately get passed on to customers, where we have already seen electric prices increased by 20% or more in California, New York and Massachusetts. The chart on this slide shows the trend as it relates to savings from a typical 125 KW cogeneration system. Over the past few years, this system would save a typical customer with an electric rate of $0.15 per kilowatt hour, around $94,000 a year using $0.75 per therm gas. But with gas rates increasing over 45% to $1.10 per therm, and electric rates increasing 20% to $0.18, you see here in the middle that the savings increases to around $105,000 per year. And if gas rates and electric rates further increase on the right, you'll see the savings continue to increase because you are continuing to offset expensive heat and electricity. As I mentioned, we are already seeing electricity rates increase with major utilities such as ConnEd and Eversource, and we fully expect that trend to continue. At the end of the day, rising energy prices will put a premium on the value of systems such as ours that can provide efficient reduction in energy costs. Turning to Slide 14. We continue to stay focused on the pathway to growth we shared last year. We've made progress in the indoor growing market, where we are one of the best solutions for energy savings and resiliency, especially when the existing electric grid can't meet the facility's power requirements. We are making good progress on the development of our hybrid drive air cooled chiller, which will fill a gap in our Tecochill offering. The hybrid drive will substantially expand the sales potential for Tecochill and many of our markets where an air-cooled chiller system is needed. We expect to have the hybrid drive product in pilot operation early next year, and we'll showcase the product in February at the 2023 AHR Expo, which is one of the largest HVAC trade shows in North America. We also continue to see a promising opportunity for our technology as a foundation for clean and efficient microgrids. We have shown that a cost-effective combination of our clean cooling systems combined with our grid resilient microgrid systems is an effective solution for facilities requiring affordable and reliable power. We expect grid supply constraints to continue as the nation's aging electric grid becomes further burden and overloaded due to increased electricity demand. Finally, as I mentioned in our earnings release, we have formed a special Board Committee to look into expanded business opportunities for the company in controlled environment agriculture. Through our interactions with many industry participants in the CEA market, we've had the opportunity to see the vast growth potential worldwide, primarily driven by controlled indoor food production. Since these operations are energy intensive, we believe there may be additional opportunity for Tecogen beyond our current products and services. The special committee will be headed by Professor Ahmed Ghoniem from MIT and will provide updates on their progress going forward. So in conclusion, I hope to continue showing results against these goals and look forward to providing updates over the next few months. With that, I'd like to turn it over to the operator for questions.

[Operator Instructions] Our first question comes from Sameer Joshi with H.C. Wainwright. Please state your question.

Hi, Sameer.

Yes, thanks. Hey, Ben and Abinand. How are you?

Good.

So we looked at the backlog number and it seems at the end of the last quarter or last call, it was around $11.8 million. It is you have executed against it, and it is down to 9.2% as of yesterday. Has there been -- is this normal at this time of the year? Or is it that you're finding it difficult to get more orders?

Yes. No, I don't think it's not a typical -- typically, I mean, again, we already shipped a lot of stuff through this quarter that we're in right now, with new orders back filling again. And it's not atypical to have the backlog go up and down. One thing that is a little bit different, I'll tell you, Sameer, is that we are -- in this environment now, the world environment of industrial and price changes, we only hold our pricing, we're very much holding our pricing to terms. We could let pricing flip to 30 or 60 days sometimes in a typical world. But with things changing so much, we're very much making sure that customers are committing. And if they don't commit within a time frame, then we have reserve the option to adjust the pricing because that's happening to us with our vendors. And so as a result of that, sometimes the PO closes at the very last minute because we, of course, waited until we absolutely know what the customer wants and everything. So there's a little bit of that in there. I wouldn't take it as an overall trend that the demand has gone down. I think it's a combination of those three things, which is we already shipped a bunch of stuff out this quarter. And it's just the POs that we're doing and the constitute backlog really got to be perfected from a cost standpoint, more importantly, these days than in the past.

Got it. And so you are comfortable at least on the products and services side to see year-over-year growth for this year? Maybe services may be a little muted, but on the product side?

