The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the accompanying
condensed consolidated financial statements and related notes thereto for the
three or six months ended June 30, 2022, as applicable, as well as the Company's
consolidated financial statements and related notes thereto and management's
discussion and analysis of financial condition and results of operations in the
Company's Form 10-K for the year ended December 31, 2021, filed with the US.
Securities and Exchange Commission (the "SEC") on March 31, 2022.
Business
The Company's direct sales effort targets the hospitality, education,
commercial, utility and government/military markets. The Company is focusing its
sales efforts in areas with available public funding and incentives, such as
rebate programs offered by utilities for efficiency upgrades. Through the
Company's proprietary platforms, technology and partnerships with energy
efficiency providers, the Company's management intends to position the Company
as a leading provider of energy management solutions.
Forward-Looking Statements
In accordance with the Private Securities Litigation Reform Act of 1995, the
Company can obtain a "safe-harbor" for forward-looking statements by identifying
those statements and by accompanying those statements with cautionary statements
which identify factors that could cause actual results to differ materially from
those in the forward-looking statements. Accordingly, the following
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" may contain certain forward-looking statements regarding strategic
growth initiatives, growth opportunities and management's expectations regarding
orders and financial results for the remainder of 2022 and future periods. These
forward-looking statements are based on current expectations and current
assumptions which management believes are reasonable. However, these statements
involve risks and uncertainties that could cause actual results to differ
materially from any future results encompassed within the forward-looking
statements. Factors that could cause or contribute to such differences include
those risks as described in the Company's filings with the SEC, including the
current reports on Form 8-K, which factors are incorporated herein by reference.
The Company expressly disclaims a duty to provide updates to forward-looking
statements, whether as a result of new information, future events or other
occurrences.
Critical Accounting Policies and Estimates and New Accounting Pronouncements
Please refer to Notes A & B under Item 1 - Financial Statements.
Revenues
The table below outlines product versus recurring revenues for comparable
periods:
Three Months Ended
June 30, 2022 June 30, 2021 Variance
Product $ 1,787,391 92% $ 1,672,905 90% $ 114,486 7%
Recurring 150,979 8% 182,584 10% (31,605 ) -17%
Total $ 1,938,370 100% $ 1,855,489 100% $ 82,881 4%
Six Months Ended
June 30, 2022 June 30, 2021 Variance
Product $ 3,741,821 92% $ 2,780,769 88% $ 961,051 35%
Recurring 347,254 8% 368,929 12% (21,675 ) -6%
Total $ 4,089,075 100% $ 3,149,698 100% $ 939,376 30%
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Product Revenue
Product revenue principally arises from the sale and installation of energy
management platforms. The suite of products consists of thermostats, sensors,
controllers, wireless networking products, switches, outlets and a control
platform.
For the three months ended June 30, 2022, product revenues increased 7% or $0.11
million when compared to the prior year. Hospitality revenues decreased 9% to
$1.42 million, MDU revenues decreased 100% to 0.00 million, healthcare revenues
decreased 100% to $0.00 million and governmental revenues decreased 100% to
$0.00 million, while educational revenues increased 3,431% to $0.36 million.
Product revenues derived from channel partners remained relatively unchanged at
$1.40 million compared to the prior year period. The increase was primarily
driven by increased volumes from two existing customers in the hospitality and
educational markets. International revenues decreased 7% to $0.13 million. The
decrease in international revenues was primarily driven by decreased volumes
from one existing customer in the hospitality market.
For the six months ended June 30, 2022, product revenues increased 35% or $0.96
million when compared to the prior year. Hospitality revenues increased 9% to
$2.48 million, governmental revenues increased 121% to $0.27 million and
educational revenues increased 984% to $0.91 million, while MDU revenues
decreased 71% to $0.07 million and healthcare revenues decreased 100% to $0.00
million.
Product revenues derived from channel partners increased 23% to $2.83 million
compared to the prior year period. The increase was primarily driven by
increased volumes from two existing customers in the hospitality and educational
markets, partially offset by volume decreases from two existing customers in the
hospitality market. International revenues decreased 31% to $0.27 million when
compared to the prior year period. The decrease in international revenues was
primarily driven by decreased volumes from two existing customers in the
hospitality market.
Backlogs were approximately $3.9 million and $3.0 million at June 30, 2022 and
2021, respectively.
Recurring Revenue
Recurring revenue consists of Telkonet's service and support programs for its
energy management platforms. The Company recognizes revenue ratably over the
service period for monthly support revenues and defers revenue for annual
support services over the term of the service period.
For the three and six months ended June 30, 2022, recurring revenue decreased by
17% and 6%, respectively, when compared to the prior year periods. The decrease
was related to decreased unit sales of call center support services.
