TechKnow Final MDA v7

TechKnow
Executive Briefing – Quarter ended December 31, 2014
Nick Heim – Chief Executive Officer
Andrew Mills – Chief Financial Officer
Chris Askounis – Chief Operating Officer
Myia Franklin – Chief Marketing Officer
Nikki Bynes – Chief Sales Officer

TechKnow Quarter 12 Executive Briefing 2
Table
of
Contents

Overview
....................................................................................................................................
3

Results
of
Operations
.............................................................................................................
4

Operating
Revenues
...............................................................................................................
7

Revenue
Mix
Analysis
......................................................................................................................
7

Research
and
Development
Expenses
..............................................................................
8

Traveler
Segment
............................................................................................................................................
9

Mercedes
Segment
.......................................................................................................................................
12

Innovator
Segment
......................................................................................................................................
15

CostCutter
Segment
.....................................................................................................................................
18

Work
Horse
Segment
..................................................................................................................................
21

Marketing
and
Selling
Expenses
.......................................................................................
24

Advertising
.......................................................................................................................................
24

Marketing
Research
......................................................................................................................
24

Sales
Force
Expenses
.....................................................................................................................
24

Sales
Offices
and
Web
Centers
...................................................................................................
24

Web
Marketing
Expenses
............................................................................................................
24

Cost
of
Production
.................................................................................................................
25

Materials
Components
&
Costs
..................................................................................................
26

Traveler
............................................................................................................................................................
26

Mercedes
..........................................................................................................................................................
26

Innovator
.........................................................................................................................................................
27

Cost
Cutter
.......................................................................................................................................................
27

Work
Horse
.....................................................................................................................................................
27

Labor
...................................................................................................................................................
27

Changeover
.......................................................................................................................................
27

Operations
Overhead
Expenses
........................................................................................
28

Excess
Capacity
...............................................................................................................................
28

Inventory
Holding
..........................................................................................................................
28

Financial
Position
..................................................................................................................
29

Breakeven
Analysis
..............................................................................................................
30

Liquidity
and
Capital
Resources
.......................................................................................
31

Business
Outlook
...................................................................................................................
32

DCF
Valuation
..................................................................................................................................
33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Disclaimer:
This
Management’s
Discussion
and
Analysis
of
Financial
Conditions
and
Results
of
Operations
contain
forward-‐
looking
statements,
within
the
meaning
of
the
Private
Securities
Litigation
Reform
Act
of
1995
that
involve
risks
and

uncertainties.

Forward-‐looking
statements
provide
current
expectations
of
future
events
based
on
certain
assumptions
and

include
any
statement
that
does
not
directly
relate
to
any
historical
or
current
fact.
Forward-‐looking
statements
can
also
be

identified
by
words
such
as
“future,”
“anticipates,”
“believes,”
“estimates,”
“expects,”
“intends,”
“plans,”
“predicts,”
“will,”

“would,”
“could,”
“can,”
“may,”
and
similar
terms.
Forward-‐looking
statements
are
not
guarantees
of
future
performance
and

the
Company’s
actual
results
may
differ
significantly
from
the
results
discussed
in
the
forward-‐looking
statements.
A

discussion
of
factors
that
might
cause
such
differences
is
discussed
within
the
MD&A.
The
Company
assumes
no
obligation
to

revise
or
update
any
forward-‐looking
statements
for
any
reason,
except
as
required
by
law.

Overview

TechKnow’s
innovative
high
performance
computers
provide
peace
of
mind
with

unmatched
security
software
and
a
user-‐friendly
interface.

Our
computers
serve
the
needs

of
any
professional
ranging
from
web,
graphic,
and
business
designers
as
well
as
engineers

and
statistical
analysts
for
the
CostCutter,
Innovator,
Work
Horse,
Mercedes,
and
Traveler

markets.

TechKnow
operates
internationally
in
Los
Angeles,
Chicago,
New
York,
Atlanta,

Toronto,
Montreal,
Calgary,
Vancouver,
Paris,
Rome,
Berlin,
London,
Curitiba,
Rio
de

Janeiro,
Sao
Paulo,
Belo
Horizonte,
Shanghai,
Tianjin,
Guangzhou,
and
Beijing.

During
Quarter
12,
the
Company
implemented
a
two-‐phase
strategy.

First,
we
chose
to

compete
on
the
basis
of
greater
value
for
equal
or
lower
price
in
the
price
sensitive
market

segments,
which
are
CostCutter
and
Work
Horse.

Second,
we
chose
to
compete
on
the

basis
of
greater
value
at
equal
or
greater
price
in
the
less
price
sensitive
markets,
which
are

Traveler,
Innovator,
and
Mercedes.

The
Company
sold
one
product
per
segment
in
all
five

of
the
markets.

TechKnow’s
primary
competitor
in
the
industry
is
Rush
Industries;
secondary
competitors

consist
of
SkyDock
Industries
and
Excellicore.

TechKnow
comprises
60%
of
the
total

market
share,
with
104,000
units
demanded
in
Quarter
12.

The
Company
has
a
majority

presence
in
all
5
markets,
as
demonstrated
below:

• Traveler
(67%)

• Mercedes
(67%)

• Innovator
(45%)

• Work
Horse
(43%)

• CostCutter
(87%)

During
the
first
three
years
of
business
operations,
TechKnow
has
established
strong

competitive
advantages
through
the
use
of
debt
and
equity
capital
to
fund:

• Aggressive
investments,
relative
to
the
competition,
in
research
and
development
of

new
product
features

• Aggressive
investments,
relative
to
the
competition,
in
operating
capacity,
changeover,

and
quality
costs

• Aggressive
investments,
relative
to
the
competition,
in
sales
force
and
sales
offices

expansion
globally

Respectively,
the
aggressive
investment
strategies
listed
above
have
created
the
following

competitive
advantages
for
the
Company:

• Superior
brand
judgments,
relative
to
the
competition,
in
four
of
the
five
market

segments

• Superior
production
capabilities,
relative
to
the
competition,
in
the
areas
of
production

volume
and
costs

• Superior
global
market
presence,
relative
to
the
competition,
in
the
areas
of
sales
force

and
sales
offices

Results
of
Operations

During
Quarter
12,
net
income
was
$69,221,512
compared
to
net
income
of
$39,459,619
in

Quarter
11,
an
increase
of
$29,761,893
or
75.4%.

