The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements and related notes thereto
for the three or nine months ended September 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.
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, this "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.
Business
The Company, formed in 1999 and incorporated under the laws of the state of
Utah, is the creator of the EcoSmart and the Rhapsody Platforms of intelligent
automation solutions designed to optimize energy efficiency, comfort and
analytics in support of the emerging Internet of Things ("IoT"). The platforms
are deployed primarily in the hospitality, educational, governmental and other
commercial markets, and is specified by engineers, HVAC professionals, building
owners, and building operators. We currently operate in a single reportable
business segment.
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.
Critical Accounting Policies and Estimates and New Accounting Pronouncements
Please refer to Notes A & B under Item 1 - Financial Statements.
26
Revenues
The table below outlines product versus recurring revenues for comparable
periods:
Three Months Ended
September 30, 2022 September 30, 2021 Variance
Product $ 1,828,954 91% $ 1,290,389 89% $ 538,565 42%
Recurring 188,380 9% 163,679 11% 24,701 15%
Total $ 2,017,334 100% $ 1,454,068 100% $ 563,265 39%
Nine Months Ended
September 30, 2022 September 30, 2021 Variance
Product $ 5,570,775 91% $ 4,071,159 88% $ 1,499,616 37%
Recurring 535,634 9% 532,607 12% 3,027 1%
Total $ 6,106,409 100% $ 4,603,766 100% 4 1,502,643 33%
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 September 30, 2022, product revenues increased 42% or
$0.54 million when compared to the prior year. Hospitality revenues increased
21% to $1.44 million, educational revenues increased 706% to $0.32 million and
governmental revenues increased 216% to $0.07 million, while MDU revenues
decreased 100% to $0.00 million and healthcare revenues were unchanged at $0.00
million. Product revenues derived from channel partners increased 55% to $1.43
million compared to the prior year period. The increase was primarily driven by
increased volumes from three existing customers in the hospitality market,
partially offset by a decrease in volume from one existing customer.
International revenues increased 228% to $0.22 million. The increase in
international revenues was primarily driven by increased volumes from one
existing customer in the hospitality market.
For the nine months ended September 30, 2022, product revenues increased 37% or
$1.50 million when compared to the prior year.
Hospitality revenues increased 13% to $3.92 million, governmental revenues
increased 135% to $0.34 million and educational revenues increased 895% to $1.23
million, while MDU revenues decreased 75% to $0.07 million and healthcare
revenues decreased 100% to $0.00 million. Product revenues derived from channel
partners increased 32% to $4.26 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 one existing customer. International revenues increased 6% to $0.49 million
when compared to the prior year period. The increase in international revenues
was not primarily driven by any specific customer.
Backlogs were approximately $3.3 million and $3.1 million at September 30, 2022
and 2021, respectively.
27
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 nine months ended September 30, 2022, recurring revenue
increased by 15% and 1%, respectively, when compared to the prior year periods.
The increase was related to increased 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
September 30, 2022 September 30, 2021 Variance
Product $ 1,371,312 75% $ 851,873 66% $ 519,439 61%
Recurring 32,952 17% 13,646 8% 19,306 141%
Total $ 1,404,264 70% $ 865,519 60% $ 538,745 62%
Nine Months Ended
September 30, 2022 September 30, 2021 Variance
Product $ 3,049,048 55% $ 2,164,586 53% $ 884,462 41%
Recurring 94,027 18% 36,868 7% 57,159 155%
Total $ 3,143,075 51% $ 2,201,454 48% $ 941,621 43%
Costs of Product Revenue
Costs of product revenue include materials and installation labor related to
Telkonet's platform technologies. For the three and nine months ended September
30, 2022, product costs increased 61% and 41%, respectively, compared to the
prior year period.
The quarterly variance was primarily attributable to increases in material costs
of $0.31 million resulting from increased product revenues, logistical expenses
of $0.04 million, inclusive of import tariffs 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
75%, an increase of 9%, compared to the prior year period.
The quarterly variance was primarily attributable to increases in material costs
of $0.31 million resulting from increased product revenues, logistical expenses
of $0.04 million, inclusive of import tariffs 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
75%, an increase of 9%, compared to the prior year period.
