x☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF ~~1934.~~

For the transition period from ~~__________~~____________ to ~~__________.~~______________

(Registrant’s ~~Telephone Number, Including Area Code)~~telephone number, including area code)

(Former name or former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

Indicate by check mark whether the registrant (1) ~~has~~ filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx ☒ No¨ ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yesx No¨ ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting ~~company,”~~company” and “emerging growth company” in Rule 12b-2 of the Exchange ~~Act.~~Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o ☐

Indicate by check mark whether the registrant is a shell company as(as defined in Rule 12b-2 of the Exchange ~~Act.~~Act). Yes o☐ Nox ☒

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of October 31, ~~2017 is 133,440,111.~~2021, was 136,311,335.

See accompanying notes to the unaudited condensed consolidated financial statements

CONDENSED CONSOLIDATED ~~STATEMENTS~~STATEMENT OF ~~CASH FLOWS~~STOCKHOLDERS’ EQUITY (UNAUDITED)

See accompanying notes to the unaudited condensed consolidated financial statements

A summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial statements follows.

The accompanying unaudited condensed consolidated financial statements of Telkonet, Inc. (the “Company”, or “Telkonet”) have been prepared in accordance with Rule S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, the results from operations for the nine months ended September 30, ~~2017,~~2021, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2021. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, ~~2016~~2020 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC.

Telkonet, Inc., formed in 1999 and incorporated under the laws of the state of Utah, is the creator of the EcoSmart ~~Platform~~and the Rhapsody Platforms of intelligent automation solutions designed to optimize energy efficiency, comfort and analytics in support of the emerging Internet of Things (“IoT”).

In 2007, the Company acquired substantially all of the assets of Smart Systems International (“SSI”), which was a provider of energy management products and solutions to customers in the United States and Canada and the precursor to the Company’s EcoSmart platform. ~~The EcoSmart platform provides~~In 2020, the Company launched the Rhapsody Platform, which simplifies the installation and setup of the Company’s newest products and integrations. Both platforms provide comprehensive savings, management reporting, analytics and virtual engineering of a customer’s portfolio and/or property’s room-by-room energy consumption. Telkonet has deployed more than a half million intelligent devices worldwide in properties within the hospitality, ~~military,~~ educational, ~~healthcare~~governmental and other commercial markets. The ~~EcoSmart platform is rapidly being~~platforms are recognized as a ~~leading~~ solution for reducing energy consumption, operational costs and carbon footprints, and eliminating the need for new energy generation in these marketplaces – all ~~while~~whilst improving occupant comfort and convenience.

On March 28, 2017, the Company, and the Company’s wholly-owned subsidiary, EthoStream LLC, a Wisconsin limited liability company (“EthoStream”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) with DCI-Design Communications LLC (“DCI”), a Delaware limited liability company, whereby DCI would acquire all of the assets and certain liabilities of EthoStream for a base purchase price of $12,750,000. The Purchase Agreement provided that proceeds of $900,000 were to be withheld from the $12,750,000 base purchase price and placed into an escrow account to support potential indemnification obligations of up to $800,000 and net working capital adjustments of up to $100,000. Another $93,000 is classified in other current assets as a net working capital receivable. The escrow amount, net of potential claims, will be fully released after an escrow period not to exceed 12 months after closing. The assets included, among other items, certain inventory, contracts and intellectual property. DCI acquired only the liabilities provided for in the Purchase Agreement. On March 29, 2017, pursuant to the terms and the conditions of the Purchase Agreement, the Company closed on the sale. The income from discontinued operations (net of tax) represents the activity of EthoStream from January 1, 2017 through the date of the sale on March 28, 2017. The gain from sale of discontinued operations (net of tax) represents the gain recognized from the EthoStream selling price that was in excess of the assets sold to DCI and liabilities assumed by DCI on March 28, 2017. On September 27, 2017, the Company reached a final settlement with DCI on net working capital as set forth in the Purchase Agreement. On September 29, 2017, the Company received $100,000 from the escrow account for the portion of the escrow account set aside for net working capital adjustments and cash proceeds of $311,000 from DCI in the settlement of net working capital adjustments. The net working capital receivable of $93,000 in other current assets was applied against the cash proceeds of $311,000 received on September 29, 2017 resulting in a gain from sale of discontinued operations of $218,000 recognized during the three months ended September 30, 2017.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned ~~subsidiaries,~~subsidiary, Telkonet Communications, Inc., ~~and EthoStream. The current and prior period accounts of Ethostream have been classified~~operating as discontinued operations on the condensed consolidated balance sheet, the condensed consolidated statement of operations and the condensed consolidated statement of cash flows. All significant intercompany balances and transactions have been eliminated in consolidation.

~~Unless otherwise noted, all financial information in the consolidated financial statement footnotes reflect the Company’s results from continuing operations.~~a single reportable business segment.

The accompanying financial statements have been prepared on a going concern basis which assumes the Company ~~reported a net loss~~will be able to realize its assets and discharge its liabilities in the normal course of ~~$3,034,984 from continuing operations~~business for the ~~nine months~~foreseeable future and, thus, do not include any adjustments relating to the recoverability and classification of assets and liabilities that may be necessary if the Company is unable to continue as a going concern.

Since inception through September 30, 2021, we have incurred cumulative losses of $128,311,007 and have never generated enough funds through operations to support our business. For the nine-month period ended September 30, ~~2017,~~2021, the Company had a cash ~~used in operating activities~~flow deficit from ~~continuing~~ operations of ~~$2,459,746~~$1,310,788. The Company has made significant investments in the engineering, development and ~~had an accumulated deficit~~marketing of ~~$119,301,087. Since inception,~~its intelligent automation platforms, including but not limited to, hardware and software enhancements, support services and applications. The funding for these development efforts has contributed to, and continues to contribute to, the ongoing operating losses and use of cash. Operating losses have been financed by debt and equity transactions, capacity under the Company’s primary sources of ongoing liquidity for operations have come through private and public offerings of equity securities, and the issuance of various debt instruments, asset-based lending and the sale of assets.

~~On March 29, 2017, an amendment to the~~$2 million revolving credit facility with Heritage Bank of Commerce ~~a California state chartered bank~~ (“Heritage Bank”), ~~was executed to amend certain terms of the Loan and Security Agreement (the “Heritage Bank Loan Agreement”) following~~ the sale of ~~certain assets of the Company’s~~a wholly-owned subsidiary, ~~EthoStream. Heritage Bank amended the EBITDA compliance measurement.~~

~~On October 23, 2017, an amendment to the revolving credit facility with Heritage Bank was executed to amend certain terms~~and management of the Heritage Bank Loan Agreement. Among the terms of the amendment was that if the Company deviates from its projected EBITDA for the quarters ended September 30, 2017 or December 31, 2017, the Company will be deemed to be in compliance as of the measurement date if the Company’s unrestricted cash maintained at Heritage Bank is in excess of $5,000,000. The amendment also extends the revolving credit facility’s maturity date by one year to September 30, 2019.

The outstanding balance of the revolving credit facility was $79,953 as of September 30, 2017 and the remaining available borrowing capacity was approximately $1,304,000. As of September 30, 2017, the Company was in compliance with all financial covenants.