Cost of Sales
The table below outlines product versus recurring cost of sales, along with
respective amounts of those costs as a percentage of revenue for the comparable
periods:
Three Months Ended
June 30, 2022 June 30, 2021 Variance
Product $ 544,835 30% $ 734,899 44% $ (190,064 ) -26%
Recurring 29,306 19% 12,322 7% 16,984 138%
Total $ 574,141 30% $ 747,221 40% $ (173,080 ) -23%
Six Months Ended
June 30, 2022 June 30, 2021 Variance
Product $ 1,677,735 45% $ 1,312,713 47% $ 365,022 28%
Recurring 61,076 18% 23,222 6% 37,854 163%
Total $ 1,738,811 43% $ 1,335,935 42% $ 402,876 30%
26
Costs of Product Revenue
Costs of product revenue include materials and installation labor related to
Telkonet's platform technologies. For the three and six months ended June 30,
2022, product costs decreased 26% and increased 28%, respectively, compared to
the prior year period.
The variance was primarily attributable to increases in logistical expenses of
$0.04 million, inclusive of import tariffs and the use of installation
subcontractors of $0.08 million, partially offset by a decrease in inventory
adjustments of $0.10 million and a purchase price variance of $0.19 million,
resulting from global chip shortages, supply chain challenges and inflationary
pressures, Material costs as a percentage of product revenues were 31%, a
decrease of 10%, compared to the prior year period.
For the six month comparison, the variance was primarily attributable to
increases in material costs of $0.23 million resulting from increased product
revenues of $0.96 million, logistic expenses of $0.11 million and the use of
installation subcontractors of $0.21 million, partially offset by decrease in
inventory adjustments of $0.25 million. Material costs as a percentage of
product revenues were 35%, a decrease of 2%, compared to the prior year period.
Costs of Recurring Revenue
Recurring revenue costs are comprised primarily of call center support labor.
For both the three and six months ended June 30, 2022, recurring revenue costs
increased by 138% and 163%, respectively when compared to the prior year period.
The variance was primarily due to increases in call center staffing.
Gross Profit
The table below outlines product versus recurring gross profit, along with
respective actual gross profit percentages for the comparable periods:
Three Months Ended
June 30, 2022 June 30, 2021 Variance
Product $ 1,242,556 70% $ 938,006 56% $ 304,550 32%
Recurring 121,673 81% 170,262 93% (48,588 ) -29%
Total $ 1,364,229 70% $ 1,108,268 60% $ 255,962 23%
Six Months Ended
June 30, 2022 June 30, 2021 Variance
Product $ 2,064,086 55% $ 1,468,056 53% $ 596,029 41%
Recurring 286,178 82% 345,707 94% (59,529 ) -17%
Total $ 2,350,264 57% $ 1,813,763 58% $ 536,500 30%
Gross Profit on Product Revenue
Gross profit on product revenue is influenced by pricing, revenue volume and the
composition of those revenues.
Gross profit on product revenue for the three months ended June 30, 2022
increased 32% or $0.30 million when compared to the prior year period. The
increase in gross profit was primarily attributable to an increase in revenues
of $0.11 million, decreases in inventory adjustments of $0.10 million and
purchase price variances of $0.19 million, partially offset by increases in
logistical expenses of $0.04 million, inclusive of import tariffs and the use of
installation subcontractors of $0.08 million. For the three months ended June
30, 2022, the actual gross profit percentage increased by 10% to 70% compared to
the prior year period. Tariffs imposed on Chinese imports resulted in an adverse
impact of approximately 3% on the actual gross profit percentage for the three
months ended June 30, 2022, compared to approximately 1% for the prior year
period. Tariffs will fluctuate based upon volume of goods imported, which is
contingent upon expected inventory supply and demand.
27
Gross profit on product revenue for the six months ended June 30, 2022 increased
41% or $0.60 million when compared to the prior year period. The increase in
gross profit was primarily attributable to an increase in revenues of $0.96
million and a decrease in inventory adjustments of $0.25 million, partially
offset by increases in logistic expenses of $0.11 million and the use of
installation subcontractors of $0.21 million. For the six months ended June 30,
2022, the actual gross profit percentage increased by 2% to 55% compared to the
prior year period. Tariffs imposed on Chinese imports resulted in an adverse
impact of approximately 4% on the actual gross profit percentage for the six
months ended June 30, 2022, compared to approximately 1% for the prior year
period.
Gross Profit on Recurring Revenue
Gross profit on recurring revenue for the three and six months ended June 30,
2022 decreased by 29% and by 17% respectively, when compared to the prior year
period. The decrease was primarily due to decreased unit sales of call center
support services and increases in call center staffing.