Yes, sure. I mean, again, good to see the products rebound. And importantly, it's rebounding in the markets that we're focusing on, again, a cultural environment, agriculture indoor growing and the chillers, et cetera. And there is so much more demand for that. But certainly, it's driven by cannabis, as you know. But broader speaking, these leafy greens are becoming important to get locally sourced. And the customers are driving this. So indoor food cultivation, we've already got some lettuce farms that we're selling into, some cucumbers. I think a tomato farm. I think the leafy greens and my own opinion is the one that's really going to be one of the biggest segments for us. And so as I mentioned, I think there's a lot of value here and a lot of potential. We are talking and meeting with these guys at trade shows and we're learning about the business. And I'll be honest with you; we're learning the best way to do things we feel sorry for the folks that we know are not doing it the right way by going to, for example, upfront cost and cheap solutions that are ultimately going to kill you over the long-term with utility rates. And we know this. And this is, again, given us the perspective to set up this Board Committee to think about that overall market to say this is something that's really going to be growing a CAGR is around 24% that they got an at or so for CEA. And there could be other opportunities for this. So I think getting back to your question, I'm okay with the backlog. I'm excited that the backlog is continuing to grow and controlled environment agriculture. And I'm hoping that we'll see even more growth in that space, the rest of this year.

Okay, good. Good to hear that. And then you also mentioned increasing solar plus, battery plus, CHP kind of applications or at least your drive towards that. Are you seeing -- are there any such projects in the pipeline? Or are you pushing any of these projects?

No, not so much with the solar piece, Sameer, but with the storage piece, for sure. I mean, in California, we've had a project with they're integrating storage in there, where they're going to charge the battery during those important hours, whatever it is in California, one to five, when the solar is overwhelming their grid and they want that you need to be charging those times and then discharging that battery, of course, at other times. And that's all integrated with our inverter are inverted. So yes, we do see a couple of projects there. I think we're going to start seeing more of them. We don’t generally -- we are generally not the project developer of those things. We, of course, will be a participant in selling our equipment into it. But generally, there's a project developer that's involved in pulling everything together like this one I mentioned in California. And they're starting to come up more and more. I think, again, as you see in electric rates go up and up, it starts to overcome any natural gas version. I think people are realizing that natural gas is a pretty valuable piece of fuel for us these days. And anybody that can make the most efficient use of that is going to be very successful. So again, we do have a couple of projects we've done storage, not so much on the solar side of things. It starts to get complicated when you mix solar electrons with gas-generated electrons. It sounds ridiculous, I know Sameer, but some people get offended when those electrons get co-mingled, I don't know why. But -- yes, but anyway, I think you're going to see -- start to see more of the storage with the CHP.

Good to hear. Just a couple of things observed in the statement, there was an unfavorable contract liability line item and then proceeds of some disposition of assets. These are small amounts, but just can you tell us what those are?

Sure. So yes, so when we purchased ADG, we were allowed to do essentially when you purchase as part of the purchase accounting, this unfavorable contract liability, essentially acts as almost like a reverse depreciation. So when one of the sites that we had that essentially seized operating, we were able to collect sort of termination payments because essentially, the facility goes down, but they basically paid termination payment. So since the asset was closed, we were paid for that asset. We were also able to remove the book value of the asset itself as well as the unfavorable contract liability, and it so happened that it gave us actually again once you included all the number netted out.

Got it. And then one more clarification. There was -- from the employment retention credit, you have around 1.3 as of last quarter that was outstanding and some of it has gone through. Should we expect the rest of it the $700,000 odd to come in during this quarter?

Yes. So basically, the one thing I want to clarify, the $5.5 million in cash position that we had at the end of the quarter, we hadn't received any employee retention credit at that point. And then in April, we received $564,000 in employee retention credit. Surprisingly, it was for the filing for the third quarter. So we are still due the first and second quarter amounts of $712,000. So we are hoping that, that will come through sometime imminently because we were given a notice saying that it would be paid within 60 days, and that was almost 60 days ago now. So we are hoping that, that’s relatively imminent. I think the IRS is systematically having problem maybe last in first out.

Yes. Got it. Actually I have asked this question earlier, but on the service margin front, they were pretty stable. Do you expect those to be impacted maybe because of inflation and resource expenses going up?

So the one good thing with generally our service contracts is that our escalation cause builds in inflation. So it's an escalator on top of inflation. We should be able to escalate these numbers. And the other thing is it's a relatively high margin business to start with and labor and all some of the other aspects of it do impact. So I don't think this margin is going to be impacted too much, at least for this year. We haven't seen it to date. And I don't believe that it will be impacted too much. One other thing I just wanted to also add on your earlier question on backlog. One thing that we should really recognize is the backlog today is really predominantly product. In past years and past quarters, sometimes we've had inflation -- sorry, installation numbers in there.

Yes.

So that artificially inflates backlog, whereas what you're looking at now is high margin product backlog.

We have any installation activity anymore now?

No, no. And this makes an impact. And basically, if you have a backlog for almost 6 months' worth of production, I mean, that's a pretty strong backlog in my opinion.