The
two
primary
contributors
to
the

change
in
our
bottom
line
for
Quarter
12
are:

1. An
increase
in
gross
sales
of
$77,840,794
or
52.8%

2. A
10.7%
spread
between
the
increase
in
net
revenues
of
52.8%
compared
to

the

increase
in
COGS
of
42.1%.

The
ability
to
lower
costs
is
due
to
the
Company

achieving
a
$55
average
reduction
in
variable
cost
per
unit.

Lower
cost
of
goods

sold
enabled
the
Company
to
increase
gross
margin
by
11.3%
more
than
the

aforementioned
increase
in
gross
sales.

The
following
page
displays
a
comparison
of
TechKnow’s
Quarter
12
Statement
of
Income

compared
to
Quarter
11.

The
key
drivers
of
the
75.4%
increase
in
net
income
referenced

above
are
highlighted
in
yellow
on
the
Statement
of
Income.


Chart
1
displays
the
three-‐year
growth
of
net
revenue
and
net
income;
Chart
2
displays

earnings
per
share
growth
for
the
same
period
of
time.

During
year
three
the
Company

realized
consistent
growth
in
net
revenue
and
net
income,
this
is
due
to
the
continual

increase
in
gross
sales
combined
with
the
continual
decrease
in
COGS.

Gross
sales
grew
as

a
result
of
the
Company’s
strategy
to
aggressively
invest
in
new
feature
development,

providing
a
brand
judgment
advantage.

Also,
aggressive
investing
in
operating
capacity,

changeover,
and
quality
costs
provided
a
production
cost
advantage.

Chart
1:
Three-‐Year
Growth
of
Net
Revenue
and
Net
Income

Chart
2:
Three-‐Year
Growth
of
Earnings
per
Share

Net
revenues
in
Quarter
12
were
$225,316,990
compared
to
$143,059,600
in
Quarter
11,

an
increase
of
$82,257,390
or
57.5%.

The
change
in
net
revenues
was
$47,462
as
a
result

of
price
changes,
$65,638,734
due
to
changes
in
units
sold,
and
$16,571,194
due
to
changes

in
the
mix
of
products
sold.

Net
revenues
fell
short
of
projections
by
$21,818,010.

Q3
Q4
Q5
Q6
Q7
Q8
Q9
Q10
Q11
Q12

Net
Revenue

0.83
2.10
2.40
24.00
28.50
45.60
44.00
93.40
147.40
225.30

Net
Income

-‐0.61
-‐0.78
-‐6.30
6.30
3.20
-‐3.00
7.00
16.50
39.40
69.20

-‐50.00

0.00

50.00

100.00

150.00

200.00

250.00

$
Millions

Net
Revenue
&
Net
Income

Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Q9
Q10
Q11
Q12

Earnings
per
Share
-‐9
-‐28
-‐20
-‐20
-‐97
96
49
-‐19
44
103
244
429

-‐200

-‐100

0

100

200

300

400

500

$
EPS

Earnings
per
Share

Operating
Revenues

Revenue
Mix
Analysis

Figure
1

Figure
2

Revenue
change
due
to
price
was
the
result
of
an
increase
in
the
price
of
the
Traveler

product,
TechKnoGo2.

Revenue
change
due
to
volume
was
the
result
of
an
increase
in

production
capacity
of
400
units
per
day.

This
allowed
the
Company
to
increase
the

number
of
units
sold
in
the
Traveler,
Mercedes,
Innovator,
and
Work
Horse
segments.

Revenue
change
due
to
sales
mix
was
the
result
of
sales
shifting
from
the
Cost
Cutter
to
the

Work
Horse
and
Mercedes
segments.

The
goal
for
TechKnow
was
to
control
at
least
60%
of
all
markets.

The
overall
strategy
for

the
Traveler,
Mercedes,
and
Innovator
segments
was
to
compete
on
the
basis
of
greater

value
at
an
equal
or
greater
price.

Strategy
for
the
CostCutter
and
Work
Horse
segments

was
to
compete
on
the
basis
of
greater
value
at
an
equal
or
lower
price.

To
achieve
this
we

aggressively
invested
in
production
capabilities
in
order
to
keep
cost
lower
than
those
of

our
competitors.

As
of
Quarter
12
TechKnow
has
67%
of
the
Traveler
market
share,
67%

of
the
Mercedes
market
share,
45%
of
the
Innovator
market
share,
87%
or
the
CostCutter

market
share,
43%
of
Work
Horse
market
share,
and
an
overall
market
share
of
60%.

Research
and
Development
Expenses

In
Quarter
12,
research
and
development
expense
totaled
$1,100,000
compared
to

$1,300,000
a
decrease
of
$200,000
or
15%.

As
of
Quarter
11
the
Company
had
all
available

research
and
development
features
with
the
exception
of
high-‐speed
wireless
network

connection,
with
a
material
cost
of
over
$1,000
this
feature
was
not
worth
the
investment

because
price
would
have
to
be
raised
an
enormous
$2,000
to
maintain
margins.

TechKnow’s
strategy
to
aggressively
invest
in
new
product
features,
relative
to
its

competitors,
is
evident
in
Chart
3.

Chart
3
demonstrates
the
Companies
competitive

advantage
in
product
features
for
Quarters
3-‐12.

This
competitive
advantage
will
be

evident
throughout
the
discussion
of
product
segments
and
their
relative
brand
judgments.

Chart
3:

The
following
five
sections
labeled
Traveler,
Mercedes,
Innovator,
CostCutter,
and
Work
Horse

contain
the
Company’s
detailed
revenue
analysis
of
each
segment
in
order
of
profitability
for

the
Company.

Traveler
Segment

Figure
3

The
13.1%
increase
in
net
revenues
and
8.6%
increase
in
cost
of
goods
sold
were
the
result

of
a
surge
in
volume
sold.

