Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements. Any statements contained herein that are not historical fact may deem to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). The words believes, anticipates, plans, expects, intends, and similar expressions identify some of the forward-looking statements. Forward-looking statements are not guarantees of performance or future results and involve risks, uncertainties and assumptions. These statements include, among other things, statements regarding:
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our ability to diversify our operations;
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inability to raise additional financing for working capital;
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the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require our management to make estimates about matters that are inherently uncertain;
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our ability to attract key personnel;
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our ability to operate profitably;
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deterioration in general or regional economic conditions;
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adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
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changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate;
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the inability of management to effectively implement our strategies and business plan;
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inability to achieve future sales levels or other operating results;
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the unavailability of funds for capital expenditures;
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other risks and uncertainties detailed in this report;
as well as other statements regarding our future operations, financial condition and prospects, and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the heading Risk Factors in Part II, Item 1A and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
References in the following discussion and throughout this Quarterly Report to we, our, us, TKLS, Trutankless, Bollente, the Company, and similar terms refer to Trutankless Inc. unless otherwise expressly stated or the context otherwise requires.
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AVAILABLE INFORMATION
We file annual, quarterly and other reports and other information with the SEC. You can read these SEC filings and reports over the Internet at the SEC's website at www.sec.gov or on our website at www.trutanklessinc.com. You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, NE, Washington, DC 20549 on official business days between the hours of 10:00 am and 3:00 pm. Please call the SEC at (800) SEC-0330 for further information on the operations of the public reference facilities. We will provide a copy of our annual report to security holders, including audited financial statements, at no charge upon receipt to of a written request to us at Trutankless Inc., 15720 N. Greenway Hayden Loop, Suite 2, Scottsdale, Arizona 85260.
General
Trutankless Inc. was incorporated in the state of Nevada on March 7, 2008. On June 5, 2018, we changed our name from Bollente Companies Inc. to Trutankless Inc. The Company is headquartered in Scottsdale, Arizona and currently operates through its wholly-owned subsidiary, Bollente, Inc., a Nevada corporation incorporated on December 3, 2009.
We are involved in sales, marketing, research and development of a high quality, whole-house, smart electric tankless water heater that is more energy efficient than conventional products.
On August 13, 2015, we formed a wholly-owned subsidiary, Bollente International, Inc. (Bollente International), to begin international manufacturing and sales expansion for our trutankless® line of water heaters. The Company no longer operates Bollente International and on July 30, 2018, the Company caused Bollente International to be dissolved.
Products
Trutankless®
We manufacture and distribute trutankless® water heaters, a line of new, high-quality, highly efficient electric tankless water heaters. Our trutankless® water heaters are engineered to outperform and outlast both its tank and tankless predecessors in energy efficiency, output, and durability. It provides endless hot water on demand for a whole household and it also integrates with home automation systems. We have several features and design innovations which are new to the electric tankless water heater market that we believe will give our products a sustainable competitive advantage over our rivals in the market. Our trutankless® water heaters are available through wholesale plumbing distributors, including Ferguson, Hajoca, Hughes Supply, WinSupply locations, Morrison Supply, and several regional distributors. A partial listing of wholesalers may be found on our website (www.trutankless.com).
Our trutankless® water heaters are designed to provide an endless hot water supply because they are designed to heat water as it flows through the system. We believe that our products are capable of higher temperature rise than competitive units at given flow rates because of its improved design and greater efficiency. Our trutankless® water heaters can save energy and reduce operating costs compared to tank systems because unlike tanks, if there is no hot water demand, no energy is being used.
In addition, we intend to improve life-cycle costs with an improved design conceived not only to increase efficiency, but also the longevity of our products versus competitive units. Generally, a typical tank water heater lasts about 11 years, whereas gas tankless systems may last longer, but requires more routine maintenance. Our product line is designed to last longer than tank water heaters without any routine maintenance required under most conditions.
