Greetings, and welcome to the Tecogen second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jack Whiting, General Counsel and Secretary. Thank you. You may begin.
Morning. This is Jack Whiting. I'm 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 two weeks until August 27, 2020. A copy of the press release regarding our second quarter 2020 earnings is available in the investors section of our website. I'd like to direct your attention to our safe harbor statement included in the earnings press release and presentation. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provision 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 Securities and Exchange Commission, 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. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in the press release regarding our second quarter 2020 earnings and in the investors section of our website. I will now turn the call over to Benjamin Locke.
Thank you, Jack. As the agenda on slide four indicates, I'll start off with a brief company overview, followed by a summary of the company's performance and results for the second quarter of 2020, which I have noted here. Product sales are up. Operating expenses are down. We generated $2.7 million in cash in the quarter, and our cash balance at the end of the quarter was $2.86 million. We will of course, take questions afterwards. Before I go on the numbers in more detail, I'd like to provide a short overview of Tecogen business as shown on slide five. Tecogen is in the business of selling and maintaining clean and efficient energy systems that reduce greenhouse gas emissions, provide significant operational savings, and provide resiliency to grid outages.
We are a leader in distributed generation technology due to our longevity and our extensive technical experience. Our air conditioning and cooling products have the highest efficiency of any other equivalently sized system. Our proprietary Ultera emissions technology ensures the cleanest emissions possible, meeting even the most stringent air quality standards, such as those in Southern California. Our flagship InVerde Cogeneration product is designed to transition from grid tie to off-grid operation seamlessly, providing power to a facility indefinitely until grid power is restored. Tecogen has deployed hundreds of these systems that can operate as microgrids independent of grid operation, recently being ranked number three in terms of number of operational microgrids in 2019.
We are well positioned as our country and the rest of the world looks towards a low carbon future. Our high operational efficiencies enable significant carbon savings when compared to traditional sources. Lastly, we have successfully expanded the Ultera emissions technology across a range of engines and sizes, from GM engines to Generac generator engines, from small Ford engines to big Caterpillar engines, and more recently with the Mitsubishi engine on the forklift project. The result of the retrofits on these engines is the same, near zero emissions on par with the fuel cell. We are considering several options to expand commercialization of our emissions technology and expect to have more to discuss on potential opportunities for Ultera in the coming months.
Turning to slide six. The second quarter of 2020 saw revenues of $7.44 million compared to $7.87 million in the second quarter of 2019, a 5.5% decrease year-over-year. This decline is primarily due to lower installation revenues in our Services segment as we close out several large turnkey construction projects and existing construction projects were slowed due to COVID restrictions. I'll talk in more detail about our Service segment in a few minutes. Importantly, we saw strong product revenues for the quarter despite the difficult environment from the pandemic. Our second quarter product revenues of $3.34 million was a 37% increase over the second quarter of 2019 and a 22% increase over the first quarter of 2020.
Our Energy Production segment was most impacted by the COVID pandemic and facility closures, down 52% from the second quarter of 2019. Fortunately, Energy Production is the smallest revenue segment to the company, but I will go into some more detail about this decline and the timing for rebound on the next slide. With regard to gross margin, we are pleased our margins improved to 39% from the first quarter margin of 35%. Even though it's declined year-over-year, a 44% margin in the second quarter of 2019 was the result of a one-off revenue event. I will talk more about our margins in just a minute, but our guidance has always to have our margins in the 35%-40% range, and I am glad we are on the high end of that guidance.
Turning to our operational expenses, our efforts to control costs and improve business processes are resulting in gradual but sustainable reductions in our OpEx, with the second quarter 2020 showing a 9% decrease year-over-year and a 13% decrease from the first quarter of 2020. The end result for the quarter was a net loss of $654,000, compared to a loss of $357,000 in the second quarter of 2019, and an adjusted EBITDA of $-363,000 as compared to an adjusted EBITDA of $-205,000 in the second quarter of 2019. While our goal, of course, is to reach profitability, we are encouraged that our core revenue contributors of Products and Services were not as critically impacted by COVID as many other companies have.