We
were
able
to
achieve
the
volume
increase
with
investments

in
operating
capacity.

The
price
increase
allowed
revenues
to
pass
cost
of
goods
sold
by

4.5%,
increasing
gross
margin.

We
have
achieved
competitive
advantage
in
the
Traveler
segment
on
the
basis
of
brand

judgment
and
number
of
units
demanded
as
demonstrated
in
Figure
4
and
Chart
4

respectively.

In
the
Traveler
segment
our
TechKnoGo2
competes
against
Rush
Industries'

Horizon
6.0
and
SkyDock
Industries'
Sky
Traveler
2.

Figure
4:
Traveler
Brand
Judgment

We
have
been
able
to
achieve
superior
brand
judgment
through
heavy
investments
in

Research
and
Development
features
faster
than
our
competition
as
demonstrated
in
the

new
product
feature
development
chart.

The
Traveler
segment
was
Rush’s
primary
target

segment
for
the
first
two
years,
when
TechKnow
initially
entered
this
market
segment
in

Quarter
9
it
was
able
to
capture
66%
of
the
market.

Chart
5:
Traveler
Demand

We
have
been
able
to
achieve
an
advantage
in
demand
for
our
Traveler
product
with

strategic
advertising,
trained
sales
force,
and
a
global
presence,
which
SkyDock
has
not

reached.

The
product
itself
also
allows
us
to
create
demand
with
a
brand
judgment
of
100;

the
product
features
of
our
TechKnoGo2
are
displayed
in
Figure
5.

Figure
5:
Traveler
Components
Cost

In
the
Traveler
segment
our
material
costs
were
higher
than
that
of
our
competitors
due
to

offering
more
features.

These
extra
features
earned
TechKnoGo2
the
highest
attainable

brand
judgment
of
100.

The
features
also
allow
us
to
charge
a
higher
price
than
our

competition.

In
Quarter
12,
the
price
of
TechKnoGo2
fell
between
the
average
and
high

prices
of
the
segment,
keeping
in
the
strategy
of
greater
value
at
equal
or
greater
price.

Regional
and
local
ads
for
the
TechKnoGo2
successfully
created
an
average
of
247
units
of

demand
per
ad
as
compared
to
137
units
of
demand
by
Rush,
and
12
units
by
SkyDock.

We

were
able
to
create
the
most
demand
per
ad
by
developing
an
advertising
plan
that
allows

local
ads
to
be
continuous
but
not
annoying
to
customers.

Regional
ads
were
placed
in

media
publications
with
a
preference
rating
of
100
or
above.

Additionally,
our
cost
of
units

demanded
is
lower
than
our
competitors.

The
average
cost
per
unit
of
demand,
for
local

and
regional
ad
placements,
for
the
TechKnoGo2
was
$25
as
compared
to
$39
by
Rush,
and

$638
by
SkyDock.

We
were
able
to
keep
costs
low
on
a
per
unit
basis
by
creating
so
many

units
of
demand
with
each
ad.

Our
Company
was
also
more
effective
with
our
sales
force
than
our
competitors.

On

average
TechKnow’s
Traveler
sales
people
created
829
units
of
demand
as
compared
to

486
units
of
demand
by
Rush’s
sales
people,
and
15
units
by
SkyDock.

The
difference
in

generated
units
of
demand
is
the
result
of
having
a
well-‐trained
sales
force,
as
we
provide

Professional
Training
Programs
and
Demonstration
Kits
to
sales
people
that
cost
$1,500

each.

Rush
provides
the
same
to
their
employees
in
the
amount
of
$1,000
and
$300,

respectively.

SkyDock
provides
the
same
tools
for
$500
and
$100.

The
cost
of
units

demanded
was
lower
than
our
competitors.

The
average
cost
of
unit
demanded
per

salesperson,
for
the
TechKnoGo2
was
$59
as
compared
to
$100
by
Rush
and
$3,600
by

SkyDock.

We
were
able
to
keep
costs
low
by
having
an
effective
sales
force
that
creates
an

ample
amount
of
demand.

In
conclusion,
TechKnow
created
more
demand
for
less
money.

This
advantage
enables
the

Company
to
cut
prices
if
it
becomes
necessary
to
maintain
or
grow
market
share.

Mercedes
Segment

Figure
6

As
a
result
of
a
rise
in
volume
sold
net
revenues
increased
392.8%
and
cost
of
goods
sold

increased
337.8%.

We
were
able
to
achieve
this
with
increased
operating
capacity
and
by

changing
the
production
and
sale
priority
in
Quarter
12
to
second
as
compared
to
fourth
in

Quarter
11.

The
improved
capacity
and
priority
change
allowed
us
to
serve
more
of
the

segment
demand
and
decrease
stock
outs
by
91.4%.

The
fulfillment
of
more
demand

resulted
in
an
increase
of
55%
in
gross
margin.

The
increase
in
segment
profit
is
the
result

of
significantly
higher
units
sold,
leading
to
costs
being
lowered
on
a
percentages
basis,

relative
to
revenues.

We
have
achieved
competitive
advantage
in
the
Mercedes
segment
on
the
basis
of
brand

judgment,
number
of
units
demanded,
and
the
cost
of
those
demanded
units.

In
the

Mercedes
segment
our
TechKnoBenz2
competes
against
Rush
Industries'
Surge
5.0.

Figure
7:
Mercedes
Brand
Judgment

We
have
been
able
to
achieve
this
judgment
through
heavy
investments
in
research
and

development
features
sooner
than
our
competition,
as
well
as
early
brand
loyalty
when
an

earlier
Innovator
product
straddled
the
Innovator
and
Mercedes
segments.

Figure
8:
Mercedes
Components
Costs

TechKnow
component
costs
in
the
Mercedes
segment
were
lower
than
that
of
our

competitor.

While
overall
we
offer
only
one
more
feature
than
Rush,
Rush
invested
in
a

research
and
development
feature
that
adds
an
additional
$1,050
to
each
product.