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We created a custom heat exchanger for our trutankless® product line that utilizes our patent pending Velix technology to heat water as it flows through the system, which means customers need not worry about running out of hot water. We believe weve selected the best materials available and a collection of exclusive design elements and features to maximize capacity, minimize energy use, and provide a truly maintenance free experience.
Our trutankless® water heaters were officially launched in the first quarter of 2014 and is sold throughout the wholesale plumbing distribution channel. We began generating revenue in the first quarter of 2014. As of the fiscal year ended December 31, 2017, we generated $695,857 in revenue. As of the nine months ended September 30, 2018, we generated $1,130,798 in revenue.
In July of 2014, we launched MYtankless.com, a customizable online control panel for our trutankless® line of smart electric water heaters. From the dashboard, residential and commercial users can obtain real-time status reports, adjust unit temperature settings, view up to three years of water usage data, and change notification settings from anywhere in the world, using a computer or web-enabled smart device at www.mytankless.com.
Additionally, service professionals can also use the dashboard to monitor system status on every unit they install, allowing them to proactively contact their customers if a service or warranty appointment is needed.
Our primary markets, Florida, Texas, Arizona, and the rest of the Sunbelt region are centers of growth in the U.S. construction industry with green building at an all-time high, and an unprecedented appliance replacement cycle. We intend to take advantage of these powerful macro-economic trends.
MYTankless.com is available as a service to consumers of trutankless® water heaters. We have applications available for download from the Google Play and Apple iOS stores, which like the online control panels, allows monitoring and control of the tankless systems.
On March 21, 2017, we announced our exclusive partnership with Mr. Rooter®.
In April 2017, we announced that our trutankless® line of smart electric tankless water heaters are the exclusive water heating solution for luxury communities built by the award-winning Arizona home builder Cullum Homes.
In June 2017, we announced that we have signed a manufacturing agreement with SINBON Electronics, a leading solution provider of electronic component integration design and manufacturing with a global presence in the U.S., Taiwan, China, Japan, the U.K., Germany, Hungary and the Czech Republic.
In September 2017, we announced that our trutankless® line of electric water heaters have launched a nationwide distribution program with Ferguson, the largest distributor of commercial and residential plumbing supplies, and pipe, valves, and fittings (PVF) in the United States.
In March 2018, we announced our sales and installation expansion into the Florida water heating market, which is over 90% electric, with our trutankless® line of electric water heaters.
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Industry Recognition and Awards
trutankless® received the Best of IBS 2014 Award for Best Home Technology Product from the National Association of Home Builders (NAHB) at this years International Builders Show (IBS) in Las Vegas. The IBS is produced by NAHB and is the largest annual light construction show in the world - featuring more than 1,100 exhibitors and attracting 75,000 attendees including high level decision makers from some of the largest home builders in the world as well as plumbing and HVAC professionals from top outfits in major markets.
trutankless® received the Governor's Award of Merit for Energy and Technology Innovation for the trutankless line of electric tankless heaters at Arizona Forward's 2014 Environmental Excellence Awards.
trutankless® received Kitchen and Bath Business Magazines 2014 K*BB Product Innovators Award Judges Choice Product.
Vero
On April 16, 2015, we announced the release of Vero, our new line of electric tankless water heaters geared towards budget-driven customers. Vero boasts the same water heating performance, durability and space savings of our flagship tankless water heater. Our trutankless® water heaters are available through wholesale plumbing distributors, including Ferguson, Hajoca, Hughes Supply, WinSupply locations, Morrison Supply, and several regional distributors. A partial listing of wholesalers may be found on our website (www.trutankless.com).
Customers and Markets
We sell our products to plumbing wholesale distributors and dealers.
Wholesalers
. Approximately 90% of our sales in 2017, 96.1% of our sales in 2016, 98.3% of our sales in 2015 and 93.5% of our sales in 2014 were to wholesale distributors for commercial and residential applications. We rely on commissioned manufacturers representatives to market our product lines. Additionally, our products are sold to independent dealers throughout the United States.