Operating Expenses
The tables below outline operating expenses for the comparable periods, along
with percentage change:
Three Months Ended
June 30, 2022 June 30, 2021 Variance
$ 1,341,795 $ 1,257,851 $ 83,944 7%
Six Months Ended
June 30, 2022 June 30, 2021 Variance
$ 2,833,300 $ 2,793,642 $ 39,658 1%
The Company's operating expenses are comprised of research and development,
selling, general and administrative expenses and depreciation and amortization
expense. During the three and six months ended June 30, 2022, operating expenses
increased by 7% and 1%, respectively, when compared to the prior year period as
outlined below.
Research and Development
Three Months Ended
June 30, 2022 June 30, 2021 Variance
$ 257,529 $ 296,413 $ (38,884 ) -13%
Six Months Ended
June 30, 2022 June 30, 2021 Variance
$ 526,769 $ 607,861 $ (81,092 ) -13%
Research and development costs are related to both present and future product
development and integration and are expensed in the period incurred. During both
the three and six months ended June 30, 2022, research and development costs
decreased 13%, when compared to the prior year periods. For the three and six
month comparison, the variance is primarily attributable to decreases in payroll
of $0.04 million and $0.08 million, respectively.
Selling, General and Administrative Expenses
Three Months Ended
June 30, 2022 June 30, 2021 Variance
$ 1,071,292 $ 951,089 $ 120,203 13%
Six Months Ended
June 30, 2022 June 30, 2021 Variance
$ 2,284,104 $ 2,162,192 $ 121,912 6%
28
During the three and six months ended June 30, 2022, selling, general and
administrative expenses increased 13% and 6% respectively, over the prior year
periods.
For the three month comparison, the variance is primarily attributable to
increases in a trade show expenses of $0.04 million and payroll taxes of $0.32
million, partially offset by decreases in consulting fees of $0.12 million and
legal fees of $0.15 million. The payroll tax increase was primarily the result
of a non-recurring Employee Retention Credit ("ERC") in 2021, allowed under the
CARES Act, which is a refundable payroll tax credit that encouraged businesses
to keep employees on the payroll during the COVID-19 pandemic.
For the six month comparison, the variance is primarily attributable to
increases in payroll of $0.20 million, payroll taxes of $0.32 million and trade
show expenses of $0.04 million, partially offset by decreases in legal fees of
0.29 million, audit fees of $0.10 million and consulting fees of $0.07 million.
The payroll tax increase was primarily the result of a non-recurring Employee
Retention Credit ("ERC") in 2021, allowed under the CARES Act, which is a
refundable payroll tax credit that encouraged businesses to keep employees on
the payroll during the COVID-19 pandemic.
Operating Income (Loss)
During the three and six months ended June 30, 2022, the Company had operating
income of $0.02 million and an operating loss of $0.48 million, respectively,
compared to operating losses of $0.15 million and $0.98 million, respectively,
during the prior year periods.
The three month operating loss improvement is primarily due to the increase in
gross profit. The six month operating loss improvement is primarily due to the
increase in gross profit and relatively unchanged operating expenses as
discussed above.
Net Income (Loss)
During the three and six months ended June 30, 2022, the Company had net income
of $0.01 million and a net loss of ($0.51 million), respectively, compared to a
net loss of ($0.16 million) and net income of $0.07 million, respectively during
the prior year periods.
The three month net loss improvement is primarily due to the increase in gross
profit. The six month net loss variance is primarily due to a $0.92 million
non-cash gain on debt extinguishment in connection with the full forgiveness of
the First PPP Loan in the prior year period, an increase in gross profit and
relatively unchanged operating expenses as discussed above.
Non-GAAP Financial Measures
Management believes that certain non-GAAP financial measures may be useful to
investors in certain instances to provide additional meaningful comparisons
between current results and results in prior operating periods. Adjusted
earnings before interest, taxes, depreciation, amortization and stock-based
compensation ("Adjusted EBITDA") is a metric used by management and frequently
used by the financial community. Adjusted EBITDA provides insight into an
organization's operating trends and facilitates comparisons between peer
companies, since interest, taxes, depreciation, amortization and stock-based
compensation can differ greatly between organizations as a result of differing
capital structures and tax strategies. Adjusted EBITDA is one of the measures
used for determining our debt covenant compliance. Adjusted EBITDA excludes
certain items that are unusual in nature or not comparable from period to
period. While management believes that non-GAAP measurements are useful
supplemental information, such adjusted results are not intended to replace our
GAAP financial results. Adjusted EBITDA is not, and should not be considered, an
alternative to net income (loss), operating income (loss), or any other measure
for determining operating performance or liquidity, as determined under
accounting principles generally accepted in the United States (GAAP). In
assessing the overall health of its business for the three months ended June 30,
2022 and 2021, the Company believes it appropriate to exclude stock-based
compensation given the variety of equity awards used by companies, varying
methodologies for determining stock-based compensation and the assumptions and
estimates involved in those determinations, the exclusion of non-cash
stock-based compensation enhances the ability of management and investors to
understand the impact of non-cash stock-based compensation on our operating
results. Further, the Company believes that excluding stock-based compensation
expense allows for a more transparent comparison of its financial results to the
previous year.
