10-Q: Tecogen Reports Wider Losses Amid Strong Chiller Sales Growth

Tecogen Inc. reported a significant increase in net loss for the third quarter and first nine months of 2025, despite a substantial rise in product revenues driven by chiller sales and a successful $18.1 million public offering.

Summary

• Total revenues for the three months ended September 30, 2025, increased by 27.6% to $7.18 million, up from $5.63 million in the same period of 2024.
• Product revenues surged by 114.5% to $2.98 million for the quarter, primarily due to a $2.2 million increase in chiller sales, including initial deliveries of the hybrid-drive air-cooled chiller.
• Service revenues saw a modest increase of 2.4% to $3.94 million for the quarter, driven by existing contracts but partially offset by a decrease from acquired Aegis maintenance contracts.
• Energy Production revenues decreased by 34.2% to $0.26 million for the quarter, attributed to contract expirations and temporary site shutdowns for repairs.
• Gross profit for the quarter decreased by 12.0% to $2.18 million, with the overall gross margin falling to 30.4% from 44.1% in the prior year.
• Loss from operations for the quarter widened by 140.6% to $(2.10) million, compared to $(0.87) million in the prior year.
• Net loss attributable to Tecogen Inc. for the quarter increased by 129.0% to $(2.13) million, or $(0.07) per basic share.
• For the nine months ended September 30, 2025, total revenues increased by 31.5% to $21.76 million, with product revenues up 188.9% to $8.67 million.
• Net loss attributable to Tecogen Inc. for the nine months increased by 19.0% to $(4.25) million, or $(0.16) per basic share.
• Cash and cash equivalents significantly increased by 182.2% to $15.25 million as of September 30, 2025, from $5.41 million at December 31, 2024, primarily due to a public offering.
• Working capital increased by 280.1% to $20.26 million at September 30, 2025, from $5.33 million at December 31, 2024.
• Net cash used in operating activities for the nine months ended September 30, 2025, was $(7.34) million, a substantial increase from $(0.12) million in the prior year period.
• Backlog of product and installation projects decreased to $4.02 million as of September 30, 2025, from $5.02 million at September 30, 2024.

Sentiment

Score: 4

Explanation: While the company achieved significant revenue growth in its product segment and secured substantial capital through a public offering, the overall financial performance deteriorated with widening net losses, declining gross margins across all segments, and a substantial increase in cash used in operating activities. The identified material weakness in internal controls is also a significant concern, offsetting the positive strategic developments and improved liquidity.

Positives

• Total revenues increased by 27.6% for the three months and 31.5% for the nine months ended September 30, 2025, demonstrating overall top-line growth.
• Product revenues surged by 114.5% for the quarter and 188.9% for the nine months, largely driven by strong chiller sales, including initial deliveries of the new hybrid-drive air-cooled chiller.
• Successfully completed a public offering on July 21, 2025, raising approximately $18.1 million in net proceeds, significantly boosting cash and cash equivalents to $15.25 million.
• Common stock began trading on the NYSE American LLC on May 6, 2025, enhancing market visibility and liquidity.
• Entered into a strategic Sales and Marketing Agreement with Vertiv Corporation on February 28, 2025, for DTx chillers in the data center cooling market, providing exclusive international rights and non-exclusive US rights.
• Granted US Patent 11,936,327: 'Hybrid Power System With Electric Generator and Auxiliary Power Source' in March 2024, for the Tecochill Hybrid-Drive Air-Cooled Chiller.
• Settled a legal proceeding related to a cogeneration unit fire for CDN $400,000, with Tecogen responsible for CDN $100,000, resulting in a $79,006 benefit recorded in the nine months ended September 30, 2025.
• Related party promissory notes totaling $1.5 million from directors John N. Hatsopoulos and Earl R. Lewis, III, were fully repaid or converted into common stock, reducing related party debt.

