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 months ended March 31, 2022, 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 contained in Part I.
Revenues
The table below outlines product versus recurring revenues for comparable
periods:
Three Months Ended
March 31, 2022 March 31, 2021 Variance
Product $ 1,954,430 91% $ 1,107,864 86% $ 846,566 76%
Recurring 196,275 9% 186,345 14% 9,930 5%
Total $ 2,150,705 100% $ 1,294,209 100% $ 856,496 66%
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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 March 31, 2022, product revenues increased by 76% or
$0.85 million when compared to the prior year. Hospitality revenues increased
40% to $1.06 million, government revenues increased 132% to $0.28 million,
education revenues increased 644% to $0.55 million while MDU revenues decreased
60% to $0.07 million and healthcare revenues decreased 100% to $0.00 million.
Product revenues derived from value-added resellers and distribution partners
were $1.42 million for the three months ended March 31, 2022, an increase of 55%
compared to the prior year period. The increase was primarily driven by three
customers, partially offset by non-repeatable revenues in 2022 from four
customers. For the three months ended March 31, 2022, international revenues
decreased 45% to $0.14 million when compared to the prior year period. The
decrease in international revenues was primarily driven by non-repeatable
revenues in 2022 from two customers.
Backlogs were approximately $3.2 million and $2.6 million at March 31, 2022 and
2021, respectively. Beginning in the third quarter of 2021, global supply chain
disruptions have created delays in our order fulfillment. These disruptions are
ongoing and order cancellations could result if these issues persist.
Recurring Revenue
Recurring revenue is attributed to our call center support services. 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. Recurring revenue consists of Telkonet's service and support programs
for its energy management platforms. For the three months ended March 31, 2022,
recurring revenue increased by 5% when compared to the prior year period. 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
March 31, 2022 March 31, 2021 Variance
Product $ 1,132,900 58% $ 577,814 52% $ 555,087 96%
Recurring 31,770 16% 10,900 6% 20,870 191%
Total $ 1,164,670 54% $ 588,714 45% $ 575,957 98%
Costs of Product Revenue
Costs of product revenue include materials and installation labor related to
Telkonet's platform technologies. For the three months ended March 31, 2022,
product costs increased $0.56 million compared to the prior year period based
upon greater revenues. The variance was primarily attributable to increases in
material costs of $0.47 million, inclusive of product surcharges of $0.24
million resulting from global chip shortages, supply chain challenges and
inflationary pressures, logistical expenses of $0.08 million, inclusive of
import tariffs, warranty expense of $0.02 million and the use of installation
subcontractors of $0.13 million, partially offset by a decrease in inventory
adjustments of $0.15 million. Material costs as a percentage of product revenues
were 40%, an increase of 7%, compared to the prior year period.
Costs of Recurring Revenue
Recurring revenue costs are comprised primarily of call center support labor.
For the three months ended March 31, 2022, recurring revenue costs increased by
191% when compared to the prior year period. The variance was primarily due to
increases in call center staffing.
26
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
March 31, 2022 March 31, 2021 Variance
Product $ 821,530 42% $ 530,050 48% $ 291,479 55%
Recurring 164,505 84% 175,445 94% (10,940 ) -6%
Total $ 986,035 46% $ 705,495 55% $ 280,539 40%
Gross Profit on Product Revenue
Gross profit on product revenues for the three months ended March 31, 2022
increased by 55%, or $0.29 million, when compared to the prior period. The
variance was primarily attributable to an increase in revenues of $0.56 million
and a decrease in inventory adjustments of $0.15 million, partially offset by
increases in material costs of $0.47 million, inclusive of product surcharges of
$0.24 million resulting from global chip shortages, supply chain challenges and
inflationary pressures, logistical expenses of $0.08 million, inclusive of
import tariffs, warranty expense of $0.02 million and the use of installation
subcontractors of $0.13 million. Material costs as a percentage of product
revenues were 40%, an increase of 7%, compared to the prior year period. For the
three months ended March 31, 2022, the actual gross profit percentage decreased
by 9% to 46% 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 March 31, 2022, compared to
approximately 3% for the prior year period.
Gross Profit on Recurring Revenue
Gross profit on recurring revenue for the three months ended March 31, 2022
decreased 6% when compared to the prior year period.