Slide seven shows our definition and calculation of adjusted EBITDA. Despite the negative EBITDA for the quarter, we generated $2.66 million in cash from operations in the quarter versus cash outflows of $2.1 million in the second quarter of 2019. I think that is probably one of the most important takeaways from the quarter. That brings our cash and equivalents balance at the end of the quarter to $2.86 million, a significant improvement from our cash balance of $878,000 at the end of 2019, when we also owed $2.8 million on our line of credit. As we get closer to reaching our profitability goal, we expect to build on our cash balance to fund future business growth.
Moving to slide eight, I'd like to provide some more color on our quarterly revenues in each segment. First, as I mentioned, we saw product revenues increase 37% year-over-year and 22% higher than the first quarter of this year. Product sales were led by Cogeneration with only a small contribution from Chiller sales. This is not indicative of any negative trends of Chiller sales, instead relating more to tight customer timelines for delivery of many of our Cogeneration systems in the quarter. I fully expect higher Chiller contributions next quarter as we continue finding opportunities for gas cooling as a compelling alternative to expensive electric Chiller. Importantly, our backlog for Cogeneration and Chiller products remains strong, as I will discuss in a moment.
Next, with regard to our Service revenues, please be reminded that this segment consists Service Contracts and parts, which is the real O&M services piece, and our Installation Services, which is more construction activity. Although the overall Service revenues declined 21% year-over-year, this is mainly due to turnkey installation projects in 2019 that have finished or are close to finishing. While COVID also adversely impacted our Installation Service revenue in the quarter, those projects that remain in our installation portfolio are resuming as individual states allow.
As I've mentioned in recent calls, our goal is to focus on manageable, cost-effective installation projects and work with construction partners on larger, more complex construction projects. Moving to Service Contracts and parts piece of the Service segment, we saw revenues decline slightly as O&M services to some facilities, including the O&M services provided to our own Energy Production sites, were curtailed due to COVID restrictions and closures. The fact that we only saw a 4% drop in revenues year-over-year in our services demonstrates that the steady growth we see in O&M contracts each quarter was enough to almost offset the revenue declines in the quarter due to COVID restrictions. We fully expect our Service Contract revenues to resume their upward trends as COVID restrictions are eased.
Turning to Energy Production, as I mentioned earlier, we saw a large decline in our Energy Production revenues as a result of COVID restrictions and facility closures. I would like to point out that the market segments of our Energy Production sites most impacted by COVID were hotels, health clubs, and recreational facilities, whereas large residential buildings maintain operation. We are seeing some gradual opening of our Energy Production sites in these markets, but the timing of some of these sites reopening is still undetermined. Fortunately, this segment is the smallest contributor of revenue to the company at the current time, so the impacts are muted. We will work with our Energy Production customers to accommodate their reopening and resume our Energy Production services, since that will also resume our contracted O&M services revenues to these sites.
Lastly, on this slide, we saw our overall gross margins come in at 39% as compared to 44% in Q2 2019, when we had a one-off activity in our Services segment. Importantly, our second quarter margins increased over the first quarter of 2020 margins of 35%, primarily due to improvements in our products margin. We have internal goals to push our margins even higher, but for now, I am maintaining our guidance of overall gross margins of 35%-40%. Turning to slide nine, I'd like to reiterate some of the key takeaways from the quarter. First, our core business of product sales and service performed well despite the enormous challenges of the COVID pandemic. Product sales were up both year-over-year and Service Contracts and parts were only down 4%, despite numerous sites curtailing or halting service due to the pandemic.
I fully expect our Service Contracts revenue to resume its steady upward trend the rest of the year, barring any resurgence of the pandemic. Our installation activity is also resuming, though not to the revenue levels of 2019, as we have scaled back from large, complex turnkey installations. Lastly, though the revenue contribution isn't as much as Products and Services, we see a slower recovery in our Energy Production revenues as some facilities, such as hotels and health clubs, slowly start to reopen. The next key takeaway is our strong cash position. As I mentioned, we increased our cash generated from operations by $2.66 million in the quarter, as opposed to cash outflows of $2.1 million in the second quarter of 2019.