Yes. Yes. So actually, just one clarification on that. When do you expect this to be realized the $9.2-ish million in backlog as of yesterday? All of it this year or some of it may be spilling over next year?

Yes. I think you're probably going to see the majority of it this year. I think a couple of things might spill over to next year just because when the construction works. I know of a couple of projects, I know are going to reach the finish line, not due to us, but the big enough and everything they need to do. But yes, Sameer, I think to say most of it in this year a little bit in 2023.

Got it. And the last one, any updates on Ultera or vehicles on station?

Yes, not so much. Of course, we are still putting it on all of our products, and we are still has some couple of retrofit projects that we are finishing up. You heard us mention, of course, these Caterpillar engines that we retrofitted with Ultera. I think those are mostly finishing up and going be running soon. And we will be opportunistic about any uses for it. But the focus of the company now is really on that last slide. You saw, it's on the AC chiller on the hybrid drive on our main products, on our microgrids. And if Ultera has a need for somebody, of course, we'd be willing to do it.

I understood. That’s slide is helpful. Thanks for that Ben. Thanks for taking my question.

Okay. Nice talking to you, Sameer.

[Operator Instructions] Our next question comes from Alex Blanton with Clear Harbor. Please state your question.

Hi, good morning.

Hi, Alex. Hi, good morning.

Yes, I was looking for your slides, and I couldn't find them. They're not on the presentation page.

Okay. We will make sure you get them after the call, Alex. I thought the way I thought it all on before the call, but anyways.

It looks like the only way you can see the slide is to actually view the webcast.

Yes.

The slides are on the webcast, but they're not on elsewhere on the site for people who are calling in by phone, as I am.

Okay. Well, they should be. But regardless of that, Alex, we will make sure you get the presentation. Happy to answer any questions you have about what we talk about so far.

Now you mentioned that material costs were not covered by price increases in the first quarter. Do you expect them to be cover your material cost increases for the rest of the year?

Yes, partially, right. We are -- you're going to start seeing the price increases that we instated at the start of the year to start affecting our Q2 numbers. And then the ones that we inflated very recently are going to start impacting your Q3 and Q4 numbers. And the advantage is we do purchase material for at least a quarter, quarter and half out as much as possible. So I don't foresee margins sliding further. But again, if there are something changes, we will let investors know.

So your contracts are in effect, fixed price you can increase as material costs go up, you can't add that cost plus.

Well, I mean a lot of these things are bids, Alex, right? You put in a bid and then …

Right. I know, but contracts can be bid contracts, but they have cost plus provisions.

Yes. Yes. I understand.

So most of the larger -- they typically don't. And again, this is one where actually Bob is a perfect. I think, Bob, would you like to answer this question?

Bob is on a different phone line, Alex. So maybe we would give him a chance to unmute himself.

I'm sorry, go ahead. So the question about pricing is that what you're asking me to answer?

About material costs and how many of our contracts have from suppliers have escalation related to material costs. And I -- as far as I’m aware.

Most do not. Yes, most do not. And we are constantly negotiating prices. We try to lock in prices for the stuff that's very dependent on metals. That would be the large chiller components, and we try to lock them in, in advance. So -- but it's starting to be well, difficult to do that because the pricing has become so variable.

It's hard to know in advance what costs are going to go up. But if you have clauses in your contracts that allow you to pass that along to the customer, then you can do that. But that's what I'm asking. Do you have clauses?

Yes, we do not. We do not. We have had them in the past. I think it's been difficult. Our vendors aren't really amenable to that right now in the past -- in the recent past [indiscernible].

I'm not talking about the vendors. I'm talking about the customers.

Okay. I’m talking about the customers. Sorry, go ahead.

You can't -- cost increases then pass along to the customer according to a contract provision that allows you to do the contract on a cost-plus basis.

Right. As far as I know, and I'm not the expert on the sales side, but most of the contracts, most of our sales are bid, and you got a 30-day window of …

I understand they're a bid, but you can still have cost-plus contracts, even if they're bid.

So I think, Alex, the key here is, right, how are we mitigating the impacts that are being passed from suppliers to us to …

Exactly. That's right.

… [indiscernible], right. So I think the way we've kind of done this just because it is, firstly, our quotes to our customers have much shorter periods that they're active now. And more importantly, what we are doing is as soon as we start getting essentially confirmed POs, we are purchasing material on the back of that. So that we know essentially what the big material costs for that particular order is going to look like. And in the event that we don't have a fixed PO from a customer, where basically there's no held price to the customer. So that's kind of why by and large, we believe that the margins that we are seeing right now are either going to remain flat or likely to -- hopefully will improve a little bit. But again, this is something that there's only so much we can pass on to the customer just because of the nature of how these projects are done.