Operating Expenses
The tables below outline operating expenses for the comparable periods, along
with percentage change:
Three Months Ended March 31,
2022 2021 Variance
Total $ 1,491,506 $ 1,535,791 $ (44,285 ) -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 months ended March 31, 2022, operating expense
decreased by 3% when compared to the prior year period.
Research and Development
Three Months Ended March 31,
2022 2021 Variance
Total $ 269,240 $ 311,448 $ (42,208 ) (14 )%
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 months ended March 31, 2022, research and development costs decreased 14%
when compared to the prior year period. The variance is primarily attributable
to decreases in payroll of $0.04 million and certification expenses of $0.01
million partially offset by an increase in third-party consultant expenses of
$0.01 million.
27
Selling, General and Administrative Expenses
Three Months Ended March 31,
2022 2021 Variance
Total $ 1,212,813 $ 1,211,103 $ 1,710 0%
During the three months ended March 31, 2022, selling, general and
administrative expenses remained unchanged compared to the prior year period.
Operating Loss and Net Income (Loss)
During the three months ended March 31, 2022, the Company had an operating loss
of ($0.52) million, compared to an operating loss of ($0.83) million during the
prior year period. The improvement was primarily due to incremental gross profit
from additional revenue and a (3%) decrease in operating expenses.
During the three months ended March 31, 2022, the Company had net loss of
($0.52) million compared to net income of $0.08 million for the prior year
period. The decrease in profitability was primarily due to the non-recurrence of
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. This was partially
offset by the impact of increased revenues and a decrease in 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 March
31, 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 INCOME (LOSS)
TO ADJUSTED EBITDA
FOR THE THREE MONTHS ENDED MARCH 31,
2022 2021
Net income (loss) $ (517,828 ) $ 82,739
Gain on debt extinguishment - (920,673 )
Interest expense, net 12,357 7,873
Income tax (benefit) provision - (235 )
Depreciation and amortization 9,453 13,240
EBITDA (496,018 ) (817,056 )
Adjustments:
Stock-based compensation 1,815 1,815
Adjusted EBITDA $ (494,203 ) $ (815,241 )
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Liquidity and Capital Resources
For the three-month period ended March 31, 2022, the Company reported a net loss
of ($517,828) and had cash used in operating activities of ($1,515,209) and
ended the period with an accumulated deficit of ($129,186,004) and total current
assets in excess of current liabilities of $5,668,680. At March 31, 2022, the
Company had $5,878,897 of cash and approximately $514,000 of availability on its
Credit Facility.
Since inception through March 31, 2022, we have incurred cumulative losses of
($129,186,004) 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. With the receipt of the First
PPP Loan on April 17, 2020 (discussed below), the Company was able to lift some
of these mandates in order to return necessary personnel for the Company's
ongoing operations.
In addition, on January 12, 2022, the Company closed on the VDA Transaction (see
Note A), resulting in additional working capital of $5,000,000.
Loans under PPP
In addition to the actions noted above, on April 21, 2020, the Company entered
into an unsecured promissory note, dated April 17, 2020, with Heritage Bank for
a $913,063 loan under the PPP ("the First PPP Loan"). In January 2021, the
Company applied for forgiveness of the amount due on the First PPP Loan. On
February 16, 2021, the outstanding principal and interest accrued on the First
PPP Loan was fully forgiven.
On April 27, 2021, the Company entered into a second unsecured promissory note,
dated as of April 26, 2021, for a second PPP loan ("the Second PPP Loan" and,
together with the First PPP Loan, the "PPP Loans"), with Heritage Bank under a
second draw of the PPP administered by the SBA and authorized by the Keeping
American Workers Employed and Paid Act. In September 2021, the Company applied
for forgiveness of the amount due on the Second PPP Loan. On September 15, 2021,
Heritage Bank confirmed that the Second PPP Loan granted to the Company, in the
original principal amount of $913,063 plus accrued interest of $3,044 thereon,
was forgiven in full.
Working Capital
Working capital (current assets in excess of current liabilities) from
operations increased by $4,459,318 during the three months ended March 31, 2022
from working capital of $1,209,361 at December 31, 2021 to a working capital of
$ 5,668,679 at March 31, 2022. The increase in working capital was primarily due
to the injection of funds from the $5 million common shares purchase.