Rush's

Surge
5.0
is
also
pricier
than
the
TechKnoBenz2,
meaning
their
margins
are
more

condensed
than
ours
and
they
cannot
compete
with
us
if
a
price
war
were
ever
to
occur.

Chart
6
demonstrates
how
the
brand
judgment
advantage
combined
with
strategic

advertising
and
trained
sales
force
has
yielded
the
company
significantly
more
units

demanded
than
Rush.

Chart
6:

Regional
and
local
ads
for
the
TechKnoBenz2
successfully
created
an
average
of
179
units

of
demand
per
ad
compared
to
49
units
of
demand
by
Rush.

We
were
able
to
create
the

most
demand
per
ad
by
running
local
inserts
in
a
way
that
allowed
them
to
be
constant

without
being
superfluous
and
irritating
viewers.

We
also
ran
regional
ads
in
media

publications
with
a
preference
rating
of
100
or
above.

The
cost
of
units
demanded
through

advertising
is
lower
than
our
competitor's.

The
average
cost
per
unit
of
demand
for
the

TechKnoBenz2
was
$33
compared
to
$106
by
Rush.

Costs
are
able
to
remain
low
because

of
the
amount
of
demand
each
ad
generates.

Our
Company
was
also
more
efficient
with
our
sales
force
than
our
competitor.

On
average

TechKnow's
Mercedes
sales
people
created
467
units
of
demand
compared
to
196
units
of

demand
Rush
sales
people
created.

The
sales
force
efficiency
is
the
result
of
well
trained

sales
people,
as
we
provide
professional
training
programs
and
demonstration
kits
in
the

amount
of
$1,500
each.

Rush
provides
the
same
tools
for
$1,000
and
$300,
respectively.

The
cost
of
units
demanded
was
also
lower
than
our
competitor.

The
average
cost
of
unit

demanded
per
salesperson,
for
the
TechKnoBenz2
was
$105
compared
to
$247
per
Rush

salesperson.

To
summarize,
the
cost
efficiency
employed
by
our
Company
provides
us
the
ability
to

lower
prices
and
compete
with
a
new
entrant
should
they
attempt
to
compete
with
a
low

price
strategy.

Innovator
Segment

Figure
9:
Innovator
Probilability

The
41.6%
increase
in
net
revenues
and
31.6%
increase
in
cost
of
goods
sold
were
the

result
of
an
increase
in
volume
sold.

The
volume
escalation
is
the
result
of
increasing

production
capacity
in
Quarter
12,
decreasing
stock
outs
by
69.5%.

The
increase
in
gross

margin
is
the
effect
of
revenues
outgrowing
cost
of
goods
sold
by
about
10%.
This
spread

was
achieved
through
material
cost
discounts
from
suppliers
due
to
purchasing
in
bulk.

We
have
achieved
a
competitive
advantage
in
the
Innovator
segment
on
the
basis
of
brand

judgment,
number
of
units
demanded,
and
the
cost
of
those
demanded
units.

In
the

Innovator
segment,
our
TechKnoVator5
competes
against
Rush
Industries'
Volt
2.0
and

Surge
5.0,
SkyDock
Industries'
Sky
Innovator
2,
and
Excellicore's
Aurum
S
and
Accelerator

X2S.

Figure
10:
Innovator
Brand
Judgment

We
have
been
able
to
achieve
the
highest
brand
judgment
through
substantial
investments

in
research
and
development
features
throughout
the
last
two
years.

Towards
the
end
of

the
third
year
investment
opportunities
in
new
product
features
were
fewer,
allowing
Rush

to
gain
ground
in
features
by
Quarter
12.

Product
features
for
the
respective
companies

are
displayed
in
Figure
11.

Figure
11:
Innovator
Material
Components

TechKnow
component
costs
in
the
Innovator
segment
were
higher
than
those
of
our

competitors
because
we
provided
Research
and
Development
features
that
the
other

companies
could
not.

The
extra
features
earned
the
TechKnoVator5
a
brand
judgment
of

100.

The
features
also
allow
us
to
charge
a
price
higher
than
most
of
our
competition.

The

price
of
the
TechKnoVator5
generally
falls
between
the
average
and
low
prices
of
the

segment
prices.

We
are
able
to
provide
these
lower
prices
because
of
discounted

manufacturing
costs
due
to
buying
materials
in
bulk.

The
price
strategy
was
successful
as

the
segment
provided
gross
margins
of
40.6%.

Chart
7:
Innovator
Demand

We
have
been
able
to
achieve
these
units
with
strategic
advertising,
trained
sales
force,
and

a
global
presence,
which
is
only
also
achieved
by
Rush.

The
product
itself
allows
us
to

create
substantial
demand
with
a
perfect
brand
judgment
of
100.

Regional
and
local
ads
for
the
TechKnoVator5
successfully
created
an
average
of
142
units

of
demand
per
ad
as
compared
to
54
units
of
demand
by
Rush,
29
units
demanded
by

SkyDock,
and
34
units
by
Excellicore.

We
were
able
to
create
the
most
demand
per
ad
by

having
a
consistent,
but
not
redundant,
local
presence
as
well
as
regional
ad
placements
in

media
publications
with
an
Innovator
preference
rating
of
100
or
above.

The
average
cost

per
unit
of
demand
for
the
TechKnoVator5
was
$43
compared
to
$102
for
Rush,
$207
for

SkyDock,
and
$193
for
Excellicore.

We
were
able
to
keep
costs
low
on
a
per
unit
basis
by

creating
so
many
units
of
demand
with
each
ad.

Our
Company
was
also
more
efficient
with
our
sales
force
than
our
competitors.

On

average,
a
TechKnow
Innovator
sales
person
created
408
units
of
demand
compared
to
288

units
by
a
Rush
sales
person,
62
units
by
a
SkyDock
sales
person,
and
218
for
an
Excellicore

sales
person.

Demand
per
sales
person
was
the
result
of
having
a
better
trained
sales
force,

as
we
provided
Professional
Training
Program
and
Demonstration
Kits
in
the
amount
of

$1,500
each
as
compared
to
$1,000
and
$300,
respectively,
by
Rush,
$500
and
$100,

respectively,
by
SkyDock,
and
$1,100
and
$250,
respectively,
by
Excellicore.