On March 28, 2017, the Company and EthoStream, entered into the Purchase Agreement with DCI whereby DCI acquired all of the assets and certain liabilities of EthoStream for a base purchase price of $12,750,000, subject to an adjustment based on the net working capital ~~of EthoStream on the closing date of the sale transaction.~~levels. The Company’s ~~liquidity for~~ability to continue as a going concern is dependent upon generating profitable operations in the ~~remainder of 2017 remains strong due~~future and obtaining the necessary financing to ~~the net proceeds received~~meet its obligations and repay its liabilities arising from ~~the sale of EthoStream.~~

The restricted cash on deposit of $800,000 as of September 30, 2017 reflects amounts placed into an escrow account to support potential indemnification obligations associated with the sale of the Company’s wholly-owned subsidiary, EthoStream. The escrow amount, net of potential claims, would be fully released after an escrow period not to exceed 12 months from the transaction closing on March 29, 2017. On September 29, 2017, the Company received $100,000 from the escrow account for the portion of the escrow account set aside for net working capital adjustments.normal business operations when they come due.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~To that end, the Company anticipates closing on the contribution of $5 million to the Company by VDA Group S.p.A., an Italian joint stock company (“VDA”), in exchange for the issuance by the Company to VDA of (i) 162,900,947 shares of Company common stock, par value $0.001 per share; and (ii) a warrant to purchase 105,380,666 additional shares of common stock pursuant to the terms of the Stock Purchase Agreement, dated as of August 6, 2021, between the Company and VDA (the “Stock Purchase Agreement”) during the fourth quarter of this year.

The Company’s operations and financial results have also been impacted by the COVID-19 pandemic. Both the health and economic aspects of the COVID-19 pandemic are highly fluid and the future course of each is uncertain. We cannot predict whether the outbreak of COVID-19 will be effectively contained on a sustained basis. Depending on the length and severity of the COVID-19 pandemic, the demand for our products, our customers’ ability to meet payment obligations to the Company, our supply chain and production capabilities, and our workforces’ ability to deliver our products and services could be impacted. Management is actively monitoring the impact of the global situation on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce. While we expect this disruption to continue to have a material adverse impact on our results of operations, financial condition, cash flows, and liquidity, the Company is unable to reasonably determine the full extent of the impact at this time.

Due to travel restrictions and social distancing edicts, the hospitality industry, our largest market that generally accounts for a majority of our revenue, has suffered as much as any. Rising cases of COVID-19 in certain areas, the emergence of new virus strains, including the more transmissible Delta variant, and a stagnation of vaccinations has exacerbated the uncertainty of the pandemic’s length and severity. Although certain of these restrictions have been lessened or eliminated, they may be reinstated due to rising cases, and business travel, which comprises the largest source of hotel revenue, remains limited. Business travel is not expected to return to 2019 levels until at least 2023.^[1] According to an STR forecast, until group, business and international demand returns, U.S. hotel occupancy rates will not exceed 50% in 2021. Moreover, full recovery of revenue per available room (RevPAR) is unlikely to return to pre-pandemic levels until the end of 2024.^[2]

In addition, on November 30, ~~2017~~2020, the Company entered into the License Agreement with Sipco and IPCO, LLC dba Intus^IQ in order to settle a patent infringement lawsuit without the expense of costly litigation. As of September 30, 2021, the Company had a current liability of approximately $132,000, which $27,000 is included in accounts payable and $105,000 in other accrued liabilities (See Note F – Current Accrued Liabilities for further breakdown of accrued liabilities), along with a non-current liability of $395,000 included in accrued royalties – long-term recorded on its Condensed Consolidated Balance Sheet. The payment of the royalty fees is expected to have a material and adverse impact on the Company’s results of operations and liquidity. See Note I – Commitments and Contingencies for a discussion of the patent infringement lawsuit and the License Agreement.

These actions are in addition to the cost elimination and liquidity management actions that the Company began implementing in the second half of 2019, including reviewing opportunities to decrease spend with third party consultants and providers, strategically reviewing whether or not to fill employee positions in the event of vacancies, and implementing sales campaigns to sell slow-moving inventory and reduce existing inventory volumes. There is no guarantee, however, that these actions, nor any other actions identified, will yield profitable operations in the foreseeable future.

^[1] Fox, Jena Tesse. “AHLA report ties recovery to optimistic leisure travelers.” Hotel Management January/February 2021: 10.

^[2] Fox, Jena Tesse. “STR, HVS chart “slow climb’ to full hotel industry recovery.” Hotel Management December 2020: 6.

The Company also has a $2 million revolving credit facility with Heritage Bank (the “Credit Facility”). The Company is currently in compliance with the financial covenants in the loan agreement for the Credit Facility. However, based on the Company’s current level of operations and forecasted cash flow analysis for the twelve-month period subsequent to the date of this filing, without further cost cutting measures, working capital management, and/or enhanced revenues, the Company believes it is reasonably likely that it will breach the covenant to maintain a minimum unrestricted cash balance of $2 million at some time during 2021. Violation of any covenant under the Credit Facility provides Heritage Bank with the option to accelerate repayment of amounts borrowed, terminate its commitment to extend further credit, and foreclose on the Company’s assets. As of September 30, 2021, the outstanding balance on the Credit Facility was $266,293.

On September 30, 2021, the Company entered into a Twelfth Amendment to the Heritage Bank Loan Agreement (the “Amendment”) to extend the revolving maturity date from September 30, 2021 to December 31, 2021, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement. The Company is in discussions with Heritage Bank about the possibility of a waiver or a change to the financial covenant with Heritage Bank. Any covenant waiver or amendment could lead to increased costs, increased interest rates, and a decrease in the size of the line of credit, additional restrictive covenants, or other lender protections. There is no assurance, however, that the Company will be able to further extend the maturity date of the Credit Facility. There is also no assurance that the Company will be able to obtain a covenant waiver or amendment, in which case Heritage Bank could immediately declare all amounts due under the Credit Facility, terminate the Credit Facility, and foreclose on the Company’s assets. Currently, the Company has sufficient cash balances to pay the amounts due under the Credit Facility. However, depending on the timing of a default and the Company’s ongoing use of cash reserves and the Credit Facility to finance its near-term working capital needs, there is no assurance that at the time of a default that the Company would have sufficient cash balances to pay the amounts due at such time. The Company may also seek additional financing from alternative sources, but there is no assurance that such financing will be available at commercially reasonable terms, if at all.

The Company currently expects to draw on its cash reserves and utilize the Credit Facility (to the extent the maturity date is extended and the Company remains in compliance with the covenants) to finance its near-term working capital needs. It expects to continue to incur operating losses and negative operating cash flows for at least one year beyond the date of these financial statements. The Credit Facility provides the Company with needed liquidity to assist in meeting its obligations. However, as discussed above, without further cost cutting measures, working capital management, and/or enhanced revenues, the Company believes it is reasonably likely that it will breach a financial covenant under the Credit Facility at some time during 2021, in which case, without a waiver or amendment, the Credit Facility could be terminated, and without additional financing, the Company may be unable to meet its obligations or fund its operations within the next twelve months. As disclosed previously, the Company’s Board has also been considering strategic alternatives to maximize shareholder value, including but not limited to, a sale of the Company, an investment in the Company, a merger or other business combination, a sale of all or substantially all assets or a strategic joint venture.