Okay. This is related to that. You gave the numbers in the press release, 44.7% last year on the product margin, 32.9% this year. If I wanted to calculate what you would have earned if you had been able to recover the cost increases, but I think the difference between those two and multiply it by the sales, if I did that, I would get $460,000. In other words, it would be profit that was not realized -- pretax profit that was not realized because of material costs. Is that a reasonable thing to do?

I guess, but it's not really real world though, Alex, because I'm not [multiple speakers] point.

I know. Well, I'm saying if your materials costs hadn't gone up, would you've had the same margin as last year? That's really the question.

Yes. Yes. But and this is the big but. So there are also selling costs associated with it, right? Those external commissions that come out of the operating, so that the profit number that you're calculating …

We are talking gross margin, though …

Yes, the gross margin -- yes. So you would see -- yes, you can just take the delta in margin and multiply by the product revenues. I mean that's roughly where you're going to yes, our numbers would have been if we get being able to locate it.

Okay. All right. That's the question. All right. Good. The replay of this call, it doesn't say in the release how long it's going to be available. Do you know?

2 weeks.

2 weeks. Okay. And also, I have one more question. There are some very large contracts that have been released in the past year to people like Oshkosh for fleets of vehicles that would be essentially the idea is they want to get down to zero emissions, such as a post office is a big contract that for thousands of new vehicles with lower emissions and zero emissions. Do you have any chance of getting in on that with your Ultera product?

Probably -- I think my answer would be I think I'm not maybe close we will see, but I think perhaps -- but the amount of resource and time and the opportunity cost of going after that versus what we've kind of really focused ourselves on our business plan is why I would hesitate on that because I'm not quite sure all the time and effort it would take to prove that out and then maybe see if there's something there is the time and effort that the same folks can be selling -- making progress on the priorities that we've mentioned. So that's not to say no, Alex. It's just -- I think it's something that we've not prioritized tremendously right now because of the other things are much more important. Abinand, do you agree with.

Yes. And it's also a lot of the way the emissions regulations are gone. There is only certain hydrocarbon -- certain pollutants that are being included in those. So there are ways to do that right now that may not necessarily represent as large an opportunity as might initially appear. It's something that we're keeping an eye on. But -- right now, it's not something that we believe that it's going to be an impact on our earnings. And a lot of it is going to go electric as well. Unfortunately, some of those fleet vehicles and some of those.

Okay. And finally, the pandemic hopefully is easing. Has there been a negative effect on your marketing because of that? The reason I'm asking you is that we are increasingly focusing as a governmental level on climate change at least under the Biden administration. Climate change is a big priority. And it seems to me that this would filter down to more marketing opportunities for you because you can build buildings that don't have emissions. And that's what the government wants. And so I'm just wondering whether the marketing aspect of your company and the number of orders in your backlog and whatnot, would have been bigger, had there not been some problems caused by the pandemic?

Quite certainly, Alex. I mean, I think the pandemic not happened. We would have not had -- we would certainly would have had more progress in some of our markets. Everything slowed down, particularly, as you know, Alex, I mean, the hospitality shut down entirely. Hotels were shuttered, athletic facilities, nursing homes, they didn't shut down, of course, but they became isolated not letting people in. And all of those three there, those three are our big verticals, hospitality, health care, and athletic facilities. And they're only now getting back on track. Hotels are now starting to get back online. But even there, that was a -- that whole industry took it in the chin. Health care is starting to get back. Athletic facilities are starting to get back up and running. So that's starting to get back on track. But yes, it took a couple of our key vertical markets right out from under us, and they're only now starting to get back, which is a good thing.

When you say starting to get back, what are the signs that tell you that? I mean, are you getting …

Hotel occupancies are up for example.

Is it reflected in increase, this is what I'm asking. Increase.

Yes. And Alex, I will answer it. And I really would like to turn the call over for the next question.

Okay.

But again, I think what we're seeing, hotel is 13% of our backlog right now, health care, 2%. And those, I'm hoping will increase as we go on.

Okay. Thank you very much.

All right. Thanks, Alex. Take care.

Thank you. [Operator Instructions] Our next question comes from Michael

Good morning.

Hi,

A technical question. Can you expand on the advantages of developing and moving into the air-cooled chillers versus the water cooled? Is there a technological difference? And then what's the marketing difference?