Our quarter-end cash and equivalents balance was $2.86 million. Next T he improvements we are seeing in our operational expenses are taking hold, with our OpEx down 9% year-over-year and down 13% quarter-over-quarter. I expect further reductions in our OpEx in the coming quarters as we continue to find ways to improve our operations. Lastly, our backlog remains strong, with $10.4 million in product backlog and $2.7 of backlog in Installation Services. with that, I'd like to turn the call over to the operator for questions.
Thank you. Ladies and gentlemen, we will now be conducting the question- and- answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Amit Dayal with H.C. Wainwright. Please proceed with your question.
Thank you. Good morning, everyone.
Hi, Amit.
Hi, Ben. Just going through sort of discussion from last quarter about exposure to the New York market for you guys. How are you seeing sort of improvements in that region for you? Has backlog picked up from there? Any color on how that market is recovering would be helpful. Thank you.
Sure. With regard to New York recovering with regard to the pandemic or New York regarding their policies and the like?
Well, as much as you could cover.
Yeah.
I was trying to focus more on the pandemic, but if there is additional color, that would be helpful, too.
Sure. Yeah, I understand. I'll cover both, Amit. We were able to maintain our services for our sites in New York, for the most part, throughout the pandemic, with the exception of, as I mentioned, some facilities closed up, the hotels and the like. As I said, a lot of our portfolio of services is multi-unit residential, and those, if anything, maintained their populations, right? Because people were staying at home. We're starting to see that start loosen up a little bit. Sites are starting to open back up again in New York. I think I'm encouraged by that. I'll tell you where I see the opportunity here, Amit, is I think what this has done is created a burden on a lot of facilities, a cash burden on facilities for their operation.
In there lies an opportunity for our ADG model, our Energy Production model, albeit with our partners. As you know, Amit, we've got our project finance partners. There's certainly opportunity now to come in with these OSUs, these prepaid savings plans, where they don't have to put any money down, and they can get their energy or their hot water or their cooling. It doesn't have to be Cogeneration. They could replace their Chiller. They may have to replace $500,000 worth of Chiller, and they don't have $500,000 . With our project partners, have set up financial arrangements, not just for cogen, but for our Chiller systems, where they can get installed at zero cost to them, and they can be eased of their capital burdens. We're starting to see the market pick up a little bit.
Certainly, construction is happening again. Our construction projects are starting to resume, not just in New York, but in Massachusetts and other places. New York as a whole is starting to come back to business. As I said, I think there might be an opportunity in this for sort of a resurgence or another effort at these Energy Production platforms. I'm happy to clarify any part of that, if you like.
Yeah. Along those lines, have you started to add or bring anything into the pipeline from this opportunity? Are you still a little bit away from being able to do that?
Sure. No, we are. Our pipeline has new projects in New York, just to be not too subtle about it. In our backlog, are projects that are new that are going to occur in New York, and they're for InVerde, and for the same drivers that have driven our product in New York all these years, even though there's not the incentive in there. It's the energy savings, of course. Now in New York, particularly, there's this Local Law 97 that sets requirements for greenhouse gas reduction, carbon reductions for buildings by certain timelines. Our cogen systems and our Chiller system is one of the biggest bangs for your buck in terms of greenhouse gas savings for the building.
As I mentioned in our slide, our efficiencies are so high as compared to heating and cooling and powering a building from the grid, that you're going to get greenhouse gas reductions by putting in our equipment. That's an opportunity for us as well. Of course, the resiliency piece. Every time there's an outage, there was some threats of outages over this past quarter. We mobilize our guys and make sure that all oils are topped off and people feel good knowing that they have a piece of equipment that can keep the lights on should the grid go down. I think the key fundamental drivers in New York are still there. The incentives aren't there anymore, but again, I think the savings that we show, and in particular, the avoided penalties of carbon taxes, still make it a very good proposition for us.