If cash resources become insufficient to meet the Company’s ongoing obligations, the Company may be required to scale back or discontinue portions of its operations or discontinue operations entirely, pursue a sale of the Company or its assets at a price that may result in a significant or complete loss on investment for its shareholders, file for bankruptcy or seek other protection from creditors, or liquidate all its assets. In addition, if the Company defaults under the Credit Facility and is unable to pay the outstanding balance, Heritage Bank could foreclose on the Company’s assets. The Company’s shareholders may lose some or all of their investment as a result of any of these outcomes. Accordingly, and in light of the Company’s historic losses and potential inability to access sources of liquidity to continue its operations, there is substantial doubt about the Company’s ability to continue as a going concern.

The Company computes earnings per share under ASC 260-10, “Earnings Per Share”. Basic net income (loss) per common share is computed using the weighted average shares outstanding. Diluted net income (loss) per common share is computed using the treasury stock method, which assumes that the proceeds to be received on exercise of outstanding stock options and warrants are used to repurchase shares of the Company at the average market price of the common shares for the year. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company's outstanding stock options and warrants. For both the nine months ended September 30, ~~2017~~2021 and ~~2016,~~2020, there were ~~5,621,800 and 2,240,225~~3,599,793 shares of common stock underlying options and warrants excluded due to these instruments being ~~anti-dilutive, respectively.~~anti-dilutive.

The preparation of financial statements in conformity with United States of America (U.S.) generally accepted accounting principles (“GAAP”) requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used when accounting for items and matters such as revenue recognition and allowances for uncollectible accounts receivable, inventory obsolescence, depreciation and amortization, long-lived assets, taxes and related valuation allowance, income tax provisions, stock-based compensation, and contingencies. The Company believes that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results may differ from those estimates.

The Company accounts for income taxes in accordance with ASC 740-10 “Income Taxes.” Under this method, deferred income taxes (when required) are provided based on the difference between the financial reporting and income tax bases of assets and liabilities, and availability of net operating losses at the statutory rates ~~enacted for~~expected in future periods. The Company has a policy of establishing a valuation allowance when it is more likely than not that the Company will not realize the benefits of its deferred income tax assets in the future.

The Company ~~adopted~~follows ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10-25 also provides guidance on ~~derecognition,~~de-recognition, classification, treatment of interest and penalties, and disclosure of such positions.

~~For~~Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606, the Standard”) supersedes nearly all legacy revenue ~~from product sales,~~recognition guidance. ASC 606, the Standard outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue based on when it satisfies its performance obligations by transferring control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for said goods or services.

The Company accounts for a customer contract under ASC 606 when the contract is legally enforceable. A contract is legally enforceable when all of the following criteria are met: (1) the contract has been approved by the Company ~~recognizes revenue in accordance with ASC 605-10, “Revenue Recognition”~~ and ~~ASC 605-10-S99 guidelines that require that four basic criteria must be met before revenue~~the customer and both parties are committed to perform their respective obligations, (2) the Company can ~~be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred;~~identify each party’s rights regarding goods or services transferred, (3) the ~~selling price~~Company can identify payment terms for goods or services transferred, (4) the contract has commercial substance, and (5) collectability of all the consideration to which the Company is ~~fixed and determinable; and (4) collectability~~entitled in exchange for the goods or services transferred is ~~reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding~~probable.

A contract does not exist if either party to the ~~fixed nature~~contract has the unilateral right to terminate a wholly unperformed contract without compensating the other party (or parties). Nearly all of the ~~selling prices of the products delivered and the collectability of those amounts. Assuming all conditions~~Company’s contracts do not contain such mutual termination rights for ~~revenue recognition have been satisfied, product revenue is recognized when products~~convenience. All contracts are shipped and installation revenue is recognized when the services are completed. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The guidelines also address the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.

~~Multiple-Element Arrangements (“MEAs”):~~The Company ~~accounts for~~will enter into product only contracts that ~~have both~~contain a single performance obligation related to the transfer of products to a customer.

The Company will also enter into certain customer contracts that encompass product and installation ~~under~~services, referred to as “turnkey” solutions. These contracts ultimately provide the ~~MEAs guidance~~customer with a solution that enhances the functionality of the customer’s existing equipment. For this reason, the Company has determined that the product and installation services are not separately identifiable performance obligations, but in ~~ASC 605-25. Arrangements under such~~essence represent one, combined performance obligation (“turnkey”).

The Company also offers technical phone support services to customers. This service is considered a separate performance obligation.

The Company generally enters into contracts ~~may~~containing fixed prices. It is not customary for the Company to include ~~multiple deliverables consisting~~contract terms that would result in variable consideration. In the rare situation that a contract does include this type of provision, it is not expected to result in a ~~combination of equipment~~material adjustment to the transaction price. The Company regularly extends pricing discounts; however, they are negotiated up front and ~~services. The deliverables included~~adjust the fixed transaction price set out in the MEAs are separated into more than one unit of accounting when (i) the delivered equipment has value to the customer on a stand-alone basis, and (ii) delivery of the undelivered service element(s) is probable and substantially in the Company’s control. Arrangement consideration is then allocated to each unit, delivered or undelivered, based on the relative selling price of each unit of accounting based first on vendor-specific objective evidence (“VSOE”) if it exists, second on third-party evidence (“TPE”) if it exists and on estimated selling price (“ESP”) if neither VSOE or TPE exist.contract.

~~VSOE – In most instances, products are sold separately in stand-alone arrangements. Services are also sold separately through renewals of~~

Customer contracts with varying periods. The Company determines VSOE based on pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables,will typically contain upfront deposits that will be applied against future invoices, as well as ~~renewal rates~~customer retainage. The intent of any required deposit or ~~stand-alone prices for~~retainage is to ensure that the ~~service element(s).~~

~~TPE – If~~obligations of either party are honored and follow customary industry practices. In addition, the Company ~~cannot establish VSOE~~will typically be paid in advance at the beginning of any support contracts, consistent with industry practices. None of these payment provisions are intended to represent significant implicit financing. The Company’s standard payment terms are thirty days from invoice date. Products are fully refundable when returned in their original packaging without damage or defacing less a restocking fee. Historical returns have shown to be immaterial. The Company offers a standard one-year assurance warranty. However, customers can purchase an extended warranty. Under the revenue recognition standard, extended warranties are accounted for as a service warranty, requiring the revenue to be recognized over the extended service periods. Contracts involving an extended warranty are immaterial and will continue to be combined with technical phone support services revenue and recognized on a straight-line basis over the term of the contract.

Allocate the transaction price to the performance obligations

Revenues from customer contracts are allocated to the separate performance obligations based on their relative stand-alone selling price ~~for a specific product or service included in a multiple-element arrangement, the Company uses third-party evidence of selling price.~~(“SSP”) at contract inception. The Company determines TPE based on sales of a comparable amount of similar product or service offered by multiple third parties considering the degree of customization and similarity of product or service sold.

