TELKONET INC (TKOI)·Q3 2021 Earnings Summary

Executive Summary

• Q3 2021 revenue fell 35% year over year to $1.45M and 22% sequentially vs Q2; gross margin compressed to ~40% from ~60% in Q2 as channel partner sales weakened and installation subcontractor use rose .
• Net income was $0.02M ($0.00 EPS), driven by a non‑cash $0.92M PPP loan forgiveness gain; adjusted EBITDA was a loss of $0.88M, highlighting core operating weakness despite one‑time benefits .
• Management highlighted persistent headwinds (pandemic recovery, supply chain, staffing turnover) but pointed to an $83M pipeline and expected VDA Group $5M financing to close in Q4 as near‑term catalysts; tariffs adversely impacted Q3 gross margin by ~8% .
• Stock reaction catalysts: closing of the VDA transaction (majority ownership, board changes) and 2022 backlog conversion; note that Q3 profitability was a non‑recurring PPP forgiveness event rather than operating strength .

What Went Well and What Went Wrong

• What Went Well

  • “We’ve strengthened our position for growth” via pending VDA partnership/financing and broader international guest-room solutions alignment .
  • Pipeline expanded to ~$83M with marquee partnerships and broader franchise relationships; management sees 2022 growth potential despite component/shipping hurdles .
  • Year‑to‑date gross profit increased 3% vs prior year on lower material/logistics/inventory adjustments, offsetting revenue contraction .

• What Went Wrong

  • Product revenues from channel partners fell 45% to $0.93M, driven by two customers; international revenue fell 86% to $70K (one customer), underscoring channel concentration risk .
  • Gross margin compressed to ~40% (down ~9 pts YoY), with an ~8% adverse impact from tariffs and higher subcontractor usage; adjusted EBITDA remained deeply negative .
  • Sequential deterioration from Q2: revenue down 22%, gross profit down ~47%, and operating loss widened, reflecting renewed caution and supply chain constraints late in Q3 .

Financial Results

Segment mix (Product vs. Recurring):

Vertical revenue breakdown:

Key KPIs:

Notes:

• Q3 net income reflects a $0.92M non‑cash PPP loan forgiveness gain; operating loss and adjusted EBITDA show underlying operating performance .
• Cash at Q1 was discussed in the call but presented with a prior‑year comparison; management emphasized working capital and availability rather than a standalone Q1 cash figure .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “Although the Company continues to endure numerous headwinds… we’ve strengthened our position for growth” via VDA partnership/financing .
• “We’ve continued to see our pipeline grow to currently $83 million… formed relationships with the largest of hospitality franchises… and substantial individual properties” .
• “Short‑term hurdles… component procurement and transportation… will not halt an improved performance, especially with… our partner, VDA” .
• CFO: “Tariffs imposed on Chinese imports resulted in an adverse impact of approximately 8% on the actual gross profit percentage” in Q3 .

Q&A Highlights

• Pipeline and 2022 outlook: Management expects 2022 to be a “decent growth year” contingent on resolving manufacturing/component and shipping issues; noted recent re‑acceleration after Delta variant pause .
• Strategic transaction mechanics: Post‑close, VDA to own ~53% (up to ~65% with warrants), majority of board to change; reverse split may be considered post‑transaction to normalize share count .
• Credit facility/covenants: Company remains compliant but flagged potential cash covenant risk without improved revenues; lender consented to VDA transaction; borrowing base availability ~$0.33M at Q3 .

Estimates Context

• We attempted to retrieve Q3 2021 consensus EPS and revenue estimates via S&P Global but data was unavailable in this session (request limit exceeded). As such, a beat/miss analysis vs Wall Street consensus cannot be provided at this time [functions.GetEstimates error].
• Coverage for OTC microcaps can be limited; use company‑reported results for evaluation until consensus is accessible.

Key Takeaways for Investors

• Q3 deterioration vs Q2 reflects renewed caution and supply chain/tariff headwinds; core operations remained loss‑making with adjusted EBITDA at $(0.88)M despite PPP forgiveness boosting GAAP net income .
• Concentration risk is material: declines tied to two channel customers and one international customer drove much of the revenue/margin pressure; diversification and VDA’s global footprint are strategic priorities .
• Near‑term catalysts: closing of $5M VDA financing and board transition in Q4, potential synergies in purchasing/manufacturing and expanded international sales coverage .
• 2022 setup: pipeline of ~$83M and backlog of ~$3.1M offer revenue visibility; execution hinges on resolving component/shipping constraints and converting leisure‑led demand while business travel lags .
• Watch tariffs: Q3’s ~8% gross margin drag vs ~1% in Q2 underscores volatility tied to import timing and volumes; margin recovery path depends on sourcing and pricing actions .
• Liquidity/credit covenants bear monitoring: availability ~$0.33M; covenant flexibility aided by lender consent to VDA deal, but operating improvement is needed to de‑risk .
• Strategic tech positioning (Touch Combo, Rhapsody, Mitsubishi/LG integrations) remains a medium‑term differentiator for hospitality and adjacent verticals as capex cycles normalize .

Footnote: No S&P Global consensus estimates were available in this session for TKOI to enable beat/miss comparisons. Values would be retrieved from S&P Global when accessible.