TECOGEN INC. QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2024

Financial Performance Overview

Tecogen Inc., a leading manufacturer of high-efficiency cogeneration systems, reported mixed financial results for the three and nine months ended September 30, 2024. Total revenues for the three-month period decreased by 20.8% year-over-year to $5.63 million, while revenues for the nine-month period declined 14.0% to $16.54 million.

The primary driver of the revenue decline was a significant drop in product sales, particularly for the company’s chiller units. Product revenues fell 52.7% in Q3 2024 and 57.7% in the first nine months of the year compared to the same periods in 2023. This was largely due to the relocation of Tecogen’s manufacturing operations to a new facility in April 2024, which disrupted production and caused delays in fulfilling customer orders.

In contrast, the company’s service and energy production segments performed better. Service revenues increased slightly by 0.2% in Q3 2024 and 9.7% in the first nine months, boosted by the addition of maintenance contracts acquired from Aegis Energy Services. Energy production revenues also grew, rising 17.3% in Q3 and 27.6% year-to-date, as the company’s distributed generation assets saw increased utilization.

Profitability and Margins

Despite the revenue declines, Tecogen was able to improve its gross profit margins. Gross margin increased from 41.1% to 44.1% in Q3 2024, and from 40.8% to 43.1% in the first nine months of the year. This was driven by higher service contract margins, which offset lower product margins impacted by unabsorbed labor costs during the manufacturing facility transition.

However, the company’s bottom-line performance deteriorated, with a net loss of $930,408 in Q3 2024 compared to a $481,573 loss in the prior-year quarter. For the nine-month period, the net loss widened from $2.75 million to $3.57 million. The increased losses were primarily due to the drop in higher-margin product sales, as well as a modest 0.8% rise in operating expenses.

Strengths and Weaknesses

One of Tecogen’s key strengths is its diversified business model, with revenue streams from product sales, service contracts, and energy production. This helps to mitigate the impact of volatility in any single segment. The company’s focus on energy efficiency and emissions reduction also positions it well to capitalize on growing demand for sustainable technologies.

However, Tecogen’s reliance on product sales, which typically have higher margins than its other offerings, makes it vulnerable to disruptions in manufacturing and supply chains. The recent facility relocation highlighted this weakness, as it significantly curtailed the company’s production capacity and resulted in delayed shipments and lost revenue.

Additionally, Tecogen’s small scale and limited resources compared to larger competitors could hinder its ability to quickly adapt to changing market conditions or invest in new product development. The company’s high fixed costs and ongoing need for capital investment also present challenges to achieving consistent profitability.

Outlook and Future Prospects

Looking ahead, Tecogen’s management is cautiously optimistic about the company’s prospects. The planned $2 million private placement offering to existing shareholders, if successful, would provide much-needed capital to fund operations and growth initiatives.

The company also sees opportunities in emerging markets such as controlled environment agriculture (CEA) and data centers, where its cogeneration and chiller technologies can provide energy savings and emissions reductions. Tecogen’s recent development of a hybrid-drive air-cooled chiller, which can utilize both grid power and natural gas, is an example of its efforts to innovate and meet evolving customer needs.

However, the company faces headwinds from regulatory and market trends that may impact demand for its fossil fuel-based products. The push to eliminate fossil fuels from buildings in some regions could constrain sales, though Tecogen believes its hybrid solutions can help address these decarbonization goals.

Additionally, the company must continue to navigate supply chain challenges and inflationary pressures that have impacted both its product and service margins. Successful execution of its cost-control measures and engineering improvements to increase service intervals will be crucial to improving profitability.

Conclusion

Tecogen’s financial performance in 2024 has been mixed, with the disruption caused by its manufacturing facility relocation weighing heavily on product sales and overall profitability. While the company’s service and energy production segments have shown resilience, the path to consistent profitability remains challenging.

To overcome these obstacles, Tecogen will need to focus on strengthening its operational efficiency, diversifying its product portfolio, and securing additional capital to fund growth initiatives. The company’s expertise in energy-efficient and low-emission technologies positions it well to capitalize on emerging market trends, but it must also address its structural weaknesses to achieve long-term sustainability.

Investors and stakeholders will be closely watching Tecogen’s ability to navigate the current operating environment and execute its strategic plans in the coming quarters and years.