Negatives

• Net loss attributable to Tecogen Inc. increased significantly by 129.0% to $(2.13) million for the three months and 19.0% to $(4.25) million for the nine months ended September 30, 2025.
• Loss from operations widened by 140.6% to $(2.10) million for the three months and 20.9% to $(4.11) million for the nine months ended September 30, 2025.
• Overall gross margin decreased substantially to 30.4% for the quarter (from 44.1%) and 36.2% for the nine months (from 43.1%), primarily due to increased labor and material costs across all segments.
• Services segment gross margin saw a significant decline to 25.3% for the quarter (from 44.4%) and 36.8% for the nine months (from 46.4%) due to higher engine replacement and repair costs.
• Cash used in operating activities increased dramatically to $(7.34) million for the nine months ended September 30, 2025, compared to $(0.12) million in the prior year, indicating increased cash burn from core operations.
• Energy Production revenues decreased by 34.2% for the quarter and 40.1% for the nine months, due to contract expirations and temporary site shutdowns.
• Backlog of product and installation projects decreased by 19.9% to $4.02 million as of September 30, 2025, from $5.02 million at September 30, 2024.
• Identified a material weakness in disclosure controls and procedures and internal control over financial reporting related to general controls over information technology.

Risks

• Incurred a loss from operations of $4,106,810 during the nine months ended September 30, 2025, and have a history of incurring losses, with no assurance of future profitability.
• Business is capital intensive, and products are built to order with customized configurations, leading to significant lead times and potential impact on profitability from changes in customer orders or lack of demand.
• Material weakness in disclosure controls and procedures and internal control over financial reporting, specifically concerning general controls over information technology, could adversely affect financial reporting accuracy and timeliness, and potentially impact stock price or access to capital markets.
• Anti-fossil fuel sentiment in key markets like New York City has negatively impacted cogeneration unit sales, posing a challenge to product demand.
• Residual impacts of the COVID-19 pandemic continue to affect supply chains, causing delays, lack of critical components (e.g., engines), and increased costs, impacting product and service margins.
• Energy prices for natural gas may be affected by geopolitical tensions (Ukraine, Middle East), which could impact the performance of the Energy Production Segment and the economic savings of cogeneration equipment.
• Higher electricity prices, while potentially increasing economic savings for products, also introduce volatility and uncertainty in the market.

Future Outlook

The company anticipates significant growth opportunities from power-constrained customers, particularly data centers and industrial facilities, due to the ability of its chiller products to reduce electrical capacity needs by 30% or more and its InVerde product providing on-site power generation. The political environment following the 2024 US elections may also favorably impact anti-fossil fuel sentiment and the regulatory environment for the business. Tecogen expects its products to run on Renewable Natural Gas (RNG) as it is introduced into the US gas pipeline infrastructure. The company is also focusing on opportunities for its cogeneration equipment in low carbon Controlled Environment Agriculture (CEA). Management is implementing annual service price increases and engineering improvements to offset rising material costs and improve service margins.

Management Comments

• "We believe that as regulations take into account scope 2 emissions and products like our hybrid chiller that can choose the cleanest fuel source will have a significant advantage in decarbonization efforts."
• "The political environment following the 2024 elections in the United States may have a material impact on anti-fossil fuel sentiment and the regulatory environment that may be favorable to our business."
• "Tecogen believes that these power constrained customers, in particular data centers and industrial facilities, represent a significant opportunity for growth."
• "Our chiller products can reduce the electrical capacity needed on-site by 30% or more. Our InVerde product can provide on-site power generation which allows customers to eliminate long lead times associated with electrical switch gear and bridge shortfalls in power from the utility."
• "We have instituted annual service price increases in 2023 through 2025 and will continue to implement price increases to offset material price increases in excess of inflation and have also been making engineering improvements to increase service intervals and gross margins."
• "CEA offers an exciting opportunity to apply our expertise in clean cooling, power generation, and greenhouse gas reduction to address critical issues affecting food and energy security."
• "If electricity prices rise, the economic savings generated by our products are likely to increase."
• "We are committed to remediating the material weakness identified in internal controls over financial reporting and have begun the process to remediate this material weakness."

Industry Context

The company operates in the distributed generation and energy efficiency sector, which is influenced by utility rates, regulatory environments, and technological advancements. The increasing demand for power from data centers and EV charging presents a significant market opportunity for Tecogen's chiller and on-site power generation products, especially in regions facing utility power constraints. While anti-fossil fuel sentiment in some markets poses a challenge, the company is positioning its hybrid and ultra-clean technologies as solutions for decarbonization. The industry also faces ongoing supply chain challenges and rising material costs, which Tecogen is addressing through price increases and engineering improvements.