The

Company’s
cost
of
units
demanded
were
lower
than
that
our
competitors.

The
average
cost

of
unit
demanded
per
sales
person,
for
the
TechKnoVator5
was
$115
compared
to
$168
for

Rush,
$1,192
for
SkyDock,
and
$276
for
Excelliocore.


Again,
the
cost
structure
of
TechKnow's
marketing
and
selling
expenses,
relative
to
its

competition,
is
important
because
it
enables
us
to
be
in
a
position
to
slash
prices,
should

such
an
occasion
ever
arise.

CostCutter
Segment

In
Quarter
12
we
sold
8,583
CostCutter
units,
which
accounted
for
$16,150,200
in
sales

revenue.

Total
demand
units
were
10,664,
a
decrease
of
2,618
units
from
Quarter
11.

The

strategy
for
the
CostCutter
segment
is
to
provide
greater
quality
at
lower
price.

We
have

kept
our
price
for
the
CostCutter
below
the
average
price
to
allow
us
to
honor
our
strategy.

Figure
12

TechKnow’s
brand
judgment
for
the
CostCutter
segment
ranges
from
70-‐72
with
our

competitor
Rush
behind
with
a
brand
judgment
of
56-‐58.

This
jump
in
judgment
can
be

attributed
to
adding
newly
developed
features
that
our
competition
does
not
have.

Figure
13

Figure
14
demonstrates
total
component
cost
for
the
four
companies
who
compete
in
the

CostCutter
market.

Figure
14

The
Company’s
CostCutter
segment
pricing
is
effectively
the
lowest
in
every
region;
empire

undercut
us
by
$1
in
the
United
States,
Canada,
and
China.
With
a
superior
product
for
the

lowest
price
the
Company
effectively
implemented
its
strategy
to
offer
our
consumers

greater
value
at
a
lower
price.

Figure
15

TechKnow
had
the
highest
demand
in
the
CostCutter
segment
in
every
quarter
for
both

Years
2
and
Years
3.

TechKnow
entered
the
CostCutter
segment
at
the
start
of
the
game,

creating
a
demand
of
695
units
with
the
TechKnoEase.

Since
then
we
have
released
four

different
versions
of
the
Cost
Cutter
product.

We
recently
launched
the
TechKnoEase4
in

Quarter
11
with
new
and
improved
features
that
meet
the
needs
of
our
consumers,
which

you
can
see
in
the
figure
below
the
positive
direction
that
took
the
Company’s
ending

Quarter
12
with
a
demand
of
12,208
units.

Chart
8:

Cost Cutter Segment Pricing for Quarter 12
United States Europe Canada Brazil China
TechKnoEase4
TechKnow Price 2,000$ 2,000$ 1,700$ 2,000$ 1,700$
TechKnow Rebate -$ -$ -$ -$ -$
High Price 3,169$ 3,169$ 3,099$ 2,879$ 2,739$
Average Price 2,584$ 2,585$ 2,399$ 2,440$ 2,169$
Low Price 1,999$ 2,000$ 1,699$ 2,000$ 1,599$

Work
Horse
Segment

In
Quarter
12,
TechKnow
continued
to
produce
and
sell
the
TechknoEase4
in
the
Work

Horse
segment.

In
Quarter
11
we
discontinued
the
TechKnoHorse3
and
introduced
the

TechKnoHorse4
which
included
five
new
features:
digital
video
disk
(DVD),
extremely
high

capacity,
office
software-‐word,
spreadsheets-‐new
release,
UPS
(uninterruptible
power

supply),
and
the
plug
and
play
design.

With
the
new
brand
we
saw
an
increase
in
total

demand
by
3377
units
for
Quarter
11
and
a
continued
increase
of
701
units
for
Quarter
12

in
Figure
17.

Market
share
for
the
Work
Horse
segment
decreased
by
3%
in
Quarter
12

from
Quarter
11,
the
TechKnoHorse4
brand
accounted
for
5.95%
of
the
Company’s
sales

revenues
in
Quarter
12.

Due
to
the
lack
of
capacity
we
did
not
produce
any
products
in
the

Work
Horse
segment
in
Quarter
11,
therefore
net
revenues
had
a
100%
increase
in
Quarter

12
from
Quarter
11.

Figure
16

The
Company’s
component
cost
for
our
TechKnoHorse4
brand
was
$1,369,
which
was
the

higher
than
comparable
products
produced
by
our
competitors.

This
is
because
we
have

more
research
and
development
than
our
competitors.

And
despite
material
cost
per
unit

in
the
Work
Horse
segment
being
that
we
have
the
highest
cost
we
actual
achieved
the

lowest
component
cost
due
to
production
volume
discounts.

Which
allows
us
to
remain

aligned
with
our
strategy
of
providing
greater
value
at
lower
price.

Figure
17

The
Company
did
not
receive
as
high
of
a
brand
judgment
rating
as
Rush’s
brand.

Rush’s

brand
received
the
higher
brand
judgment
due
to
the
fact
that
they
met
the
needs
of
their

customers
by
offering
their
brand
with
luxury
features
such
as
a
stylish
desktop
design
and

a
high
comfort
keyboard
with
wrist
rest,
a
feature
that
we
did
not
see
fit
for
the
Work

Horse
segment.

The
following
table
shows
the
industry’s
Work
Horse
brand
judgment
for

Quarter
12.

Figure
18

Work Horse Brand Judgment by Geographic Region
TechKnow Rush
United States 79 81
Canada 79 81
Europe 79 81
Brazil 80 82
China 80 82

The
Company’s
Work
Horse
segment
pricing
is
not
the
lowest
nor
is
it
the
highest
priced.

Our
competitor,
Excellicore
offers
the
lowest
price
in
all
regions
excluding
Canada
and

China;
of
those
two
regions
we
offer
the
lowest
price.

Rush
is
the
competitor
with
is
the

highest
pricing
across
the
board
in
all
regions.