~~ESP – The estimated selling price represents~~SSP is the price at which the Company would sell a ~~product~~promised good or service ~~if it were~~separately. The best evidence of an SSP is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers. However, turnkey solutions are sold onfor a ~~stand-alone basis. When neither VSOE nor TPE exists~~broad range of amounts resulting from, but not limited to, tiered discounting for ~~all elements,~~value-added resellers (“VAR”) based upon committed volumes and other economic factors. Due to the high variability of our pricing, the Company ~~determines ESP~~cannot establish a reliable SSP using observable data. Accordingly, the Company uses the residual approach to allocate the transaction price to performance obligations related to its turnkey solutions. When support services are not included within the turnkey solution, the residual method is not utilized and no allocation of the transaction price to the performance obligation is necessary.

All support service agreements, whether single or multi-year terms, automatically renew for one-year terms at a suggested retail price (“SRP”). Support service renewals are consistently priced and therefore would support the ~~arrangement element based on sales, cost and margin analysis,~~use of SRP as ~~well as other inputs based on~~ the ~~Company’s pricing practices. Adjustments~~best estimate of an SSP for ~~other market and Company-specific factors are made as deemed necessary in determining ESP.~~such performance obligations.

Under the estimated selling price method, revenue is recognized in MEAs based on estimated selling prices for all of the elements in the arrangement, assuming all other conditions for revenue recognition have been satisfied. To determine the estimated selling price, the Company establishes the selling price for its products and installation services using the Company’s established pricing guidelines, and the proceeds are allocated between the elements and the arrangement.

When MEAs include an element of customer training, the Company determined it is not essential to the functionality, efficiency or effectiveness of the MEA due to its perfunctory nature in relation to the entire arrangement. Therefore the Company has concluded that this obligation is inconsequential and perfunctory. As such, for MEAs that include training, customer acceptance of said training is not deemed necessary in order to record the related revenue, but is recorded when the installation deliverable is fulfilled. Historically, training revenues have not been significant.Revenue Recognition

The Company ~~provides call center~~recognizes revenues from product only sales at a point in time when control over the product has transferred to the customer. As the Company’s principal terms of sale are FOB shipping point, the Company primarily transfers control and records revenue for product only sales upon shipment.

A typical turnkey project involves the installation and integration of 200-300 rooms in a customer-controlled facility and usually takes sixty days to complete. Since control over goods and services transfers to a customer once a room is installed, the Company recognizes revenue for turnkey solutions over time. The Company uses an outputs measure based on the number of rooms installed to recognize revenues from turnkey solutions.

Revenues from support services ~~to properties installed by the Company. The Company receives monthly service fees from such properties for its services. The Company recognizes the service fee ratably~~are recognized over time, in even daily increments over the term of the ~~contract. The prices for these services~~contract, and are ~~fixed~~presented as “Recurring Revenue” in the Statement of Operations.

Contracts are billed in accordance with the terms and ~~determinable prior~~conditions, either at periodic intervals or upon substantial completion. This can result in billing occurring subsequent to ~~delivery of~~revenue recognition, resulting in contract assets. Contract assets are presented as current assets in the service. The fair value of these services is known due to objective and reliable evidence from standalone executed contracts. The Company reports such revenues as recurring revenues. Deferred revenue includesCondensed Consolidated Balance Sheet.

Contract liabilities include deferrals for the monthly support service fees. Long-term ~~deferred revenue represents~~contract liabilities represent support service fees tothat will be ~~earned or provided beginning~~recognized as revenue after September 30, ~~2018. Revenue recognized that has not yet been billed to a customer results in an asset as~~2022.

Contract Completion Cost

The Company recognizes related costs of the ~~end~~contract over time in relation to the revenue recognition. Costs included within the projects relate to the cost of material, direct labor and costs of outside services utilized to complete projects. These are presented as “Contract assets” in the ~~period. As of September 30, 2017 and December 31, 2016, there was $68,855 and $193,400 recorded within accounts receivable, respectively, related to revenue recognized that has not yet been billed.~~

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~)Condensed Consolidated Balance Sheet.

Sales Taxes

Unless provided with a resale or tax exemption certificate, the Company assesses and collects sales tax on sales transactions and records the amount as a liability. It is recognized as a liability until remitted to the applicable state. Total revenues do not include sales tax as the Company is considered a pass through conduit for collecting and remitting sales taxes.

Guarantees and Product Warranties

The Company records a liability for potential warranty claims in cost of sales at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. The products sold are generally covered by a warranty for a period of one year. In the event the Company determines that its current or future product repair and replacement costs exceed its estimates, an adjustment to these reserves would be charged to earnings in the period such determination is made. For the ~~nine~~three months ended September 30, ~~2017~~2021 and the year ended December 31, ~~2016,~~2020, the Company experienced returns of approximately ~~1.0%~~1% to ~~2.5%~~3% of materials included in the cost of sales. As of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, the Company recorded warranty liabilities in the amount of ~~$77,810~~$17,551 and ~~$95,540,~~$45,328, respectively, using this experience factor range.

Product warranties for the nine months ended September 30, ~~2017~~2021 and the year ended December 31, ~~2016~~2020 are as follows:

Schedule of product warranties
	September 30, 2021			December 31, 2020

Beginning balance	$	45,328		$	58,791
Warranty claims incurred		(14,548	)		(20,499	)
Provision charged (credited) to expense		(13,229	)		7,036
Ending balance	$	17,551		$	45,328

September 30,
2017 December 31,
2016
Beginning balance $ 95,540 $ 66,555
Warranty claims incurred (48,767 ) (115,120 )
Provision charged to expense 31,037 144,105
Ending balance $ 77,810 $ 95,540

~~Reclassifications~~Advertising

~~Certain amounts~~The Company follows the policy of charging the costs of advertising to expenses as incurred. The Company incurred $2,750 and $1,153 in advertising costs during the three months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2021 and 2020, the Company incurred advertising costs of $5,725 and $8,315, respectively.

Research and Development

The Company accounts for research and development costs in accordance with the ASC 730-10, “Research and Development”. Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. Total expenditures on research and product development for the three months ended September 30, 2021 and 2020 were $268,917 and $231,088, respectively. Research and product development expenditures for the nine months ended September 30, 2021 and 2020 were $876,778 and $892,179, respectively.

Stock-Based Compensation

The Company accounts for stock-based awards in accordance with ASC 718-10, “Share-Based Compensation”, which requires a fair value measurement and recognition of compensation expense for all share-based payment awards made to the Company’s employees and directors, including employee stock options and restricted stock awards. The Company estimates the fair value of stock options granted using the Black-Scholes valuation model. This model requires the Company to make estimates and assumptions including, among other things, estimates regarding the length of time an employee will hold vested stock options before exercising them, the estimated volatility of the Company’s common stock price and the number of options that will be forfeited prior to vesting. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Changes in these estimates and assumptions can materially affect the determination of the fair value of stock-based compensation and consequently, the related amount recognized in the Company’s condensed consolidated statements of operations.