That's a really good question, Mike. So firstly, from a technology standpoint, basically a water-cooled chiller system has a cooling tower on the outside that's basically rejecting the heat of the atmosphere. You typically see that in larger facilities. So in terms of like refrigeration tons, you're talking maybe 300 tons upwards. And you typically see those kind of systems in hospitals and larger buildings. The air cool chiller, you typically see on buildings that are a little smaller and also places that don't necessarily want to put a cooling tower. They don't want to put those additional capital outlays. Air cool chiller typically tends on the electric side tends to be a little less efficient, but it's a much easier install. And what we are finding is we are coming across projects that want an air cool solution. I mean, sometimes, if you look at just electric air cool chillers, I mean you see something like a 5x in terms of number of air cool chillers sold versus water cool chillers. In our case, what we're likely to see is to be able to address some of the markets that one, we haven't necessarily, where we've lost orders because the clients say, I don't want to put a large cooling tower. So they might put an air-cooled chiller. This would be a much easier installation. The other piece that we bring to the table compared to any other solution is that combination of chilled water and hot water at the same time. And our air cool chiller will be able to do that and also have the ability to run on the electrical grid. So like we can basically toggle between an electrical power source or an engine depending on which is greener or which offers the best economics. So it would allow us to go after customers that care about resiliency because they have two power sources now. They also will allow us to go after customers that have, say, a need for that non-water and chilled water at the same time. I mean our typical chiller solution because we are so efficient on producing these two sources, I mean, a 400-ton chiller might save a customer, $100,000 or more per year and depending on utility costs. So air cool chiller also has very, very good savings potentials for customers. So the marketing -- the way we plan to approach it as Ben already mentioned, we are going to launch at the AHR conference, having a trade show next year. This was probably one of the largest chiller trade shows. And then on top of that, we’ve already started reaching out to key like potential customers that either have our older air-cooled product, which isn't as efficient or have expressed an interest in having an air cool product. So we are going to get some demo sites lined up as well. And then typically, the rest of the sales channel sort of to our preferred partners and engineers. So the marketing plan is actually pretty similar to how we sell the Tecochill, but it just allows us to go after a much larger potential market.

And then as a follow-up on that, are there any particular geographies where air cooled is a greater opportunity than water cooled?

I don't think it's so much a function of geography, Mike, as it is those factors that Abinand was mentioned. If you got a hospital, that's a big hospital and they've got a sophisticated HVAC system. They're going to have a water-cooled system with a cooling tower, right? But you got a medical center, one of the little medical centers that are popping up everywhere. They're not going to make that investment in that sophistication. They're going to have an air cool type system. So it's not so much a geography based as it is, I think, size. And then the geography will certainly play into the spark spread, the economic factors. The only caveat is it might allow us to open up places where water is more of a scarce resource. Places were putting a cooling tower and having a large water circuit to go to cooling towers is seen as less desirable just because just there's a shortage of water or there's a shortage of good sources of water or places where they don't necessarily want to risk things like dangerous disease with having to maintain water treatment and cooling towers. So those are potential things that might open up with an air cool that right now we are a little constrained by.

And then as a follow-up on this train of thought, are there opportunities to retrofit existing air cool systems with our technologically advanced system. Is that a different market than original build?

No, I think the retrofit is going to be one of our big prime spots to be moving on this. Indeed, we already -- as Abinand was mentioning, we've already circled a few of our customers that we know about that have their existing system that would be a perfect candidate for this and they start saving bundles of money right out of the gate. And one key thing that we've built into the air cool product is one of the biggest things in New York, in particular, is there's a sort of certain restrictions on size of compressors and things and the type of cooling systems that you can have. And what we've built into our air cool chiller design has the ability to address that New York market that currently were we can only do in the larger facilities because they are and this could open up a lot of retrofit opportunities, especially in New York that right now are not touch -- that we cannot touch.

And then from a manufacturing standpoint, is it a shorter build time for air cooled versus water cooled or are they about the same?

It might be too soon to tell on that, Mike. We are still -- we’ve got the design together, which is great, and we are going to start fabricating and getting metal bent and getting the compressors and putting this one thing together in our building and testing it out. I don’t --I can't foresee anything about this production building these things and volumes being is anything that takes up a necessarily a long amount of time. I think we should be able to hang these things up pretty quickly. But again, just a little too soon to tell on that one.

Well, congratulations on the real progress that's being made, and I think this air-cooled system is going to open up an extraordinary opportunity for the company, while we will maintain our other sales efforts. So congratulations, and I look forward to progress reports. Talk to you soon.

Thanks, Mike. I always appreciate it.

Thank you. There are no further questions at this time. I will hand the floor back to management for any closing remarks.

All right. Well, thank you all for your interest in Tecogen and listening to our call and look forward to giving you updates on our next quarter's results.