However,
TechKnow’s
pricing
is
below
the

average
compared
to
the
competition
(Figure
20).

The
Company’s
pricing
for
this
brand

was
consistent
with
our
strategy
to
provide
greater
value
at
lower
price.

Figure
19

TechKnow
had
the
highest
demand
in
the
Work
Horse
segment
in
every
quarter
excluding

Quarter
5
in
Years
2
and
in
every
quarter
for
Years
3.

We
entered
the
Work
Horse
segment

in
Quarter
6
with
the
introduction
of
the
TechKnoHorse.

Every
quarter
from
then
on
we

focused
on
making
sure
we
met
the
needs
of
our
customers
to
create
a
high
demand
for
our

product.

We
became
more
competitive
in
the
Work
Horse
segment
in
Quarter
9
with
the

launch
of
the
TechKnoHorse3.

The
following
figure
shows
the
industry
market
growth
for

Year
2
and
3
in
the
Work
Horse
segment.

Chart
9:

Marketing
and
Selling
Expenses

Total
marketing
and
selling
expenses
in
Quarter
12
were
$9,807,778
compared
to

$8,152,507
in
Quarter
11,
an
increase
of
$1,655,271
or
20.3%.

As
of
Quarter
12,
TechKnow

operates
globally
in
all
regions
and
in
every
city.

Advertising

Advertising
expenses
in
Quarter
12
were
$3,672,067
as
compared
to
$2,935,688
in
Quarter

11,
an
increase
of
$736,379
or
25.1%.

Expense
increase
was
the
result
of
the
addition
of

one
more
local
insert
in
every
city.
The
Quarter
12
strategy
was
not
as
effective
as
Quarter

11
as
units
demanded
per
ad
decreased
by
-‐4.4%
and
cost
per
unit
demanded
increased
by

3.1%.

Marketing
Research

In
Quarter
12
TechKnow
purchased
all
available
market
research.
Moving
forward
the

company
will
increase
its
investment
in
marketing
research
in
order
to
find
new
available

markets
to
expand
into.

Sales
Force
Expenses

Sales
force
expenses
in
Quarter
12
were
$4,961,711
compared
to
$4,042,819
in
Quarter
11,

an
increase
of
$918,892
or
22.7%.

The
increase
in
Sales
Force
expense
was
the
result
of

the
hiring
of
36
new
salespersons
and
increasing
compensation
in
all
cities.

Compensation

increase
was
produced
positive
results
as
productivity
relative
to
potential
increased
in
all

regions
but
Europe.

Sales
Offices
and
Web
Centers

Sales
offices
and
web
centers
expenses
in
Quarter
12
were
$
1,059,000
compared
to

$1,059,000
in
Quarter
11,
no
change.

This
is
the
result
of
not
opening
new
offices
in

Quarter
12,
as
offices
in
were
opened
in
all
cities
were
opened
in
Quarter
7.

Therefore
in

Quarter
12
the
expenses
were
due
to
Quarterly
lease
costs,
which
are
constant
costs.

Web
Marketing
Expenses

As
of
Quarter
12
TechKnow
has
not
entered
the
web
sales
market,
and
to
date
has
incurred

no
web
marketing
expenses.

This
is
a
result
of
the
Company
not
seeing
a
substantial

enough
amount
of
demand
for
a
web
market.

Cost
of
Production

In
Quarter
12
TechKnow
produced
74,902
units
compared
to
Quarter
11
production
of

50,341
units,
an
increase
of
24,561
units
or
32.8%.

As
a
result
of
the
production
increase,

Quarter
12
total
production
costs
were
$107,948,181
compared
to
Quarter
11
production

costs
of
$75,956,438,
an
increase
of
$31,991,743
or
29.6%.

TechKnow’s
change
in

production
cost
per
unit
is
displayed
in
Figure
21.

Figure
20

Figure
21

Materials
Components
&
Costs

The
Company
has
achieved
more
than
a
50%
decrease
in
cost
due
to
production
volume

discounts,
as
demonstrated
in
chart
10.

In
Quarter
12
TechKnow
produced
1,217
units
a

day
compared
to
Rush’s
production
of
445
units
per
day.

We
achieved
this
through
our

strategy
to
aggressively
invest
in
production
capabilities,
relative
to
the
competition,
which

enabled
us
to
produce
772
more
units
a
day
than
our
closest
competitor.

Chart
10:

Traveler

In
Quarter
12
total
production
costs
for
the
Traveler
were
$33,085,176
compared
to

$31,617,282,
an
increase
of
$1,467,894
or
4.4%.

This
increase
is
primarily
due
to
an

increase
in
the
number
of
units
produced.

In
Quarter
12
the
Company
produced
27,298

units
compared
to
25,539
in
Quarter
11,
an
increase
of
1,759
units
or
6.4%.

In
Quarter
12

the
total
material
cost
per
unit
was
$1,016
per
unit
compared
to
$1,059
in
Quarter
11,
a

decrease
of
$43
or
4.2%.

Mercedes

In
Quarter
12
total
production
costs
for
the
Mercedes
were
$33,310,179
compared
to

$6,904,768
in
Quarter
11,
an
increase
of
$26,405,411
or
79.2%.

This
increase
is
primarily

due
to
increasing
production
priority
as
well
as
producing
more
units.

In
Quarter
12
the

company
produced
16,597
units
compared
to
producing
3,088
units
in
Quarter
11,
an

increase
of
13,509
units
or
81.3%.

In
Quarter
12
the
total
material
cost
was
$1,811
per

unit
compared
to
$2,056
in
Quarter
11,
a
decrease
of
$245
or
13.5%.


Innovator

In
Quarter
12
total
production
costs
for
the
Innovator
were
$28,245,486
compared
to

$22,880,788
in
Quarter
11,
an
increase
of
$5,364,680
or
18.9%.

This
increase
is
primarily

due
to
an
increase
in
demand
and
producing
more
units.

In
Quarter
12
the
company

produced
14,316
units
compared
to
10,906
units
in
Quarter
11,
an
increase
of
3,410
units

or
23.8%.