Manufacturing and Distribution
Our principal supplier is Sinbon Electronics, a contract manufacturer and engineering company based in Taiwan with manufacturing facilities in China. Sinbon handles procurement and supply chain management. We have an engineering agreement which is ongoing, and our manufacturing agreement is currently being negotiated.
Finished products are generally shipped Free on Board (FOB) Shanghai via ocean freight and are warehoused at Associated Global Systems located in Phoenix, Arizona. Merchandise is typically shipped using common carriers or freight companies are selected at the time of shipment based on order volume and the best available rates.
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RESULTS OF OPERATIONS
Results of Operations for the three months ended September 30, 2018 compared with the three months ended September 30, 2017.
Revenues
In the three months ended September 30, 2018, we generated $351,413 in revenues, as compared to $131,364 in revenues in the prior year. Cost of goods sold was $304,381 in the three months ended September 30, 2018, as compared to $105,685 in the three months ended September 30, 2017. This increase in cost of goods sold was primarily attributable to an increase in cost of inventory.
To the knowledge of management, the Company is unaware of any trends or uncertainties in the sales or costs of our products and services for the periods discussed.
Gross Profit
Our gross profit increased $21,353, or approximately 83%, to $47,032 for the three months ended September 30, 2018 from $25,679 for the three months ended September 30, 2017. This increase in gross profit was primarily attributable to an increase in products sold.
Expenses
Operating expenses totaled $748,987 during the three months ended September 30, 2018 as compared to $307,029 in the prior year. In the three-month period ended September 30, 2018, our expenses primarily consisted of General and Administrative of $366,933, Research and Development of $121,572 and Professional fees of $260,482.
General and administrative fees increased $280,413, or approximately 324% to $366,933 for the three months ended September 30, 2018 from $86,520 for the three months ended September 30, 2017. This increase was primarily due to an increase in wages and marketing.
Research and development increased $73,349, or approximately 152% to $121,572 for the three months ended September 30, 2018 from $48,223 for the three months ended September 30, 2017. This increase is attributed primarily to the Company spending more towards developing its technology.
Professional fees increased $88,196, or approximately 51% to $260,482 for the three months ended September 30, 2018 from $172,286 for the three months ended September 30, 2017. Professional fees increased due to an increase in consulting fees associated with business development.
Other Expenses
Interest expense increased $88,196 to $260,482 in the three months ended September 30, 2018 from $172,286 in the three months ended September 30, 2017. The increase was the result of an increase in notes payable with interest accruals.
Net Loss
In the three months ended September 30, 2018, we generated a net loss of $890,827, an increase of $518,920 from $371,907 for the three months ended September 30, 2017. This increase was attributable to increased cost of goods sold and consulting fees associated with business development.
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Results of Operations for the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017.
Revenues
In the nine months ended September 30, 2018, we generated $1,130,798 in revenues, as compared to $389,503 in revenues in the prior year. Cost of goods sold was $1,037,813, as compared to $295,433 in the nine months ended September 30, 2017. This increase in cost of goods sold was primarily attributable to an increase in cost of inventory.
To the knowledge of management, the Company is unaware of any trends or uncertainties in the sales or costs of our products and services for the periods discussed.
Gross Profit
Our gross profit decreased $1,085, or approximately 1%, to $92,985 for the nine months ended September 30, 2018 from $94,070 for the nine months ended September 30, 2017. This decrease in gross profit was primarily attributable to an increase in cost of goods sold.
Expenses
Operating expenses totaled $1,654,462 during the nine months ended September 30, 2018 as compared to $1,209,082 in the prior year. In the nine-month period ended September 30, 2018, our expenses primarily consisted of General and Administrative of $1,014,306, Research and Development of $126,058, and Professional fees of $514,098.