The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. The expected stock price volatility is based on the ~~condensed consolidated balance sheets as~~historical volatility of December 31, 2016 and statements of cash flows have been reclassified to conform to the current year presentation. The Company reclassified $106,743 from current assets of discontinued operations to cash and cash equivalents for certain EthoStream assets not sold to DCI on March 28, 2017. The Company reclassified $150,936 from current liabilities of discontinued operations to accrued liabilities and expenses for certain EthoStream liabilities not assumed by DCI on March 28, 2017. The reclassifications were not material and had no effect on the Company’s ~~total current assets, current liabilities or stockholders’ equity as of December 31, 2016.~~stock for the related expected term.

Stock-based compensation expense in connection with options granted to employees for both the three months ended September 30, 2021 and 2020 was $1,815. Total stock-based compensation expense in connection with options granted to employees for both the nine months ended September 30, 2021 and 2020 was $5,446.

NOTE B – NEW ACCOUNTING PRONOUNCEMENTS

In ~~May 2014,~~June 2016, the FASB issued ASU No. 2016-13, Financial ~~Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts~~Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides guidance for estimating credit losses on certain types of financial instruments, including trade receivables, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. ASU 2016-13 also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.credit deterioration. The guidance for this standard was initially effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, however in August 2015 the FASB delayed the effective date of the standard for one full year. Companies will adopt the standard using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii)requires a modified retrospective ~~approach with~~transition method and early adoption is permitted. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses, Derivatives and Hedging, and Leases (“ASU 2019-10”), which defers the ~~cumulative effect~~adoption of ~~initially adopting~~ ASU ~~2014-09 recognized at the date of adoption (which includes additional footnote disclosures).~~2016-13 for smaller reporting companies until January 1, 2023. The Company expects to adopt ASU 2014-09 as of January 1, 2018 with a cumulative effect adjustment to opening retained earnings, if necessary, under the modified retrospective approach. The Company has developed a project plan for the implementation of the new standard including a review of all revenue streams to identify any differences in the performance obligations, timing, measurement or presentation of revenue recognition. The Company’s implementation of this ASU includes the evaluation of its customer agreements to identify terms or conditions that could be considered a performance obligation such that, if material to the terms of the contract, consideration would be allocated to the performance obligation and could accelerate or defer the timing of recognizing revenue. The Company also continueswill continue to evaluate the ~~presentation~~impact of ASU 2016-13 on its principal versus agent arrangements. The Company’s evaluation of its revenue streams and the treatment under the new guidance on the timing of revenue recognition and the allocation of revenue to the Company’s goods and services is in process and any effect cannot be determined at this time.consolidated financial statements.

Management has evaluated other recently issued accounting pronouncements and does not believe any will have a significant impact on our consolidated financial statements and related disclosures.

1215

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~NOTE C – REVENUE)

~~In February 2016,~~The following table presents the ~~FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”).~~ Company’s product and recurring revenues disaggregated by industry for the three months ended September 30, 2021.

Disaggregation of revenues
	Hospitality		Education		Multiple Dwelling Units		Government		Healthcare		Total
Product	$	1,195,394	$	39,577	$	33,728	$	21,690	$	0	$	1,290,389
Recurring		96,211		67,468		0		0		0		163,679
	$	1,291,605	$	107,045	$	33,728	$	21,690	$	0	$	1,454,068

The ~~new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset~~following table presents the Company’s product and ~~a lease liability on~~recurring revenues disaggregated by industry for the ~~balance sheet~~nine months ended September 30, 2021.

	Hospitality		Education		Multiple Dwelling Units		Government		Healthcare		Total
Product	$	3,463,056	$	123,975	$	290,936	$	144,997	$	48,195	$	4,071,159
Recurring		408,604		97,542		26,461		0		0		532,607
	$	3,871,660	$	221,517	$	317,397	$	144,997	$	48,195	$	4,603,766

The following table presents the Company’s product and recurring revenues disaggregated by industry for ~~all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting~~ the ~~pattern~~three months ended September 30, 2020.

	Hospitality		Education		Multiple Dwelling Units		Government		Healthcare		Total
Product	$	1,890,086	$	61,779	$	2,083	$	96,222	$	0	$	2,050,170
Recurring		116,292		72,059		1,450		0		0		189,801
	$	2,006,378	$	133,838	$	3,533	$	96,222	$	0	$	2,239,971

The following table presents the Company’s product and recurring revenues disaggregated by industry for the nine months ended September 30, 2020.

	Hospitality		Education		Multiple Dwelling Units		Government		Healthcare		Total
Product	$	4,072,147	$	383,944	$	132,353	$	174,358	$	0	$	4,762,802
Recurring		432,214		112,422		17,638		0		0		562,274
	$	4,504,361	$	496,366	$	149,991	$	174,358	$	0	$	5,325,076

Sales taxes and other usage-based taxes are excluded from revenues.

Remaining performance obligations

As of ~~expense recognition in~~September 30, 2021, the statement of operations. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginningaggregate amount of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements. Upon adoption,transaction price allocated to remaining performance obligations was approximately $0.8 million. Except for support services, the Company expects to recognize 100% of the remaining performance obligations over the next six months.

Contract assets and liabilities

Contract Assets and Liabilities
	September 30, 2021		December 31, 2020
Contract assets	$	181,761	$	104,989
Contract liabilities		1,285,192		1,052,367
Net contract liabilities	$	1,103,431	$	947,378

Contracts are billed in accordance with the terms and conditions, either at periodic intervals or upon substantial completion. This can result in billings occurring subsequent to revenue recognition, resulting in contract assets. Contract assets are presented as current assets in the Condensed Consolidated Balance Sheet.

Often, the Company will require customers to pay a deposit upon contract signing that will be applied against work performed or products shipped. In addition, the ~~ROU asset~~Company will often invoice the full term of support at the start of the support period. Billings that occur prior to revenue recognition result in contract liabilities. The change in the contract liability balance during the three-month period ended September 30, 2021 is the result of cash payments received and ~~lease liability~~billing in advance of satisfying performance obligations.

Contract costs

Costs to complete a turnkey contract primarily relate to the materials cost and direct labor and are recognized proportionately as the performance obligation is satisfied. The Company will defer costs to complete a contract when materials have shipped (and control over the materials has transferred to the customer), but an insignificant amount of rooms have been installed. The Company will recognize any deferred costs in proportion to revenues recognized from the related turnkey contract. The Company does not expect deferred contract costs to be long-lived since a typical turnkey project takes sixty days to complete. Deferred contract costs are generally presented as other current assets in the Condensed Consolidated Balance Sheet.

The Company incurs incremental costs to obtain a contract in the form of sales commissions. These costs, whether related to performance obligations that extend beyond twelve months or not, are immaterial and will continue to be recognized in the ~~balance sheets in amounts that will be material.~~period incurred within selling, general and administrative expenses.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The new standard provides guidance on the classification of certain transactions in the statement of cash flows, such as contingent consideration payments made in connection with a business combination and debt prepayment or extinguishment costs. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within that fiscal year. When adopted, the new guidance will be applied retrospectively. The Company is currently evaluating the impact of its pending adoption of ASU 2016-15 on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation — Scope of Modification Accounting (“ASU 2017-09”), which provides guidance about the types of changes to terms or conditions of a share-based payment award that would require an entity to apply modification accounting. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this update should be applied prospectively to an award modified on or after the adoption date.