In
Quarter
12
the
total
material
cost
was
$1,778
per
unit
compared
to
$1,920
in

Quarter
11,
a
decrease
of
$142
or
7.9%.

CostCutter

In
Quarter
12,
TechKnow’s
total
production
costs
for
the
CostCutter
were
$8,936,274

compared
to
$10,256,792
in
Quarter
11,
a
decrease
of
$1,320,518
or
14.8%.

This
decrease

is
primarily
due
to
reducing
the
production
priority
as
well
as
producing
fewer
units.

In

Quarter
12
the
company
produced
9,548
units
compared
to
producing
10,808
units
in

Quarter
11.

In
Quarter
12
the
total
material
cost
was
$738
per
unit
compared
to
$746
in

Quarter
11,
a
decrease
of
$8
or
1%.

Work
Horse

In
Quarter
12
total
production
costs
for
the
Work
Horse
were
$8,657,316
compared
to
$0

in
Quarter
11.

This
increase
is
due
to
having
the
fixed
capacity
to
produce
these
units
in

Quarter
12
whereas
the
Company
did
not
have
the
capacity
in
Quarter
11.

In
Quarter
12

the
company
produced
7,143
units
and
the
total
material
cost
per
unit
was
$1,016.

Labor

The
labor
cost
per
unit
in
Quarter
12
was
$167
compared
to
Quarter
11
labor
cost
of
$168.

There
was
no
change
in
total
compensation
between
Quarter
12
and
Quarter
11.

Productivity
relative
to
potential
was
100%;
no
change
between
Quarter
12
and
Quarter
11.

Changeover

The
Company’s
average
changeover
cost
for
producing
five
products
in
Quarter
12
was

$4.40
compared
to
Quarter
11
producing
four
products
with
an
average
changeover
cost
of

$11.25,
a
savings
of
$6.85
or
155.7%.

The
reduction
in
changeover
is
primarily
due
to
a

$1.1
million
investment
in
research
and
development
to
improve
changeover.

This

investment
gave
the
Company
a
52.9%
reduction
in
time
and
a
35.26%
reduction
in
cost.

Refer
to
Chart
11
on
the
following
page.

Chart
11:

Operations
Overhead
Expenses

Excess
Capacity

Excess
capacity
in
Quarter
12
is
$464,830
compared
to
no
excess
capacity
expense
in

Quarter
11.

The
reason
for
excess
capacity,
despite
having
product
stock
outs
in
Quarter

12,
is
due
to
having
production
days
at
the
end
of
the
quarter
in
which
the
simulation
does

not
allow
you
to
sell
units
as
they
are
produced.

Inventory
Holding

Inventory
holding
expense
in
Quarter
12
is
$617,819
compared
to
Quarter
11
inventory

holding
expense
of
$191,749,
an
increase
of
$426,070
or
68.9%.

This
increase
is
primarily

due
to
production
days
at
the
end
of
the
quarter
as
well
as
production
priority.
This

expense
was
undesired
because
there
was
unmet
demand
in
the
current
quarter
of
11,556

units.

Moving
forward
the
company
desires
ending
inventory
equal
to
the
initial
demand

during
the
first
ten
days
of
production
cycles
in
the
following
quarter.

Quality

In
Quarter
12,
the
Company
invested
$1,183,928
in
improving
quality
costs
compared
to

Quarter
11
investment
of
$1,342,100,
a
decrease
of
$158,172
or
11.8%.

Over
the
past
three

quarters,
the
Company
has
reduced
quality
cost
investment
because
we
achieved
a
high

reliability
judgment
of
96%.

This
judgment
represents
the
success
of
TechKnow’s
strategy

to
aggressively
invest
in
quality
cost
improvements
resulting
in
a
9%
higher
reliability

judgment
than
our
closest
competitor.

Shipping

Quarter
12
shipping
costs
were
$2,832,086
compared
to
Quarter
11
shipping
costs
of

$2,046,974,
an
increase
of
$785,112
or
27.7%.

In
Quarter
12,
the
cost
per
unit
shipped
was

$39.50
compared
to
Quarter
11
cost
per
unit
shipped
of
$41.66,
a
decrease
of
$2.16
or

5.5%.

This
decrease
is
primarily
due
to
shipping
more
units.

In
Quarter
12
the
Company

shipped
71,685
units
compared
to
shipping
49,139
in
Quarter
11,
an
increase
of
22,546

units
or
31.5%.

Financial
Position

In
Quarter
12
net
income
was
$69,221,512
compared
to
net
income
of
$39,459,619
in

Quarter
11,
an
increase
of
$29,761,893
or
75.4%.

This
increase
is
due
to
a
400
unit
per
day

increase
in
operating
capacity
that
was
effectively
utilized
to
increase
net
sales
revenues

52.8%.

Of
the
52.8%,
or
$77,840,794,
increase
in
net
revenue,
$65,638,734
is
due
to
an

increase
in
volume
and
$16,571,194
is
due
to
a
change
in
sales
mix.

In
Quarter
12
assets
totaled
$160,818,056
compared
to
$91,596,544
in
Quarter
11,
an

increase
of
$69,644,975
or
136.2%.

This
change
is
primarily
due
to
an
increase
in
cash
on

hand,
but
an
increase
in
finished
goods
inventory
also
contributed.

Cash
on
hand
in

Quarter
12
totaled
$113,846,529
compared
to
$48,201,554
in
Quarter
11,
an
increase
of

$65,644,975
or
136.2%.

TechKnow
has
amassed
this
sum
of
cash
to
conduct
a
share

repurchase
from
Guido,
who
was
given
shares
of
common
stock
in
exchange
for
an

emergency
loan
the
Company
received
in
Quarter
5.

In
Quarter
12
liabilities
totaled
$21,400,000,
which
was
the
same
total
in
Quarter
11.

This

total
reflects
the
long-‐term
loans
leveraged
by
TechKnow
to
engage
in
aggressive

investments
to
improve
product
features,
production
cost,
and
sales
force
capabilities.
The

company
currently
pays
into
a
quarterly
sinking
fund
in
accordance
with
our
capital

provider;
long-‐term
debt
will
be
paid
in
full
when
required.