Thank you for that, Ben. Just maybe one more from my side. On both the operating costs, I know you've brought that down, and you're still within the range of what you sort of guide for in terms of gross margins. On both these fronts, should we expect similar levels of performance for the remainder of the year? Or should we anticipate some variance relative to what 2Q looked like?
Gentlemen, it's past time. You may still be on mute.
Yes. I'm sorry about that. Thank you for that, operator. Yes. I'll answer that, Amit, with regard to our margins. As you saw, our product margins went up. I want to keep our product margins up there. I think we can even get a little bit higher. We've got a lot of goals to do that with our supplier arrangements, etc . Our Service margins are certainly going to improve. This past quarter, the margins took a hit because, again, COVID related. Things became very inefficient and it became very difficult, not difficult, but more challenging work environment. Our Service margins are certainly going to increase. I absolutely think we're going to keep chipping away at our G&A a little bit more. I think you're going to see improvements, Amit, next quarter and the rest of the year on our margins and on our OpEx.
That's all I have, Ben. Appreciate all your answers. Thank you.
Great. Thanks, Amit.
Thank you. Our next question comes from Alex Blanton with Clear Harbor Asset Management. Please proceed with your question.
Hi.
Hi, Alex.
Good morning.
Morning.
Just a few housekeeping questions at the beginning and then some more questions later. I was wondering why you were only going to keep this call archived for two weeks? There's no cost to archiving it. Why don't you keep it there for a year?
Alex, I'll answer that offline. Maybe you can get to your next question.
Also, I would suggest in the future, get the release out before the market opens. I think it came out about 10. That is just a common practice to give people the chance to review it.
Yeah. Alex, our PR company had a glitch this morning.
Okay.
It was a one-off. We usually get them out right at nine o'clock. We will continue to get them off at nine o'clock. We just had a glitch this morning. Sorry about that.
Is that why I can't find the slides on the website either?
Perhaps. I'll get with you offline afterwards, Alex, to make sure you have that.
I don't think they're posted. I would also suggest that you post a transcript of the call. Do you do that ordinarily?
Yes, Alex, we'll do that. I'll take all that up with you. Can we talk about the quarter?
Sure. Okay. First, I want to talk about Local Law 97. Could you explain more about that?
Sure. Local Law 97.
It might be a good idea to actually put out something from the company like a memorandum or something on this, because-
Well, Alex.
...it sounds important
It's not one of those things I think that's so defining to our company that it's worth spending that time and effort, but I will describe it to you. Basically, it sets a timeline to get your energy profile, your greenhouse gas profile of your building down over the next five to 10- 15 years in order for New York to reach their carbon reduction goals. Each building, it looks at that timeline and has to make determinations on how they can reduce their carbon footprint, or they'll be penalized with a tax related to that.
How soon do they get penalized? Is there a time pressure on this at all? How does that work?
It's scaled, Alex. It scales over the next 5- 10 years. I don't think heavy duty fines and levies start kicking in till maybe five years down the road a little bit. I think you can reach some of your goals before then. I don't have the exacts in front of me, but suffice to say, what we do, of course, you can only put in so many LED light bulbs, right? To move the needle in terms of your footprint.
Switching all of your Chiller over to gas and using heat recovery to have a 90% efficient system in there instead of your electrics, that moves the needle. Using the Cogen. Any piece of equipment that's going to be very high efficiency is going to move the needle. Therein lies the opportunity. Alex, I will say on this, too, this is all still being felt out a little bit. This Local Law 97, the administration could change, it could go away.
When did it pass?