NOTE C– D – ACCOUNTS RECEIVABLE

Components of accounts receivable as of September 30, ~~2017~~2021 and December 31, ~~2016~~2020 are as follows:

September 30,
2017 December 31,
2016
Accounts receivable $ 1,781,394 $ 1,438,345
Allowance for doubtful accounts (12,173 ) (34,573 )
Accounts receivable, net $ 1,769,221 $ 1,403,772

~~NOTE D – ACCRUED LIABILITIES AND EXPENSES~~

~~Accrued liabilities and expenses at September 30, 2017 and December 31, 2016 are as follows~~:

September 30,
2017 December 31,
2016
Accrued liabilities and expenses $ 589,288 $ 223,011
Accrued payroll and payroll taxes 354,293 331,908
Accrued sales taxes, penalties, and interest 72,331 274,869
Accrued interest 332 253
Product warranties 77,810 95,540
Total accrued liabilities and expenses $ 1,094,054 $ 925,581

Schedule of accounts receivable
	September 30, 2021			December 31, 2020
Accounts receivable	$	864,199		$	873,147
Allowance for doubtful accounts		(5,783	)		(7,973	)
Accounts receivable, net	$	858,416		$	865,174

1317

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~)

NOTE E – ~~DEBT~~

~~Kross Promissory Note~~INVENTORIES

~~On August 4, 2016, the Board~~Components of Directors authorized the Company to reimburse Peter T. Kross (“Mr. Kross”) $161,075 for expenses incurred related to his successful contested proxy. Effective June 27, 2016, Mr. Kross became a director of the Company and is considered a related party. On August 30, 2016, Mr. Kross accepted an unsecured promissory note (“Kross Note”) for $161,075 from the Company. The outstanding principal balance bore interest at the annual rate of 3.00%. Payment of interest and principal began on September 1, 2016 and continued monthly on the first day of each month thereafter through and including June 1, 2017. The Company was required to pay equal monthly installments of $16,330 which included all remaining principal and accrued interest owed by the Company to Mr. Kross under the Kross Note. The Company could prepay in advance any unpaid principal or interest due under the Kross Note without premium or penalty. The principal balance of the Kross Noteinventories as of September 30, ~~2017~~2021 and December 31, ~~2016 was zero and $97,127, respectively.~~2020 are as follows:

Components of inventories
	September 30, 2021			December 31, 2020
Product purchased for resale	$	1,398,522		$	1,792,262
Reserve for obsolescence		(543,908	)		(404,000	)
Inventory, net	$	854,614		$	1,388,262

NOTE F – CURRENT ACCRUED LIABILITIES

Current accrued liabilities at September 30, 2021 and December 31, 2020 are as follows:

Schedule of accrued liabilities and expenses
	September 30, 2021		December 31, 2020
Accrued payroll and payroll taxes	$	202,483	$	252,595
Accrued professional		218,241		176,842
Accrued sales taxes, penalties, and interest		25,588		31,396
Product warranties		17,551		45,328
Other accrued liabilities		323,919		57,151
Total current accrued liabilities	$	787,782	$	563,312

NOTE G – DEBT

Revolving Credit Facility

On September 30, 2014, the Company ~~and its wholly-owned subsidiary, EthoStream, as co-borrowers (collectively, the “Borrowers”),~~ entered into a loan and security agreement (the “Heritage Bank Loan Agreement”), with Heritage Bank of Commerce, a California state chartered bank (“Heritage Bank”), governing a ~~new~~ revolving credit facility in a principal amount not to exceed ~~$2,000,000~~$2,000,000 (the “Credit Facility”). Availability of borrowings under the Credit Facility ~~from time to time~~ is subject to a borrowing base calculation based on the Company’s eligible accounts receivable and eligible inventory each multiplied by an applicable advance rate, with an overall limitation tied to the Company’s eligible accounts receivable. The Credit Facility is secured by all of the Company’s assets. The Heritage Bank Loan Agreement is available for working capital and other general business purposes.

The outstanding principal balance of the Credit Facility bears interest at the Prime Rate plus 3.00%, which was ~~7.25%~~6.25% at both September 30, ~~2017~~2021 and ~~6.75% at~~ December 31, ~~2016.~~2020. On October 9, 2014, as part of the Heritage Bank Loan Agreement, Heritage Bank was granted a warrant to purchase 250,000 shares of Telkonet common stock. The warrant has an exercise price of ~~$0.20~~$0.20 and expires October 9, ~~2021.~~2021. On ~~February 17, 2016, an~~November 6, 2019, the eleventh amendment to the Credit Facility was executed ~~extending~~to extend the maturity date to September 30, ~~2018,~~2021, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement, and eliminate the maximum EBITDA loss covenant. The eleventh amendment was effective as of September 30, 2019.

On September 30, 2021, the Company entered into a Twelfth Amendment to the Heritage Bank Loan Agreement (the “Amendment”) to extend the revolving maturity date to December 31, 2021, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement. In addition, subject to certain conditions as specified in the Amendment, Heritage Bank consented to the proposed transaction (as described above under the “Going Concern and Management’s Plan” section in Note A – Basis of Presentation and Significant Accounting Policies) between the Company and VDA, and acknowledged and agreed that certain events occurring in connection with the Transaction, including the change of control of the Company resulting from the Transaction, do not constitute Events of Default as defined in the Loan Agreement.

The Heritage Bank Loan Agreement ~~also~~ contains ~~financial~~ covenants that place restrictions on, among other things, the incurrence of debt, granting of liens and sale of assets. The Heritage Bank Loan Agreement ~~and amendments~~ also ~~contain~~contains financial covenants. As discussed above, the EBITDA loss covenant was eliminated in the eleventh amendment to the Credit Facility. The sole financial covenants ~~that require the Borrowers to maintain a minimum EBITDA level, measured quarterly,~~are a minimum asset coverage ratio and a minimum unrestricted cash balance of $2 million, both of which are measured ~~monthly and minimum cash account balances.~~at the end of each month. A violation of ~~any~~either of these covenants could result in an event of default under the Heritage Bank Loan Agreement. Upon the occurrence of such an event of default or certain other customary events of defaults, payment of any outstanding amounts under the Credit Facility may be accelerated and Heritage Bank’s commitment to extend credit under the Heritage Bank Loan Agreement may be terminated. The Heritage Bank Loan Agreement contains other representations and warranties, covenants, and other provisions customary to transactions of this nature.

The outstanding balance on the Credit Facility was $266,293 and $267,289 at September 30, 2021 and December 31, 2020, respectively, and the remaining available borrowing capacity was approximately $330,000 and $442,000, respectively. As of September 30, ~~2017,~~2021, the Company was in compliance with all financial covenants. ~~The outstanding balance on~~

See the “Going Concern and Management’s Plan” section in Note A – Basis of Presentation and Significant Accounting Policies for a discussion of a potential default under the Credit Facility was $79,953 and $1,062,129 at September 30, 2017 and December 31, 2016, respectively. The remaining available borrowing capacity was approximately $1,304,000 and $107,000 at September 30, 2017 and December 31, 2016, respectively.Facility.