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RECONCILIATION OF NET LOSS
TO ADJUSTED EBITDA
Three Months Ended Six Months Ended
June 30 June 30
2022 2021 2022 2021
Net Income (loss) $ 8,747 $ (155,595 ) $ (509,081 ) $ (72,856 )
Gain on debt extinguishment - - - (920,673 )
Loss on disposal of fixed asset 456 - 456 -
Interest expense, net 6,848 3,828 19,204 11,702
Income tax provision 6,385 2,184 6,385 1,948
Depreciation and amortization 12,974 10,349 22,427 23,589
EBITDA 35,410 (139,234 ) (460,609 ) (956,290 )
Adjustments:
Stock-based compensation 1,815 1,816 3,630 3,631
Adjusted EBITDA $ 37,225 $ (137,418 ) $ (456,979 ) $ (952,659 )
Liquidity and Capital Resources
For the three-month period ended June 30, 2022, the Company reported net
earnings of $8,747 and had cash used in operating activities of ($1,024,297) and
ended the period with an accumulated deficit of ($129,177,258) and total current
assets in excess of current liabilities of $5,546,886. At June 30, 2022, the
Company had $4,964,495 of cash and approximately $321,000 of availability on the
Credit Facility.
Since inception through June 30, 2022, we have incurred cumulative losses of
($129,177,258) and have never generated enough cash through operations to
support our business. The Company has made significant investments in the
engineering, development and marketing of its intelligent automation platforms,
including but not limited to, hardware and software enhancements, support
services and applications. The funding for these development efforts has
contributed to, and continues to contribute to, the ongoing operating losses and
use of cash.
The Company took and continues to take a number of actions to preserve cash.
These actions ranged from suspending the use of engineering consultants,
cancelling all non-essential travel, not filling certain vacancies and for
certain periods, furloughing certain employees and pay cuts for certain other
employees and suspension of the Company's 401(k) match. Receipt of PPP monies
helped the company reinstate some of cuts made.
In addition, on January 7, 2022, the Company closed on the VDA Transaction (see
Note A under Item 1 - Financial Statements), resulting in additional working
capital of $5,000,000.
Loans under PPP
For a discussion of the PPP Loans the Company received under the Paycheck
Protection Program, see Note G under Item 1 - Financial Statements.
Working Capital
Working capital (current assets in excess of current liabilities) from
operations decreased by ($117,915) during the three months ended June 30, 2022
from working capital of $5,814,089, at March 31, 2022 to a working capital of
$5,696,174 at June 30, 2022.
30
Revolving Credit Facility
For a discussion of the terms of the Heritage Bank Loan Agreement and the Credit
Facility, see Note G under Item 1 - Financial Statements.
The outstanding balance on the Credit Facility was $628,412 and $403,089 at June
30, 2022 and December 31, 2021 respectively and the remaining available
borrowing capacity was approximately $321,000 and $460,000, respectively. As of
June 30, 2022, the Company was in compliance with all financial covenants.
Cash Flow Analysis
Cash used in operations was ($2,539,506) and ($752,779), during the six months
ended June 30, 2022 and 2021, respectively. As of June 30, 2022, our primary
capital needs included costs incurred to increase energy management sales,
inventory procurement and managing current liabilities. The working capital
changes during the six months ended June 30, 2022 compared to the six months
ended June 30, 2021 were primarily a result of increases in Account Receivable
balances of ($623,000), inventory balances of ($852,000), a decrease in Accounts
Payable balances of ($998,000), partially offset by a reduction in prepaid
balances of $389,000. Accounts receivable balances fluctuate based on the
negotiated billing terms with customers and collections. We purchase inventory
based on forecasts and orders, and when those forecasts and orders change, the
amount of inventory may also fluctuate. Accounts payable balances fluctuate with
changes in inventory levels, volume of inventory purchases, and negotiated
supplier and vendor terms.
Off-Balance Sheet Arrangements
The Company has no material off-balance sheet arrangements.
Acquisition or Disposition of Property and Equipment
The Company does not anticipate significant purchases of property or equipment
during the next twelve months.
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