It passed about two years ago, I believe. I don't want to nail myself down on that, but it's starting to be understood. New York certainly is setting up committees to understand how they're going to implement it. Building owners are trying to understand it. Energy policy firms are trying to understand it. We're trying to understand it. I think we've got a pretty good grasp regardless of the nuances of it. The bottom line is we're going to reduce your CO2 footprint. That's what the bottom line is. As long as your equipment is properly installed and running and using heat recovery, etc. , you're going to reduce that building's greenhouse gas footprint. That's the takeaway that we really try to get through to the customers.
Along those lines, if we assume that Joe Biden gets elected, he's talked about a $2 trillion infrastructure program, and part of that is reducing carbon footprint. I think there was a number mentioned, 50 million buildings needed to be modernized. Have you looked into that at all? What kind of plans are there, and how would they affect you? Hello?
Alex, there is a lot of opportunity there. Of course, it follows the same rubric of our Cogeneration systems is, we're not going to put these things in places where they can't be efficient. If you can't use the heat recovery, then you're not going to get that 90% efficiency. You still have to segment your market into those verticals that we know well, multi-unit residential, hospitals, etc. , places that use hot water. Although that's indeed widened because of the TECOCHILL.
Now we can get into more industrial processes, and manufacturing, etc. , where they need chilled water systems or even with our TECOCHILL, these refrigerated ammonia systems. Indeed, there's opportunity, but again, you can't just put them everywhere, because you have to make sure that you're following your prescription to get the maximum efficiency out of the equipment. Alex, I'll ask, if you wouldn't mind jumping back into the queue, I want to make sure I give a few more folks the opportunity to ask some questions, and then I can circle back to you, if that's okay.
Back to me. Okay. Thank you.
Thank you. Our next question comes from Joe Vidich from Manalapan Oracle Advisers . Please proceed with your question.
Good morning, Joe.
Hi, Ben. Congratulations on getting through this quarter. I know it was a pretty rough one. You guys did pretty well.
Thank you.
I guess my first question is, if you could just talk a little bit more about the Mitsubishi Caterpillar Forklift JV, just as an aside, I was just kind of curious, given the travel restrictions, if there would be the ability to maybe ship the equipment to Japan.
Yeah. Maybe. Mitsubishi's got their own kind of problems, I'm sure, over there. We're trying to be respectful not to push this particular program in front of them when I'm sure they have their own priorities. With that said, of course, Bob is keeping in touch with them, where they know what we're doing, and we know we want to get back on track. We want to get that engine certified.
Joe, there's other opportunities, too, that we're looking at, and I didn't really want to talk too much about the emissions right now because we didn't have much in the way of update, but that's not to say that there'll be more activity later in the year. I'm gonna just hold off giving any more updates on that, except to say that Mitsubishi and us are in communication. We both know we want to get this engine certified, but we don't want to rush them to do something because we just don't want to damage the partnership. It's a very good partnership right now.
Okay. That makes sense. I was wondering, with regard to the ADGE division, could you talk a little bit more about your go-to-market strategy and who are your project finance partners? How are they selling your systems? It seems like there's a lot of momentum in this space, whether it be schools that are with tight budgets or hospitals with tight budgets. It just seems like there's some big opportunities there and just wondering if you could just talk a little bit more about your go-to-market.
Sure. Yeah. It's a good question. As I said, we've got four or five project finance partners that we've worked with and probably another eight or nine of them that are begging us to find projects to work with. The problem isn't the money, honestly. Between all of our project finance partners, I'm sure I could find any amount of money I needed to fund a site. The trick is to find the sites that will deliver the earnings that they need to meet their hurdle rates. It's not as simple as a solar farm or a fuel cell where you can just kind of drop it down and didn't need too much analysis that it's gonna use electrons. As I said, for our sites, you have to make sure they're gonna use all the heat.
You have to make sure that that equipment is entirely used, again, it runs and meets all your hurdle rates for the return to these project finance folks. Because if they don't, then I am in trouble sometimes. anyways, I think I am not worried about the ability of project finance. There is plenty of project finance out there. Some of the companies we are working with are actively looking for projects themselves, and that is good. They have got their own business development folks and they are talking with my business development folks and our engineers and we go hunting together that way for good sites. That is really the exception. Most of the project finance partners we work with are kind of waiting for us to bring something to them. They are not out there looking for Cogeneration sites.