Paycheck Protection Program

The Company has received two loans under the Paycheck Protection Program (the “PPP”) administered by the United States Small Business Administration (the “SBA”) and authorized by the Keeping American Workers Employed and Paid Act, which is part of the Coronavirus Aid, Relief, and Economic Security Act, enacted on March 27, 2020. On ~~March 28, 2017,~~April 17, 2020, the Company ~~and the Company’s wholly-owned subsidiary, EthoStream,~~ entered into an ~~Asset Purchase Agreement with DCI-Design Communications LLC~~unsecured promissory note for $913,063 (“~~DCI”~~the First PPP Loan”)~~, whereby DCI would acquire all~~. In January 2021, the Company applied for forgiveness of the ~~assets and certain liabilities of EthoStream.~~amount due on the First PPP Loan. On February 16, 2021, Heritage Bank ~~had provided~~confirmed that the First PPP Loan granted to the Company, in the original principal amount of $913,063 plus accrued interest of $7,610 thereon, was forgiven in full.

On April 27, 2021, the Company entered into an unsecured promissory note, dated as of April 26, 2021, for a second PPP loan (“the Second PPP Loan”), with ~~its consent~~Heritage Bank under a second draw of the PPP administered by the SBA and authorized by the Keeping American Workers Employed and Paid Act.

The principal amount of the Second PPP Loan was $913,063, and it bore interest of 1.0% per annum and had a maturity date of five years from the date the proceeds are disbursed. The proceeds of the Second PPP Loan were disbursed on April 27, 2021. No payments of principal or interest were required until after the Payment Deferral Period (as defined in the Note), but interest accrued during this period. After this period, monthly payments of principal and interest were required and continued until maturity with respect to any portion of the Second PPP Loan not forgiven, as discussed below. The Second PPP Loan could be prepaid, in full or in part, at any time prior to maturity with no prepayment penalties. The Note contained events of default and other provisions customary for a loan of this type.

Under the terms of the PPP, the Company could apply for, and be granted, forgiveness for all or a portion of the Second PPP Loan. Such forgiveness would be determined, subject to limitations and ongoing rulemaking by the SBA, based on the use of loan proceeds for eligible purposes, including payroll costs, mortgage interest, rent, utility costs and the maintenance of employee and compensation levels. At least 60% of such loan proceeds must be used for eligible payroll costs. The amount of loan forgiveness would be reduced if the Company terminates employees or reduces salaries during the Covered Period (as defined in the Note). In September 2021, the Company applied for forgiveness of the amount due on the Second PPP Loan. On September 15, 2021, Heritage Bank confirmed that the Second PPP Loan granted to the ~~sale transaction. Upon closing~~Company, in the original principal amount of ~~the sale transaction on March 29, 2017, the entire balance outstanding on the Credit Facility~~$913,063 plus accrued interest of $3,044 thereon, was ~~repaid. On March 29, 2017an amendment to the Credit Facility was executedamending the quarterly and year to date EBITDA compliance measurements for 2017.~~forgiven in full.

The total amount forgiven in 2021 for principal and accrued interest under the PPP was $1,836,780.

1419

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~)

On August 29, 2017, an amendment to the Credit Facility with Heritage Bank was executed to amend certain terms of the Heritage Bank Loan Agreement allowing for the issuance of corporate credit cards providing credit not to exceed $100,000. The Borrower may request credit advances in an aggregate outstanding amount not to exceed the borrowing limits set forth in the amendment.

On October 23, 2017, an amendment to the revolving credit facility with Heritage Bank was executed to amend certain terms of the Heritage Bank Loan Agreement. Among the terms of the amendment was that if the Company deviates from its projected EBITDA for the quarters ended September 30, 2017 or December 31, 2017, the Company will be deemed to be in compliance as of the measurement date if the Company’s unrestricted cash maintained at Heritage Bank is in excess of $5,000,000. The amendment also extends the revolving credit facility’s maturity date by one year to September 30, 2019.

NOTE FH – ~~PREFERRED STOCK~~

~~Series A~~

The Company has designated 215 shares of preferred stock as Series A Preferred Stock (“Series A”). Each share of Series A is convertible, at the option of the holder thereof, at any time, into shares of the Company’s common stock at a conversion price of $0.363 per share. On November 16, 2009, the Company sold 215 shares of Series A with attached warrants to purchase an aggregate of 1,628,800 shares of the Company’s common stock at $0.33 per share. The Series A shares were sold at a price per share of $5,000 and each Series A share is convertible into approximately 13,774 shares of common stock at a conversion price of $0.363 per share. The Company received $1,075,000 from the sale of the Series A shares. In prior years, 30 of the preferred shares issued on November 16, 2009 were converted to shares of the Company’s common stock. In a prior year, the redemption feature available to the Series A holders expired.

~~Series B~~

The Company has designated 538 shares of preferred stock as Series B Preferred Stock (“Series B”). Each share of Series B is convertible, at the option of the holder thereof, at any time, into shares of the Company’s common stock at a conversion price of $0.13 per share. On August 4, 2010, the Company sold 267 shares of Series B with attached warrants to purchase an aggregate of 5,134,626 shares of the Company’s common stock at $0.13 per share. The Series B shares were sold at a price per share of $5,000 and each Series B share was convertible into approximately 38,461 shares of common stock at a conversion price of $0.13 per share. The Company received $1,335,000 from the sale of the Series B shares on August 4, 2010. On April 8, 2011, the Company sold 271 additional shares of Series B with attached warrants to purchase an aggregate of 5,211,542 shares of the Company’s common stock at $0.13 per share. The Series B shares were sold at a price per share of $5,000 and each Series B share was convertible into approximately 38,461 shares of common stock at a conversion price of $0.13 per share. The Company received $1,355,000 from the sale of the Series B shares on April 8, 2011. In prior years, 486 of the preferred shares issued on August 4, 2010 and April 8, 2011 were converted to shares of the Company’s common stock. In a prior year, the redemption feature available to the Series B holders expired.

Preferred stock carries certain preference rights as detailed in the Company’s Amended Articles of Incorporation related to both the payment of dividends and as to payments upon liquidation in preference to any other class or series of capital stock of the Company. As of September 30, 2017, the liquidation preference of the preferred stock is based on the following order: first, Series B with a preference value of $409,009, which includes cumulative accrued unpaid dividends of $149,009, and second, Series A with a preference value of $1,507,481, which includes cumulative accrued unpaid dividends of $582,481. As of December 31, 2016, the liquidation preference of the preferred stock is based on the following order: first, Series B with a preference value of $393,435, which includes cumulative accrued unpaid dividends of $133,435, and second, Series A with a preference value of $1,452,114, which includes cumulative accrued unpaid dividends of $527,114.

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~)

~~NOTE G –~~ CAPITAL STOCK

The Company has authorized 15,000,000 shares of preferred stock, ~~(designated and undesignated),~~ with a par value of ~~$.001~~$.001 per share. ~~The~~Of those shares, the Company has ~~designated~~ authorized 215 shares as Series A preferred stock and ~~538~~567 shares as Series B preferred stock. ~~As of~~At September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, there were 185 shares of Series A and 52 shares of Series B ~~outstanding.~~outstanding, respectively.

~~The~~As of September 30, 2021, the Company ~~has~~had authorized 190,000,000 shares of common stock with a par value of $.001 per share. As of September 30, ~~2017~~2021 and December 31, ~~2016~~2020, the Company had ~~133,440,111 and 132,774,475~~136,311,335 common shares issued and outstanding.

