Executive Summary

Q2 2021 delivered sequential improvement with revenue up 43% q/q to $1.86M and gross profit up 57% q/q to $1.11M, while operating loss narrowed materially to $(0.15)M; gross margin expanded to 60% as lower logistics, inventory adjustments, and reduced tariffs drove mix/efficiency gains .
Year-over-year, total revenue rose 45% and gross profit climbed 164%; adjusted EBITDA loss improved to $(0.14)M from $(0.93)M, reflecting expense control and margin recovery despite ongoing hospitality demand headwinds .
No formal quantitative guidance was issued; management highlighted market recovery uncertainties and emphasized strategic financing with VDA Group ($5M for 53% stake plus warrants), expected to close in Q4 2021, as a key strategic catalyst for scale, manufacturing, and international reach .
Balance sheet liquidity improved: cash rose to $3.3M, availability on the credit facility to $0.545M, with a second PPP loan of ~$0.913M outstanding; covenant risk around the $2M minimum cash remains a watch item pending extension discussions with Heritage Bank .

What Went Well and What Went Wrong

What Went Well

Gross margin expanded to 60% (+27 pts YoY), driven by higher revenue, lower logistical costs (~~$0.10M), inventory adjustments (~~$0.03M), reduced use of installation subcontractors (~$0.02M), and much lower tariff drag (~1% vs ~12% a year ago) .
Channel momentum: product revenue from channel partners increased 68% to $1.39M, primarily driven by two customers; international revenue rose 55% to $0.15M on one large customer .
Strategic financing/partnership with VDA Group positions Telkonet for manufacturing scale, broader geography (VDA 100% international vs TKOI ~90% U.S.), and complementary technology synergy; CEO: the deal “allows us to…scale Telkonet’s manufacturing…[with] next to no overlap” and “bring together…room management [and] energy management” .

What Went Wrong

Hospitality demand recovery remains slow; management cites continued pandemic/Delta variant impacts and STR expectations for U.S. hotel occupancy not exceeding 50% in 2021, delaying normalization of business travel and RevPAR recovery to 2023–2024 .
Operating expenses, while down YoY in Q2, reflect increased legal (+$0.15M) and consulting (+$0.07M) costs; YTD OpEx includes elevated legal (+$0.28M) and audit (+$0.08M) vs prior year, partly offset by CARES Act payroll tax credits .
Capital structure/dilution risk: to consummate VDA, the company plans to increase authorized common shares (up to 475M) and issue 53% to VDA at close, reducing existing shareholders from 100% to 47%, with a potential reverse split discussed post-transaction .

Financial Results

Metric	Q2 2020	Q1 2021	Q2 2021
Revenue ($USD)	$1,281,682	$1,294,209	$1,855,489
Gross Profit ($USD)	$420,014	$705,495	$1,108,268
Gross Margin (%)	~33% (60% less 27 pts)	55%	60%
Operating Loss ($USD)	$(943,299)	$(830,296)	$(149,583)
Adjusted EBITDA ($USD)	$(926,740)	$(815,241)	$(137,418)
Net Income (Loss) ($USD)	$(950,097)	$82,739	$(155,595)
Diluted EPS ($)	$(0.01)	$0.00	$(0.00)
Consensus Revenue (Q2 2021)	N/A (unavailable)	—	N/A (unavailable)
Consensus EPS (Q2 2021)	N/A (unavailable)	—	N/A (unavailable)

Segment/Channel Breakdown (Q2 2021):

Segment/Channel	Q2 2021
Hospitality Revenue ($USD)	$1,560,000
MDU Revenue ($USD)	$80,000
Healthcare Revenue ($USD)	$20,000
Educational Revenue ($USD)	$10,000
Governmental Revenue ($USD)	$5,000
Channel Partner Product Revenue ($USD)	$1,390,000
International Revenue ($USD)	$145,000

KPIs and Liquidity:

KPI	Q1 2021	Q2 2021
Backlog ($USD)	$2.6M	$3.0M
Cash & Equivalents ($USD)	$2.7M	$3.3M
Credit Facility Availability ($USD)	$311,000	$545,000
PPP Loan Status	First PPP forgiven (Feb 16, 2021)	Second PPP outstanding ~$913,000
Working Capital ($USD)	$1.8M	$1.6M

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue	FY/Q3–Q4 2021	None provided	None provided (qualitative recovery commentary only)	Maintained (no formal guidance)
Gross Margin	FY/Q3–Q4 2021	None provided	None provided; drivers cited (lower logistics, tariffs, subcontractor use)	Maintained (no formal guidance)
OpEx	FY 2021	None provided	No formal targets; noted legal/audit/royalty puts and CARES Act payroll credit tailwinds	Maintained
Capital/Transaction	Q4 2021 close	N/A	VDA financing $5M for 53% stake plus warrant; shareholder approval and share authorization up to 475M required	New disclosure