Maybe they can find a site for a solar panel, but they would be challenged to find a good operational site for cogen. We end up doing a lot of that ourselves. go-to-market strategy, how are we doing that in those cases? Of course we have our network of engineers and energy consultants that we work with and we are constantly in touch with them and anytime we see a prospective project we say we could sell it to you or we could offer you a PPA. We are always coming with those two alternatives in front of the customer. We are also doing direct mailers. We are sending out opportunity cards, if you will, to existing customers, to old customers, to prospective customers, to contacts. A tremendous amount of things you can do on the web these days.
This COVID thing forcing us to stay at home has also created opportunities for new ways to market people, new ways to communicate with people, go to meetings, discussions that can happen more easily than trying to get yourself down to New York. I think we have a pretty good strategy for reaching out to these customers. Not just for these project finance things, but of course, for any type of activity relating to their boiler plant. I have a project finance partner that would finance an entire boiler plant upgrade, of which I may just be a small part of. you are right, there is a lot of opportunity. The money is there. I have no shortage of project finance people to go to. The trick is to find those sites that deliver the economics that they need.
Right. Just one other question with regard to this, and that is, you mentioned Local Law 97 in New York City. I was just curious if there are any other policies that are being put in place around the country that are of similar nature, or if there is incentives anywhere in the U.S. that you see on the horizon or currently.
Sure. Well, of course, nationally, there's the ITC, the investment tax credit. There's that. Most of the incentives are state- to- state, and they're typically efficiency incentives. As you know, the utilities, Eversource and Con Ed and the big utilities, get reimbursed for efficiency measures. That's their measuring stick, is how much efficiency they can bring to their customer base, to the ratepayers. That's who we are. We show up and hey, we're incident efficiency. The rebates and the incentives come from the utilities oftentimes because they're the ones that need to put these energy-saving measures in place to meet their own guidelines. The amount of those incentives can sometimes be prescribed, $X/ kW. Sometimes they can be custom. More often than not, we find ourselves in the custom incentive world because we're doing something that's kind of customized.
We're not putting in a solar panel or replacing a light bulb with an LED. We're putting in a highly efficient natural gas Chiller plant that's displacing an electric plant. A little bit more nuanced how you calculate those savings, but it's there, and the energy company understands and appreciates that, and I think that's one of the reasons why we're getting more success with our Chiller. It is starting to become more broadly understood how these Chiller systems can not only reduce greenhouse gas benefits, but have other efficiencies and help the utilities meet their goals. I think I covered your question, but if I missed a part of it, Joe, I can circle back to it.
That's great. Ben, that's great. I appreciate it. That's all I have. Thanks very much.
Sure. You're welcome.
Thank you. Our next question comes from Michael Zuk with Oppenheimer. Please proceed with your question.
Good morning, Ben.
Hi, Mike. Nice to hear from you.
Two-part question. First of all, any new developments or opportunities in indoor farming? Secondly, how is the Florida operation doing?
Sure. Good questions. We indeed are seeing still continued opportunities in indoor growing. I think I might have talked about this before, that whole industry is a little bit in a, I don't want to say tailspin, there was a lot of work in that in 2018, 2019 started to slow a little bit. Suffice to say that the ones that are still around, the indoor growing companies that we're dealing with, are the ones that were smart enough to understand that they need to be aware of operational cost and not first cost. They were aware that it was going to be a more competitive environment. Indeed, here we are today in the middle of 2020, and it is a much more competitive environment for indoor growing. The come-and-go customers maybe aren't there anymore.
