TELKONET, INC.
RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA (Telkonet Segment)
FOR THE THREE MONTHS AND YEARS ENDED DECEMBER 31, 2007 AND 2006
(Unaudited)
| | | Three Months Ended | | | Years Ended | |
| | | December 31, 2007 | | | December 31, 2006 | | | December 31, 2007 | | | December 31, 2006 | |
| Net (loss), as reported | | $ | (5,449,127 | ) | | $ | (5,134,186 | ) | | $ | (20,391,110 | ) | | $ | (27,437,116 | ) |
| Net loss attributed to MSTI segment | | | 3,077,829 | | | | 1,255,135 | | | | 7,120,380 | | | | 3,272,478 | |
| Net loss attributed to Telkonet segment | | | (2,371,298 | ) | | | (3,879,051 | ) | | | (13,270,730 | ) | | | (24,164,638 | ) |
| | | | | | | | | | | | | | | | | |
| Interest (income) expense, net | | | 245,106 | | | | (159,517 | ) | | | 144,109 | | | | 5,060,844 | |
| Depreciation and amortization | | | 94,690 | | | | 53,461 | | | | 410,021 | | | | 220,898 | |
| | | | | | | | | | | | | | | | | |
| EBITDA attributed to Telkonet segment | | | (2,031,502 | ) | | | (3,985,107 | ) | | | (12,716,600 | ) | | | (18,882,896 | ) |
| Adjustments: | | | | | | | | | | | | | | | | |
| Loss on early extinguishment of debt | | | - | | | | - | | | | - | | | | 4,626,679 | |
| Gain on sale of investment | | | (1,868,956 | ) | | | - | | | | (1,868,956 | ) | | | - | |
| Stock based compensation | | | 438,226 | | | | 265,086 | | | | 1,695,846 | | | | 1,358,239 | |
| | | | | | | | | | | | | | | | | |
| Adjusted EBITDA | | $ | (3,462,232 | ) | | $ | (3,720,021 | ) | | $ | (12,889,710 | ) | | $ | (12,897,978 | ) |
| | | | | | | | | | | | | | | | | |
NON-GAAP Financial Measures:
The Company, as is common in its industry, uses EBITDA as a measure of performance to demonstrate earnings exclusive of interest and non-cash events. The Company manages its business based on its cash flows. The Company, in its daily management of its business affairs and analysis of its monthly, quarterly and annual performance, makes its decisions based on cash flows, not on the amortization of assets obtained through historical activities. The Company, in managing its current and future affairs, cannot affect the amortization of the intangible assets to any material degree, and therefore uses EBITDA as its primary management guide. Since an outside investor may base its evaluation of the Company’s performance based on the Company’s net loss not its cash flows, there is a limitation to the EBITDA measurement. EBITDA is not, and should not be considered, an alternative to net loss, loss from operations, or any other measure for determining operating performance of liquidity, as determined under accounting principals generally accepted in the United States (GAAP). The most directly comparable GAAP reference in the Company’s case is the removal of interest, depreciation, amortization, taxes and other non-cash expense. In assessing the overall health of its business during the fourth quarter and the fiscal years 2007 and 2006, The Company excluded items in the following general categories, each of which are described below:
Loss on Early Extinguishment of Debt. In August 2006, the Company recorded a one-time non-cash expense of $4,626,679 in connection with the repayment of outstanding convertible senior notes. The expense consisted of a redemption premium paid in common stock, additional warrants issued, and a write-off of unamortized debt discount and financing costs. The Company considers this a financing transaction, and it is not an indication of current or future operating performance. Therefore the Company does not consider the inclusion of this transaction helpful in assessing its current financial performance compared to previous periods as well as prospects for the future.
Gain on Sale of Investment. In November 2007, the Company completed the sale of its investment in a privately held company and recorded a $1,868,956 gain on the sale of the investment in the consolidated statement of operations for the year ended December 31, 2007. The Company considers this a financing transaction, and it is not an indication of operating performance. Therefore the Company does not consider the inclusion of our sale of this investment helpful in assessing its current financial performance compared to previous periods as well as prospects for the future.
Stock Based Compensation. The Company believes that because of 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 previous periods.
TELKONET, INC.
CONSOLIDATED STATEMENTS OF LOSSES
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
| | | 2007 | | | 2006 | |
| | | | | | | |
| Revenues, net: | | | | | | |
| Product | | $ | 9,168,077 | | | $ | 3,092,967 | |
| Rental | | | 4,984,656 | | | | 2,088,361 | |
| Total Revenue | | | 14,152,733 | | | | 5,181,328 | |
| | | | | | | | | |
| Cost of Sales: | | | | | | | | |
| Product | | | 7,165,120 | | | | 2,062,399 | |
| Rental | | | 4,505,476 | | | | 2,418,260 | |
| Total Cost of Sales | | | 11,670,596 | | | | 4,480,659 | |
| | | | | | | | | |
| Gross Profit | | | 2,482,137 | | | | 700,669 | |
| | | | | | | | | |
| Operating Expenses: | | | | | | | | |
| Research and Development | | | 2,349,690 | | | | 1,925,746 | |
| Selling, General and Administrative | | | 17,897,974 | | | | 14,346,364 | |
| Impairment Write-Down in Goodwill of Subsidiary | | | 1,977,768 | | | | - | |
| Impairment Write-Down in Long Lived Assets of Subsidiary | | | 493,512 | | | | - | |
| Impairment Write-Down in Investment in Affiliate | | | - | | | | 92,000 | |
| Non-Employee Stock Based Compensation | | | 470,220 | | | | 277,344 | |
| Non-Employee Stock Based Compensation of Subsidiary | | | 337,500 | | | | - | |
| Employee Stock Based Compensation | | | 1,225,626 | | | | 1,080,895 | |
| Employee Stock Based Compensation of Subsidiary | | | 308,634 | | | | - | |
| Depreciation and Amortization | | | 878,766 | | | | 540,906 | |
| Total Operating Expenses | | | 25,939,690 | | | | 18,263,255 | |
| | | | | | | | | |
| Loss from Operations | | | (23,457,553 | ) | | | (17,562,586 | ) |
| | | | | | | | | |
| Other Income (Expenses): | | | | | | | | |
| Gain on Sale of Investment in Affiliate | | | 1,868,956 | | | | - | |
| Registration Rights Liquidated Damages of Subsidiary | | | (500,000 | ) | | | - | |
| Loss on Early Extinguishment of Debt | | | - | | | | (4,626,679 | ) |
| Other Income | | | - | | | | - | |
| Interest Income | | | 116,043 | | | | 327,184 | |
| Interest Expense | | | (1,328,624 | ) | | | (5,594,604 | ) |
| Total Other Income (Expenses) | | | 156,375 | | | | (9,894,099 | ) |
| | | | | | | | | |
| Loss Before Provision for Income Taxes | | | (23,301,178 | ) | | | (27,456,685 | ) |
| | | | | | | | | |
| Minority interest | | | 2,910,068 | | | | 19,569 | |
| Provision for Income Tax | | | - | | | | - | |
| | | | | | | | | |
| Net (Loss) | | $ | (20,391,110 | ) | | $ | (27,437,116 | ) |
| | | | | | | | | |
| Loss per common share (basic and assuming dilution) | | $ | (0.31 | ) | | $ | (0.54 | ) |
| | | | | | | | | |
| Weighted average common shares outstanding | | | 65,414,875 | | | | 50,823,652 | |