No numerical guidance was issued; management commentary focused on market recovery timing and the VDA transaction as strategic positioning for growth .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q1 2021)	Current Period (Q2 2021)	Trend
Hospitality/Macro Recovery	Cautious outlook; STR forecast sub-50% occupancy in 2021; business travel normalization 2023–2024	Similar caution; Delta variant uncertainty; slow recovery into H2 2021	Unchanged/Cautious
Tariffs/Cost Structure	Tariff drag ~3%; margin aided by lower material/subcontractor costs	Tariff drag ~1%; margin aided by lower logistics, inventory adjustments, reduced subcontractors	Improving
Channel Partnerships	Strong quoting; Trane/Carrier/JCI relationships; Mitsubishi/LG integrations	Channel-derived product rev +68% YoY; two customers drove gains	Strengthening
International Expansion	Early momentum; partnerships forming	International revenue +55% on one customer; strategic VDA international footprint	Accelerating
Credit Facility/Covenants	Risk of $2M minimum cash breach; active lender dialogue	Q2 availability improved; covenant risk still monitored; extension discussions ongoing	Mixed
Strategic Transaction	Exploring strategic initiatives	Announced VDA financing/majority stake; board reconstitution; potential reverse split	Executing

Management Commentary

CFO: “For the quarter ended June 30, 2021, total revenues of $1.9 million represented a 45% increase… Gross profit… increased 164% to $1.1 million… actual gross profit percentage increased 27% to 60%… tariffs… adverse impact of approximately 1% vs ~12% prior year” .
CEO on VDA: “When you look at VDA as a manufacturer, we’re able to scale Telkonet’s manufacturing… we are currently largely a domestic company… whereas VDA is 100% international… bringing together… room management… [and] energy management… allows us to… improve… catalog… once the deal has closed” .
CFO on share authorization/dilution: “We’re… request[ing]… to increase the number of authorized shares… up to 475 million… [and] approval of granting that 53% ownership stake… existing shareholders will go from 100%… to 47%” .
CEO on reverse split: “One of the items… post transaction… is the ability to do a reverse split and bring the outstanding stock volume down to a more normalized number” .
Macro tone: “Business travel… remains limited… U.S. hotel occupancy rates will not exceed 50% in 2021… full recovery of RevPAR… unlikely… until end of 2024” .

Q&A Highlights

Transaction mechanics and governance: Board to be reconstituted with VDA designees post-close; reverse split under consideration to normalize share count .
Shareholder dilution and authorization: Company plans to increase authorized shares (up to 475M) to facilitate 53% issuance to VDA, leaving current shareholders at 47% ownership post-close .
Strategic rationale: Synergies across manufacturing scale, complementary tech stacks, and geography; operations to proceed as a merger-like integration for scalability, though technically structured as an investment .
Timeline and financing: Stock Purchase Agreement signed Aug 6, 2021; expected close in Q4 2021 subject to shareholder approvals and customary conditions .
Covenant/credit facility: Extension discussions ongoing; improved Q2 borrowing base/availability but minimum cash covenant risk persists .

Estimates Context

Wall Street consensus estimates via S&P Global for Q2 2021 revenue and EPS were unavailable; no comparison to consensus could be made. Consensus appears limited given micro-cap coverage constraints .

Key Takeaways for Investors

Gross margin inflection: 60% gross margin in Q2 (+27 pts YoY) with clear drivers (lower logistics/subcontractors, inventory adjustments, minimal tariff drag), suggesting structural improvements beyond volume recovery .
Sequential momentum: Revenue (+43% q/q) and gross profit (+57% q/q) improved materially; operating loss narrowed to $(0.15)M, and adjusted EBITDA to $(0.14)M, indicating operating leverage as demand returns .
Channel/customer concentration: Channel-derived product revenue +68% YoY, driven by two customers; monitor concentration risk alongside upside from partner-led pipeline .
Strategic catalyst: VDA transaction can expand manufacturing capacity, product portfolio, and international reach; closing/approvals are critical milestones that may shift the narrative and medium-term growth trajectory .
Liquidity watch: Cash improved to $3.3M and facility availability to $0.545M, but minimum cash covenant risk remains; successful credit facility extension and post-close capital structure actions (potential reverse split) are key risk mitigants .
Demand outlook: Hospitality recovery remains uneven per STR; expect near-term volatility, with more durable improvements in 2022–2023 as business travel normalizes; diversified segments (MDU, government, healthcare, education) provide incremental offsets .
Actionable: Near term, monitor shareholder votes/8-Ks on the VDA deal, credit facility amendments, and backlog conversion pace; medium term, assess integration execution, channel mix sustainability, and margin durability through H2 2021 .

Note: All comparisons are based on company filings and transcripts; consensus estimates from S&P Global were unavailable for Q2 2021.

TELKONET INC (TKOI)·Q2 2021 Earnings Summary