Importantly, the customers that are still there for our indoor growing are the ones that already have our stuff and are looking at Phase 2 and maybe Phase 3. Their design consultant is designing another one. The customers that we still have are the ones that are going to be in it for the long haul, and in many cases, are ones that already have our equipment. They're repeat customers. I think the market's still strong. It's not as kind of crazy exuberance as it was in 2018. I think if you read anything on the indoor cannabis growing, it's slowed down a little bit. The ones that are remaining are the ones that are going to be our long-term customers, and I think ultimately, that's a good thing.
Follow up, how are we doing in Florida?
Yes, Florida, right. Good. Good, Alex. Florida is a great market for us. As I said before, maybe not perfect for cogen, but absolutely for our Chiller systems. We are looking at a number of opportunities, and we will be seeing press releases. Of course, normally see press releases, but I think we are seeing good opportunity in Florida. Of course, having our service center down there is very important so that people and customers know that they'll have someone there, they can come and make sure the equipment's running. The spark spread's still very strong down there. Gas is extremely inexpensive. Electricity maybe isn't super expensive. You keep those gas prices down, you have a very good opportunity. The resilience piece, of course, comes on top of that. Every time a storm comes through, people get worried about their power and their Chiller plant.
Even if we don't put in a cogen system, if we can put an entire Chiller plant on gas instead of electric. As I said before, they can downsize their backup generator capacity so they can keep their hotel running during an outage because they have their Chiller running on natural gas. Yeah, Florida's still a real good market for us, and I'm hoping you'll see more press releases related to that in the coming months.
Then a follow-up question regarding technology. What's the difference in operations between using natural gas as our fuel source and hydrogen as a fuel source?
I'm gonna let Bob take that one, because that's right in his wheelhouse.
Well, you can run an engine on hydrogen, and it'll perform fine. You'd have to make some changes. Hydrogen has some issues with metal embrittlement and so forth. We have not had too much experience with it. I know one customer was doing some experimental operation with hydrogen. I think most engines know the path you have to take to operate on them. Having said that, if you do use hydrogen, that changes the emissions story quite a bit. There'll be no CO2 coming out of the engine. There'll be NOX, of course, and you'll still need to account for that. I don't see hydrogen as a real fuel for us for a long time, because if there's hydrogen available from renewables, it'll be going towards transportation. With transportation's where it really has an impact.
You can store it in a vehicle and drive a long distance on it, you basically have no pollution. There's so little of it available, and it's so costly to produce. You can't mine it, you have to produce it with electricity. That's where it's going to find its application. Stationary stuff like ours really doesn't show the benefit that it does on a truck or a car that has a very low-efficiency engine to begin with. That's where I see it going. I hope that answers the question.
Well, my whole purpose of the question was that Williams Companies is getting into hydrogen and hydrogen distribution, and particularly targeting the Northeast, which is basically in our backyard. I was wondering if there were opportunities. That was the rationale for the question.
Could be, but I'm not really seeing that right away. I think the pipelines, they're going to have to stay natural gas because all the appliances, all the water heaters and stoves and everything are all set up for a certain type of burner that would operate with natural gas. I think that would be quite a difficult thing to do in parallel with the existing pipelines.
Gotcha. One final question. Are we considering any type of a joint venture or an outsourcing of the Ilios technology?
Not right now, Mike. It's not something that I think that we've found a good use of our efforts on. I think the success we're having with our Chiller, I think is what I really want to be focusing my attention on. I don't have any particular strategic initiative to sell the Ilios platform. That would require some time and effort that perhaps once things stabilize, we can consider. It's not something that's in the top of our priorities right now.
Appreciate your comments and look forward to a productive third quarter.
Thanks, Mike. I appreciate it.
Thank you. Our next question comes from Alex Blanton with Clear Harbor Asset Management. Please proceed with your question.
Thanks. A couple of follow-ups.
Hi, Alex. Alex, to be brief, before you ask your question, I've got some answers for you.
Oh, good.
The PowerPoint is available on our website. It's in the webcast section. I'll send a link after this call to you to make sure you have it. The transcript will be available 48 hours after the call. I'll, again, I'll make sure that you get that as well.
Thank you. Is that gonna be on the website, the transcript, so other people can read it?