For the nine month comparison, the variance was primarily attributable to
increases in material costs of $0.54 million resulting from increased product
revenues, logistical expenses of $0.13 million, a purchase price variance of
$0.23 million, resulting from global chip shortages, supply chain challenges and
inflationary pressures, and the use of installation subcontractors of $0.19
million, partially offset by decrease in inventory adjustments of $0.26 million.
Material costs as a percentage of product revenues were 55%, an increase of 2%,
compared to the prior year period.
28
Costs of Recurring Revenue
Recurring revenue costs are comprised primarily of call center support labor.
For both the three and nine months ended September 30, 2022, recurring revenue
costs increased by 141% and 155%, 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
September 30, 2022 September 30, 2021 Variance
Product $ 457,642 25% $ 438,516 34% $ 19,126 4%
Recurring 155,428 83% 150,033 92% 5,395 4%
Total $ 613,070 30% $ 588,549 40% $ 24,521 4%
Nine Months Ended
September 30, 2022 September 30, 2021 Variance
Product $ 2,521,727 45% $ 1,906,573 47% $ 615,154 32%
Recurring 441,607 82% 495,739 93% (54,132 -11%
Total $ 2,963,334 49% $ 2,402,312 52% $ 561,022 23%
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 September 30, 2022
increased 4% or $0.02 million when compared to the prior year period. The
increase in gross profit was primarily attributable to an increase in revenues
of $0.54 million and a decrease in the use of installation subcontractors of
$0.06 million, partially offset by increases in logistical expenses of $0.04
million, inclusive of import tariffs and a purchase price variance of $0.19
million, resulting from global chip shortages, supply chain challenges and
inflationary pressures. For the three months ended September 30, 2022, the
actual gross profit percentage decreased by 9 points to 25% compared to the
prior year period. Tariffs imposed on Chinese imports resulted in an adverse
impact of approximately 5% on the actual gross profit percentage for the three
months ended September 30, 2022, compared to approximately 8% for the prior year
period. Tariffs will fluctuate based upon volume of goods imported, which is
contingent upon expected inventory supply and demand.
Gross profit on product revenue for the nine months ended September 30, 2022
increased 32% or $0.61 million when compared to the prior year period. The
increase in gross profit was primarily attributable to an increase in revenues
of $1.50 million and a decrease in inventory adjustments of $0.26 million,
partially offset by increases in material costs of $0.54 million resulting from
increased product revenues, logistical expenses of $0.13 million, a purchase
price variance of $0.23 million, resulting from global chip shortages, supply
chain challenges and inflationary pressures and the use of installation
subcontractors of $0.19 million. For the nine months ended September 30, 2022,
the actual gross profit percentage decreased by 2 points to 45% 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 nine
months ended September 30, 2022 and September 30, 2021.
29
Gross Profit on Recurring Revenue
Gross profit on recurring revenue for the three and nine months ended September
30, 2022 increased by 4% and decreased by 11% respectively, when compared to the
prior year period. Variances were primarily due to fluctuating 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
September 30, September 30,
2022 2021 Variance
$ 1,306,869 $ 1,479,832 $ (172,963 ) -12%
Nine Months Ended
September 30, September 30,
2022 2021 Variance
$ 4,140,169 $ 4,273,474 $ (133,305 ) -3%
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 nine months ended September 30, 2022, operating
expenses decreased by 12% and 3%, respectively, when compared to the prior year
period for the reasons discussed below.
Research and Development
Three Months Ended
September 30, September 30,
2022 2021 Variance
$ 272,144 $ 268,917 $ 3,227 1%
Nine Months Ended
September 30, September 30,
2022 2021 Variance
$ 798,913 $ 876,778 $ (77,865 ) -9%
Research and development costs are related to both present and future product
development and integration and are expensed in the period incurred. During the
three and nine months ended September 30, 2022, research and development costs
increased 1% and decreased 9%, respectively, when compared to the prior year
periods. For the three month comparison, the variance is not primarily driven by
any specific expense. For the nine month comparison, the variance is primarily
attributable to decreases in payroll of $0.09 million.