Revolving Credit Facility
On September 30, 2014, the Company entered into the Heritage Bank Loan
Agreement, with Heritage Bank, governing a revolving credit facility in a
principal amount not to exceed $2,000,000. Availability of borrowings under the
Credit Facility is subject to a borrowing base calculation based on the
Company's eligible accounts receivable and eligible inventory each multiplied by
an applicable advance rate, with an overall limitation tied to the Company's
eligible accounts receivable. The Heritage Bank Loan Agreement is available for
working capital and other general business purposes.
The outstanding principal balance of the Credit Facility bears interest at the
Prime Rate plus 3.00%, which was 6.25% at both March 31, 2022 and December 31,
2021. On October 9, 2014, as part of the Heritage Bank Loan Agreement, Heritage
Bank was granted a warrant to purchase 250,000 shares of Telkonet common stock
(which expired, on October 9, 2021). On November 6, 2019, the eleventh amendment
to the Credit Facility was executed to extend the maturity date to September 30,
2021, unless earlier accelerated under the terms of the Heritage Bank Loan
Agreement, and eliminate the maximum EBITDA loss covenant. The eleventh
amendment was effective as of September 30, 2019.
29
On September 30, 2021, the Company entered into a twelfth amendment to the
Heritage Bank Loan Agreement to extend the revolving maturity date to December
31, 2021, unless earlier accelerated under the terms of the Heritage Bank Loan
Agreement. In addition, subject to certain conditions as specified in the
Twelfth Amendment, Heritage Bank consented to the VDA Transaction (as described
above under the "Business and Basis of Presentation" section in Note A - Basis
of Presentation and Significant Accounting Policies) between the Company and
VDA, and acknowledged and agreed that certain events occurring in connection
with the Transaction, including the change of control of the Company resulting
from the Transaction, do not constitute Events of Default as defined in the Loan
Agreement.
On December 13, 2021, the Company entered into a thirteenth amendment to the
Heritage Bank Loan Amendment to extend the revolving maturity date to March 31,
2022, unless earlier accelerated under the terms of the Heritage Bank Loan
Agreement. In addition, the Heritage Bank Loan Amendment reduced the credit
extension amount to $1,000,000 and reduced unrestricted cash maintained in the
Company's accounts at Bank to be at least $1,000,000.
On March 10, 2022, the Company entered into a fourteenth amendment to the
Heritage Bank Loan Amendment to extend the revolving maturity date to June 30,
2023, unless earlier accelerated under the terms of the Heritage Bank Loan
Agreement.
The Heritage Bank Loan Agreement contains covenants that place restrictions on,
among other things, the incurrence of debt, granting of liens and sale of
assets. The Heritage Bank Loan Agreement also contains financial covenants. As
discussed above, the EBITDA loss covenant was eliminated in the eleventh
amendment to the Credit Facility. The sole financial covenants are a minimum
asset coverage ratio and a minimum unrestricted cash balance of $2 million
(since reduced to $1 million), both of which are measured at the end of each
month. A violation of either of these covenants could result in an event of
default under the Heritage Bank Loan Agreement. Upon the occurrence of such an
event of default or certain other customary events of defaults, payment of any
outstanding amounts under the Credit Facility may be accelerated and Heritage
Bank's commitment to extend credit under the Heritage Bank Loan Agreement may be
terminated. The Heritage Bank Loan Agreement contains other representations and
warranties, covenants, and other provisions customary to transactions of this
nature.
The outstanding balance on the Credit Facility was $436,136 and $403,089 at
March 31, 2022 and December 31, 2021 and the remaining available borrowing
capacity was approximately $514,000 and $460,000, respectively. As of March 31,
2022, the Company was in compliance with all financial covenants.
Cash Flow Analysis
Cash used in operations was $1,515,209 and $653,953, during the three months
ended March 31, 2022 and 2021, respectively. As of March 31, 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 three months ended March 31, 2022 were primarily a result of
the $5 million received as a result of the VDA Transaction, a $955,000 increase
in accounts receivable, $249,000 increase in inventories, a $242,000 reduction
in accounts payable, partially offset by a $398,000 decrease in prepaid items, a
$299,000 increase in accrued liabilities and $33,000 from the line of credit.
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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TELKONET, INC. 