In
Quarter
12
total
equity
was
$139,418,056
compared
to
$70,196,544
in
Quarter
11,
an

increase
of
$69,221,512
or
98.6%.

This
figure
was
directly
impacted
by
an
increase
in

retained
earnings
or
net
income.

In
Quarter
12
retained
earnings
were
$130,418,061

compared
to
retained
earnings
of
$61,196,544
in
Quarter
11,
an
increase
of
$69,221,512
or

113%.

Earnings
per
share
in
Quarter
12
were
$429
compared
to
earnings
per
share
of

$244
in
Quarter
11,
an
increase
of
$185
per
share
or
75.8%.


Breakeven
Analysis

The
table
below
shows
the
breakeven
analysis
for
Quarters
12
and
11.

In
Quarter
12

TechKnow
surpassed
the
breakeven
point
by
59,887
units
or
$188,232,610
compared
to

38,549
units
or
$115,692,953
in
Quarter
11.

The
increase
in
units
produced
beyond
the

breakeven
point
is
due
to
the
400
units
per
day
increase
in
operating
capacity.

TechKnow

will
continue
to
increase
operating
capacity
until
the
company
can
fully
meet
demand.

The

company
anticipates
it
will
exceed
the
Quarter
12
units
beyond
breakeven
point
by
a

similar
percent
change
of
500%.

In
Quarter
12
TechKnow’s
average
cost
per
unit
was
$1480
compared
to
$1520
in
Quarter

11,
a
decrease
of
$40
per
unit
or
2.6%.

TechKnow
will
continue
to
improve
upon
efficiency

and
limit
other
costs
of
production,
such
as
changeover
to
continue
to
see
favorable

margins.

TechKnow
will
push
for
efficiency
in
advertising
and
sales
force
to
increase

demand
while
maintaining
a
gross
margin
per
unit
of
45-‐55%.

Gross
margin
per
unit
in

Quarter
12
was
52.9%
compared
to
49.4%
in
Quarter
11,
an
improvement
of
3.5%.


Figure
22

Liquidity
and
Capital
Resources

As
discussed
earlier,
in
Quarter
12
TechKnow
ended
with
cash
of
$113,846,529
compared

to
$48,201,554
in
Quarter
11,
an
increase
of
$65,644,975
or
136.2%.

In
Quarter
12
the

company
had
an
unused
borrowing
capacity
of
$118,993,088
with
a
total
debt
capacity
of

$140,393,088.

These
figures
produced
a
liquidity
position
of
$232,839,617
in
Quarter
12

compared
to
$88,275,404
in
Quarter
11,
a
change
of
$144,564,213
or
164%.

TechKnow
is

confident
the
company
is
in
a
strong
capital
position
and
will
be
able
to
pursue
our
strategy

moving
forward.


Business
Outlook

Moving
forward
TechKnow
will
continue
to
heavily
invest
operating
profits
into
the

following
components
in
order
to
maintain
the
competitive
advantages
we
have
achieved:

• Aggressive
investments,
relative
to
the
competition,
in
research
and
development
of

new
product
features

• Aggressive
investments,
relative
to
the
competition,
in
operating
capacity,
changeover,

and
quality
costs

• Aggressive
investments,
relative
to
the
competition,
in
sales
force
and
sales
offices

expansion
globally

Computer
technology
and
hardware
is
a
rapidly
growing
industry.

We
believe
it
will

continue
to
grow
at
a
substantial
rate
over
the
next
five
years.

To
capitalize
on
this
growth

the
Company
has
to
rapidly
expand
its
sales
force,
production
capacity,
marketing
plan,

research
and
development
facilities,
and
overall
brand
image.

These
assumptions
are

reflected
in
the
companies
discounted
cash
flow
valuation
(“DCF)
for
the
next
five
years
of

operations.

DCF
Valuation

The
Company
has
made
the
following
assumptions
in
the
DCF.

The
Company
believes
now

is
the
time
to
enter
new
markets.

We
believe
we
can
utilize
the
advantages
we
have

established
to
profitably
enter
smaller
markets
(relative
to
the
current
markets).

As
of

Quarter
12,
the
Company
has
a
physical
presence
in
the
4
largest
cities
in
the
United
States;

we
will
seek
new
markets
to
enter
in
the
U.S
such
as
Houston,
Dallas,
Minneapolis,

Charlotte
or
any
other
city
we
determine
may
be
a
profitable
market.

We
will
look
to

expand
our
presence
globally
in
Asia,
Europe,
Africa,
and
Brazil.

The
Company
believes
the

industry
is
in
a
rapid
growth
phase
and
to
capitalize
on
this
we
need
to
rapidly
expand
in

the
following
areas:

1. Research
&
Development-‐
The
Company
will
increase
R&D
expense
by
1400%
in

year
four
in
order
to
invest
10%
of
gross
sales
annually
(which
is
average
for
a

tech
company).

2. Market
Research-‐
To
effectively
locate
and
establish
new
markets
the
company

increases
marketing
research
by
200%
in
years
4
&
5,
with
a
100%
increase
in

the
years
following
that.

3. Production
Capacity-‐
TechKnow
will
invest
an
average
of
$35
million
annually
to

increase
operating
capacity
by
1000
units
a
day
every
year
in
order
to
meet

expected
growth
in
demand.

4. Marketing
Plan-‐
TechKnow
assumes
it
needs
to
grow
advertising
at
the
same

rate
of
expected
sales
growth
to
aid
in
the
stimulation
of
this
anticipated
demand.

5. The
Company
will
begin
developing
an
online
sales
platform
in
year
four.

Online

sales
will
allow
us
to
reach
markets
where
we
do
not
have
a
physical
presence

and
also
benefit
us
in
researching
and
discovering
unknown
markets.

6. Other
assumptions
are
made
but
less
pertinent
to
the
overall
outcome
of
the
DCF

valuation.

Figure 23

TechKnow Final MDA v7

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