30
Selling, General and Administrative Expenses
Three Months Ended
September 30, September 30,
2022 2021 Variance
$ 1,026,023 $ 1,200,569 (174,546 ) -15%
Nine Months Ended
September 30, September 30,
2022 2021 Variance
$ 3,310,127 $ 3,362,761 (52,634 ) -2%
During the three and nine months ended September 30, 2022, selling, general and
administrative expenses decreased 15% and 2%, respectively, over the prior year
periods.
For the three month comparison, the variance is primarily attributable to
decreases in a trade show expenses of $0.09 million and legal fees of $0.20
million, partially offset by increases in payroll taxes of $0.10 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 nine month comparison, the variance is primarily attributable to
decreases in legal fees of $0.48 million, audit fees of $0.10 million and
consulting fees of $0.06 million, partially offset by increases in payroll taxes
of $0.42 million, recruiting fees of $0.10 million and staffing, payroll of
$0.08 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 nine months ended September 30, 2022, the Company had
operating losses of $0.69 million and $1.18 million, respectively, compared to
operating losses of $0.89 million and $1.87 million, respectively, during the
prior year periods.
The three month operating loss improvement is primarily due to the increase in
gross profit and reduction in SG&A expenses. The nine month operating loss
improvement is again primarily due to the increase in gross profit and a
reduction in operating expenses as discussed above.
Net Income (Loss)
During the three and nine months ended September 30, 2022, the Company had net
losses of $0.70 million and $1.21 million, respectively, compared to net income
of $0.02 million and a net loss of $0.06 million, respectively during the prior
year periods.
The three month decrease in net income is primarily due to a $0.92 million
non-cash gain on debt extinguishment in connection with the full forgiveness of
the second PPP Loan in the prior year period, partially offset by an increase in
gross profit and reduction in operating expenses.
The nine month increase in net losses is primarily due to a $1.84 million
non-cash gain on debt extinguishment in connection with the full forgiveness of
the First and Second PPP Loans in the prior year period, partially offset by an
increase in gross profit and reduction in operating expenses.
31
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
September 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.
RECONCILIATION OF NET LOSS
TO ADJUSTED EBITDA
Three Months Ended Nine Months Ended
September 30 September 30
2022 2021 2022 2021
Net Income (loss) $ (697,572 ) $ 17,240 $ (1,206,654 ) $ (55,616 )
Gain on debt extinguishment - (916,107 ) - (1,836,780 )
Gain / (Loss on sale of asset 70 - 526 -
Interest expense, net 2,735 7,584 21,940 19,286
Income tax provision 968 - 7,353 1,948
Depreciation and amortization 8,702 10,346 31,129 33,935
EBITDA (685,097 ) (880,937 ) (1,145,706 ) (1,837,227 )
Adjustments:
Stock-based compensation 1,815 1,815 5,445 5,446
Adjusted EBITDA $ (683,282 ) $ (879,122 ) $ (1,140,261 ) $ (1,831,781 )
32
Liquidity and Capital Resources
For the three-month period ended September 30, 2022, the Company reported a net
loss of ($697,572), had cash used in operating activities of ($3,121,812) and
ended the period with an accumulated deficit of ($129,874,830) and total current
assets in excess of current liabilities of $4,789,402. At September 30, 2022,
the Company had $3,721,024 of cash and $1,000,000 of availability on the Credit
Facility.
Since inception through September 30, 2022, we have incurred cumulative losses
of ($129,874,830) 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 included 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 expense reductions 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 ($757,483) during the three months ended September 30,
2022 from working capital of $5,546,885 at June 30, 2022 to a working capital of
$4,789,402 at September 30, 2022.
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 $0 and $403,089 at September
30, 2022 and December 31, 2021, respectively, and the remaining available
borrowing capacity was approximately $1,000,000 and $460,000, respectively. As
of September 30, 2022, the Company was in compliance with all financial
covenants.
Cash Flow Analysis
Cash used in operations was ($3,121,812) and ($1,310,788), during the nine
months ended September 30, 2022 and 2021, respectively. As of September 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 nine months ended September 30, 2022 compared
to the nine months ended September 30, 2021 were primarily a result of increases
in Account Receivable balances of ($929,000), inventory balances of ($583,000),
a decrease in Accounts Payable balances of ($1,237,000), partially offset by a
reduction in prepaid balances of $418,000. 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.
33
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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