Comparison to Industry Standards

• The company's gross margin of 30.4% for Q3 2025 and 36.2% for the nine months ended September 30, 2025, is significantly lower than the 44.1% and 43.1% reported in the prior year periods, indicating a decline in profitability efficiency compared to its own historical performance.
• The substantial increase in net loss and loss from operations, despite revenue growth, suggests that cost management and operational efficiency are lagging behind industry leaders in the energy solutions sector, which typically aim for stable or improving margins with revenue growth.
• The strategic agreement with Vertiv Corporation for data center cooling applications positions Tecogen in a high-growth market, aligning with broader industry trends where companies like Schneider Electric and Eaton are also expanding their offerings for data center infrastructure and energy management.
• The development and initial shipments of the Tecochill Hybrid-Drive Air-Cooled Chiller demonstrate innovation in line with industry efforts to provide more flexible and environmentally conscious cooling solutions, similar to offerings from Carrier or Trane that integrate various energy sources for optimal performance.

Management Changes

Corporate Governance

Legal Proceedings

• Settled a suit filed by The Corporation of the Town of Milton, Milton Energy Generation Solutions Inc., and Milton Hydro Distribution Inc. in the Ontario Superior Court of Justice regarding a cogeneration unit fire on July 10, 2022.
• The settlement amount was CDN $400,000, with Tecogen responsible for CDN $100,000 ($70,994 USD), which was remitted on February 7, 2025.
• A benefit of $79,006 was recorded in the condensed consolidated statements of operations for the nine months ended September 30, 2025, related to this settlement.

Related Party Transactions

• John N. Hatsopoulos (director and shareholder) provided financing of $1,000,000 through two promissory notes (October 10, 2023, and July 23, 2024) with interest rates of 5.12% and 5.06% per annum, respectively.
• Earl R. Lewis, III (director and shareholder) provided financing of $500,000 through a promissory note (September 18, 2024) with an interest rate of 4.57% per annum.
• On February 18, 2025, Mr. Hatsopoulos's notes were amended to extend maturity dates to July 31, 2026, and allow conversion to common stock.
• On May 1, 2025, Mr. Lewis converted his $500,000 promissory note plus $14,148 accrued interest into 240,256 shares of common stock at $2.14 per share, retiring the obligation.
• On September 3, 2025, and September 4, 2025, Tecogen repaid Mr. Hatsopoulos $548,675 and $528,281, respectively, retiring his $1,000,000 principal and $76,956 accrued interest obligations.

Stakeholder Impact

• Shareholders: Experienced dilution from the public offering but benefited from increased liquidity and strategic positioning in growth markets. However, increased losses and declining margins may raise concerns about profitability.
• Employees: Retention of former Aegis employees and plans for hiring additional staff for remediation efforts. Stock-based compensation plans are in place.
• Customers: Benefit from new product offerings like the hybrid-drive chiller and long-term service contracts, potentially leading to energy cost savings and improved resiliency.
• Creditors: Related party notes were fully repaid or converted, reducing debt obligations.
• Regulatory Authorities: The identified material weakness in internal controls will require significant remediation efforts and ongoing scrutiny.

Next Steps

• Continue product development, increased sales and marketing activities, and expand human resources.
• Invest in capital expenditures and fund the anticipated expansion into the data center market.
• Remediate the identified material weakness in internal controls over financial reporting by instituting mitigating controls, hiring additional staff, implementing system access controls, establishing independent review procedures, and enhancing documentation.
• Conduct regular periodic reviews of internal controls with the Board of Directors and Audit Committee.
• Continue to implement annual service price increases and engineering improvements to offset material price increases and improve service margins.
• Pursue opportunities for cogeneration equipment in Controlled Environment Agriculture (CEA).

Key Dates

Recommendation

While Tecogen successfully raised significant capital through a public offering and made strategic moves into the data center market with its new chiller technology, the current financial performance shows a concerning trend of widening losses and declining gross margins across all segments. The substantial increase in cash used in operating activities indicates a growing cash burn from core operations. Furthermore, the disclosure of a material weakness in internal controls over financial reporting is a significant governance red flag. The capital raise provides a crucial liquidity buffer and supports future growth initiatives, but the operational challenges and control issues warrant a cautious stance. A 'hold' recommendation allows investors to monitor the effectiveness of remediation efforts for internal controls and observe if strategic initiatives can translate into improved profitability and operational efficiency in upcoming periods before making further investment decisions.

Keywords

Cogeneration, CHP systems, Chillers, Hybrid-drive chiller, Data center cooling, Energy production, SEC filing, Quarterly report, Financial results, Net loss, Revenue growth, Gross margin, Public offering, NYSE American, Vertiv agreement, Internal controls, Risk factors, Natural gas engines, Distributed generation, Controlled Environment Agriculture