Yes. Yeah, okay. Yes.
Where was it? Yeah, I had a hard time finding these slides. They weren't evident. They didn't seem to be with the webcast part at all.
Yeah, it is now, Alex. I'll send you the link.
Okay, thank you. The Canadian operations, it seems to me that they would be less restricted by COVID since Canada has a very low infection rate, and in fact, won't let anybody from the U.S. in. How is that going? Is that a better operating environment right now?
Hi, Alex. It's Bob Panora. I think I know a little bit more than Ben about this. Most of our business in the Toronto area was somewhat the same as the U.S. in the days, a few months ago. The construction projects were told to stop. If our folks entered the country to do work, they'd have to quarantine for two weeks and so forth.
As it turned out, the projects we were involved with were exempt from the construction restrictions, as many were in New York., if they were related to certain types of construction projects. I guess the requirement that we have to go in the country and all that and quarantine, that also was waived as well. It really wasn't a lot different than the U.S. in my opinion, same in terms of what Toronto did. I don't know about other provinces and so forth, but they were very much like a U.S. city. At the end of the day, we were operating fine. The construction projects went on. Our guys, we have two people working there now that are Canadian citizens there. They have no restrictions. They're working fine.
Okay, great. Is there a market for better ventilation as a result of COVID? This would be a renovation retrofit type of thing where builders would retrofit their cooling system to provide better ventilation. Is there any kind of a market like that developing?
Perhaps. I think the prevailing theory is you want more air flowing through your building.
Yes.
You want to keep those HVAC or whatever they are, cubic feet of air, moving through your building. I think what they've advised some people to do is on some air conditioning systems, bring in outside air. Some air conditioning systems recirculate inside air. Then the larger systems do a little bit of both. I think they're advising some of these air conditioning systems to adjust themselves to maybe be a little bit less efficient, but bring in more outside air to keep that airflow going. Whether that's going to lead people to do an overall redesign of their Chiller plant towards a technology that might bring in more air or something reactive like that, I've not seen that. Again, I'm not sure people have reacted that far ahead on it.
Sure.
I don't see anything directly relating to us. It's just notionally I understand that there is a need for people to bring in more outside air and get more airflow going.
Yeah. Finally, do you have any thoughts on when you might turn profitable on a sustainable basis?
Yeah. Well, Alex, I want to be profitable now. Unfortunately, the world got dealt a terrible blow here.
Yes.
Not just myself, not just the people around me, not just our company, everyone. Thankfully, we didn't get hit as hard as some of these other industries that absolutely got decimated. I think we're fortunate that we made the progress that we did. My goal is still, I'd like to be profitable by the end of the year. That's my goal. I'm striving towards that. Each quarter after that'll be my goal each quarter, to get up every morning and to get profitable the next quarter after that. As much as I can control the things around me, that's what we're striving for, and I think we'll get there. This was a pretty good quarter, Alex. I know it's hard to see with those-
Yes, it was.
negative numbers in there. Without COVID, those service numbers are right back up, right?
Yes.
Without COVID, those Energy Production numbers are maybe not back up to 2019, but they're back up there.
Right.
Maybe that EBITDA number isn't negative anymore. I didn't want to play the games of maybes because we're here where we are now with COVID, and we had to deal with the hand we were dealt. I absolutely, and I can't say this enough, those hits we took in service are, barring any resurgence of the pandemic, are going to go away, and we'll see those service revenues come right back up where they should be. We'll see the margins come back up where they should be. Maybe the Energy Production won't come back to where it should be, but it'll improve a little bit. As long as we keep that order flow for our products going, we'll be in good shape.
Okay. Thank you very much.
Thank you, Alex.
Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back over to management for any additional closing comments.
Well, thank you all for listening to our call, and as always, we'll be sending any more updates as they happen. Stay safe.
Ladies and gentlemen, this does conclude tonight's public conference and webcast. We thank you for your participation, and you may disconnect your lines at this time.