General and administrative fees increased $385,884, or approximately 61% to $1,014,306 for the nine months ended September 30, 2018 from $628,422 for the nine months ended September 30, 2017. This increase was primarily due to an increase in wages and marketing.
Research and development decreased $8,884, or approximately 7% to $126,058 for the nine months ended September 30, 2018 from $134,942 for the nine months ended September 30, 2017. This decrease is attributed primarily to the Company spending less towards developing its technology.
Professional fees increased $68,380, or approximately 15% to $514,098 for the nine months ended September 30, 2018 from $445,718 for the nine months ended September 30, 2017. Professional fees increased due to an increase in consulting fee associated with business development.
Other Expenses
Interest expense increased $94,112 to $445,580 in the nine months ended September 30, 2018 from $351,468 in the nine months ended Septembere 30, 2017. The increase was the result of an increase in notes payable with interest accruals.
Net Loss
In the nine months ended September 30, 2018, we generated a net loss of $2,007,057, an increase of $540,577 from $1,466,480 for the nine months ended September 30, 2017. This increase was attributable to increased cost of goods sold and consulting fees associated with business development.
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Going Concern
The financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate the continuance of the Company as a going concern. The Company may not have a sufficient amount of cash required to pay all the costs associated with operating and marketing of its products. Management intends to use borrowings and security sales to mitigate the effects of cash flow deficits; however, no assurance can be given that debt or equity financing, if and when required, will be available. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should the Company be unable to continue existence.
Liquidity and Capital Resources
At September 30, 2018, we had an accumulated deficit of $26,004,192. Primarily because of our history of operating losses and our recording of note payables, we have a working capital deficiency of $1,384,621 at Septembere 30, 2018. Losses have been funded primarily through issuance of common stock and borrowings from our stockholders and third-party debt. As of September 30, 2018, we had $39,881 in cash, $311,083 in accounts receivable, $82,684 in inventory, and $280,800 in prepaid expenses. We used net cash in operating activities of $1,028,358 for the nine months ended September 30, 2018.
Cash Flows from Operating, Investing and Financing Activities
The following table provides detailed information about our net cash flow for all financial statement periods presented in this Quarterly Report. To date, we have financed our operations through the issuance of stock and borrowings.
The following table sets forth a summary of our cash flows for the three months ended September 30, 2018 and 2017:
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Nine months ended
September 30,
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2018
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2017
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Net cash used in operating activities
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$
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(1,028,358)
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$
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(937,831)
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Net cash used in investing activities
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(892)
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-
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Net cash provided by financing activities
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990,532
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979,577
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Net increase/(decrease) in Cash
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(38,718)
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41,746
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Cash, beginning
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78,599
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87,134
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Cash, ending
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$
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39,881
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$
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128,880
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Operating activities
- Net cash used in operating activities was $1,028,358 for the nine months ended September 30, 2018, as compared to $937,831 used in operating activities for the same period in 2017. The increase in net cash used in operating activities was primarily due to a higher volume of units sold and increase in research and development and consulting contract cost.
Investing activities
- Net cash used in investing activities for the nine months ended September 30, 2018 was $892, as compared to $0 for the same period of 2017. The increase of net cash used in investing activities was mainly attributable to the purchase of equipment during the current period.
Financing activities
- Net cash provided by financing activities for the nine months ended September 30, 2018 was $990,532, as compared to $979,577 for the same period of 2017. The increase of net cash provided by financing activities was mainly attributable to more equity financing.
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Ongoing Funding Requirements
As of September 30, 2018, we continue to use traditional and/or debt financing to provide the capital we need to run the business. It is possible that we may need additional funding to enable us to fund our operating expenses and capital expenditures requirements.
Until such time, if ever, as we can generate substantial product revenues, we intend to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. There can be no assurance that any of those sources of funding will be available when needed on acceptable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or relationships with third parties when needed or on acceptable terms, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts; abandon our business strategy of growth through acquisitions; or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. See Note 1 - Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements.