New Order Confirms That Cannabis Market Remains Strong Growth Driver for Tecogen in 2019
In recent years there has been a large expansion underway for indoor cultivation operations. Much of this added capacity is due to the construction of modern new facilities for the production of cannabis. The cannabis market has grown enormously in North America as many jurisdictions have opted to relax restrictions on medicinal cannabis use, or to legalize the adult recreational consumption outright.
Within the United States the cultivation of cannabis plants remains highly regulated, and even where laws permit legal cannabis consumption the distribution must be sourced from licensed growing operations established within those specific states. Often the ideal location to build a new facility, where it is close to large cities and infrastructure, creates challenges due to elevated electricity demands and high energy costs. Contrary to other industries where a product plant may be established in a nearby state to access cheaper electricity rates, the cultivation centers for cannabis must instead invest in the best and most efficient equipment to power their operations.
The optimal growing environment for cannabis plants involves maintaining conditions to provide ideal temperature, humidity, and light intensity for plant growth. Even a short interruption in the range for any of these variables could result in reduced yields or even the loss of an entire crop. Therefore operators of these growing centers depend on the most advanced technology available to address the demands for optimum yield and deliver the greatest efficiency in operations when designing a new facility.
Tecogen Inc (US: TGEN – $3.62 & GER: 2T1 – €2.91) has emerged as a premier supplier to this niche market due to the comprehensive natural gas powered chiller systems the Company has developed which provide cooling while also achieving superb energy efficiency, reduced pollution output, high reliability, and certified performance.
The breakthrough technology developed by Tecogen to recapture waste heat energy from generators and redirect that towards climate control has led to the most efficient solution for electrical generation and chilled air delivery that is required by large indoor growing facilities. This is contributing to rapid growth for the Company, and a new sales record was achieved in 2018 for Tecochill products with more than half of that growth driven by demand from the indoor cannabis cultivation subsector.
Rapid Sales Growth of Tecochill Chillers Continues in Massachusetts
The successful trend continues into 2019 with the announcement that another significant sale of an integrated Tecogen system was arranged for a new indoor growing facility. This week the Company reported that two 200-ton Tecochill chillers have been sold to a cannabis producer based in Massachusetts. Delivery is scheduled in the first quarter of this year and the system will become operational in the second half of 2019. The sale also includes a contract for maintenance.
Tecogen has achieved a remarkable success rate to meet the needs for energy and climate control in these newly established cannabis cultivation facilities within Massachusetts, and the sale reported this week is the 14th such operation in the state entrusting Tecogen as the supplier for this critical equipment.
Notable in this deal is the fact that the integrated solution provided by Tecogen is so effective for the needs of this operation that it was chosen as the design basis for the construction of the facility. This may lead to future sales as planned expansion is anticipated by the client. It also demonstrates the ideal performance of the Tecogen product line for this specific market and suggests the growth trend within the subsector may build further sales momentum for the Company.
Trend For Legalization of Cannabis Supports Potential Expansion for Indoor Cultivation Facilities
While the regulatory approval granted for medicinal cannabis use in Massachusetts contributed to rapid sales growth for Tecogen, the anticipation of similar legislation passing shortly in other states opens the potential for further demand as many more indoor growing facilities would be brought online to supply these new markets.
For example, legislation will be introduced early this year in the State of New York to legalize cannabis, supported by a study which concluded that the positive effects from regulated marijuana could outweigh potential negative effects. Meanwhile, New Jersey has already introduced a Bill in the state Legislature to legalize adult cannabis use.
Many other jurisdictions are also considering similar changes to adjust the regulatory framework governing cannabis consumption. According to Forbes magazine, the legal market for cannabis is expected to grow to more than $23 billion in the United States by 2022. The expected continuation of this trend therefore represents a very powerful driver of sales growth for the Company.
The exponential demand growth for cannabis, and the unique regulatory framework that requires cultivation of the plants within each state where the sales are completed, has led to a rapid increase in the construction of new indoor cultivation centers for cannabis plants. The specific requirements necessary for optimal plant yields and the high energy costs associated with many of the states where these facilities are located, has encouraged cannabis growers to purchase integrated systems developed by Tecogen as the ideal solution for their needs.
A new sales record for Tecochill chillers was achieved during 2018 as a result of the expansion for cannabis cultivation facilities. Considering the expectation for additional capacity to be added to supply these markets, plus the anticipation that cannabis legalization will be approved in several other states, even stronger sales growth lies ahead for Tecogen.
As the sales volume increases for equipment, the Company is also securing long term service contracts that will also contribute to increased recurring revenues. Combined with a network of service centers strategically located in many of the largest market centers in the United States, the growth plan for Tecogen is gaining traction on multiple levels. This steady trend of sales growth will continue to support a rising share price for the stock. Smallcaps recommendation: BUY.
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