During the nine months ended September 30, ~~2016, 5,211,542~~2021, the Company did not issue any shares of common stock. During the three months ended September 30, 2020, the Company issued 320,844 shares of common stock to directors for services performed during the three months ended September 30, 2020. The shares issued for the three months ended September 30, 2020 were valued at $18,000, which approximated the fair value of the shares when they were issued.

During the three and nine months ended September 30, 2021 and 2020, 0 warrants were ~~exercised for an aggregate of 5,211,542 shares of the Company’s common stock at $0.13 per share.~~exercised. These warrants were originally granted to shareholders of the April 8, 2011 Series B preferred stock issuance.

During the ~~nine months ended September 30, 2016, 3 shares of Series B preferred stock were converted to, in aggregate, 115,385 shares of common stock.~~

~~NOTE H – STOCK OPTIONS AND WARRANTS~~

~~Employee Stock Options~~

The Company maintains an equity incentive plan, (the “Plan”). The Plan was established in 2010 as an incentive plan for officers, employees, non-employee directors, prospective employees and other key persons. It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a better alignment of their interests with those of the Company and its stockholders.

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees of the Company under the Plan as of September 30, 2017.

Options Outstanding Options Exercisable
Exercise Prices Number
Outstanding Weighted Average
Remaining
Contractual Life
(Years) Weighted Average
Exercise Price Number
Exercisable Weighted Average
Exercise Price
$ 0.01 - $0.15 3,075,000 6.19 $ 0.14 3,075,000 $ 0.14
$ 0.16 - $0.99 2,476,800 3.44 0.18 2,246,800 0.18
5,551,800 4.97 $ 0.16 5,321,800 $ 0.16

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~)

~~Transactions involving stock options issued to employees are summarized as follows:~~

Number of
Shares Weighted Average
Price Per Share
Outstanding at January 1, 2016 1,825,225 $ 0.28
Granted 1,300,000 0.17
Exercised – –
Cancelled or expired (292,500 ) 0.69
Outstanding at December 31, 2016 2,832,725 $ 0.18
Granted 3,000,000 0.14
Exercised – –
Cancelled or expired (280,925 ) 0.17
Outstanding at September 30, 2017 5,551,800 $ 0.16

The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures. The Company estimates the volatility of the Company’s common stock based on the calculated historical volatility of the Company’s own common stock using the trailing 24 months of share price data prior to the date of the award. The Company bases the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on the Company’s common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. The Company uses historical data to estimate pre-vesting option forfeitures and record share-based compensation for those awards that are expected to vest. In accordance with ASC 718-10, the Company adjusts share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience.

There were 3,000,000 and zero options granted and zero options exercised during the nine months ended September 30, 2017 and 2016, respectively. Total stock-based compensation expense in connection with options granted to employees recognized in the condensed consolidated statements of operations for the three and nine months ended September 30, ~~2017~~2021 and ~~2016 was $2,343 and $2,703, respectively, and $320,545 and $10,204, respectively.~~2020, 0 shares of Series A or B preferred stock were converted to shares of common stock.

~~Warrants~~NOTE I – COMMITMENTS AND CONTINGENCIES

~~The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company.~~

Warrants Outstanding Warrants Exercisable
Exercise Prices
Number
Outstanding

Weighted Average
Remaining
Contractual Life
(Years)

Weighted Average
Exercise Price

Number
Exercisable

Weighted Average
Exercise Price

$ 0.18 50,000 0.16 $ 0.18 50,000 $ 0.18
0.20 250,000 4.02 0.20 250,000 0.20
300,000 3.38 $ 0.20 300,000 $ 0.20

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~)

~~Transactions involving warrants are summarized as follows:~~

Number of
Shares Weighted Average
Price Per Share
Outstanding at January 1, 2016 5,638,410 $ 0.20
Issued – –
Exercised (5,211,542 ) 0.13
Cancelled or expired (126,868 ) 3.00
Outstanding at December 31, 2016 300,000 0.20
Issued – –
Exercised – –
Cancelled or expired – –
Outstanding at September 30, 2017 300,000 $ 0.20

There were no warrants granted, exercised, cancelled or forfeited during the nine months ended September 30, 2017 and no warrants granted, 5,211,542 warrants exercised and 126,868 cancelled or forfeited during the nine months ended September 30, 2016, respectively.

~~NOTE I – RELATED PARTY TRANSACTIONS~~

On August 4, 2016, the Board of Directors authorized the Company to reimburse Peter T. Kross (“Mr. Kross”) $161,075 for expenses incurred related to his successful contested proxy. Effective June 27, 2016, Mr. Kross became a director of the Company and is considered a related party. On August 30, 2016, Mr. Kross accepted an unsecured promissory note (“Kross Note”) for $161,075 from the Company. The outstanding principal balance bore interest at the annual rate of 3.00%. Payment of interest and principal began on September 1, 2016 and continued monthly on the first day of each month thereafter through and including June 1, 2017. The Company was required to pay equal monthly installments of $16,330 which included all remaining principal and accrued interest owed by the Company to Mr. Kross under the Kross Note. The Company could prepay in advance any unpaid principal or interest due under the Kross Note without premium or penalty. The principal balance of the Kross Note as of September 30, 2017 and December 31, 2016 was zero and $97,127, respectively.

During the nine months ended September 30, 2017, the Company issued common stock in the amount of $108,000 to the Company’s non-employee directors as compensation for their attendance and participation in the Company’s Board of Director and committee meetings.

On July 1, 2016, each newly elected Board of Director member, Mr. Kross, Mr. Blatt and Mr. Byrnes were granted 100,000 stock options pursuant to the Company’s Board of Director compensation plan. These options have an expiration period of ten years, vest quarterly over five years and have an exercise price of $0.19.

Upon execution of their employment agreements during the nine months ended September 30, 2017, each of Messrs. Tienor, Sobieski and Koch, were granted 1,000,000 stock options at fair market value and all were scheduled to vest over a three year period. However, pursuant to the terms of the employment agreements, the stock options vested immediately upon the sale of the Company’s subsidiary, EthoStream, in March 2017.

~~During the nine months ended September 30, 2017, Messrs. Tienor, Sobieski and Koch, earned a bonus of $29,250 contingent on the sale and sale price amount of Ethostream.~~

From time to time the Company may receive advances from certain of its officers in the form of salary deferment or cash advances to meet short term working capital needs. These advances may not have formal repayment terms or arrangements. As of September 30, 2017 and December 31, 2016, there were no such arrangements.

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~)

~~NOTE J – COMMITMENTS AND CONTINGENCIES~~

Office ~~Lease~~Leases Obligations

In October 2013, the Company entered into a lease agreement for 6,362 square feet of commercial office space in Waukesha, Wisconsin for its corporate headquarters. The Waukesha lease would have expired in April 2021, but was subsequently amended and extended through April 2026. On April 7, 2017 the Company executed an amendment to ~~its’~~its existing lease in Waukesha, Wisconsin to expand another 3,982 square feet, bringing the total leased space to 10,344 square feet. In addition, the lease term was extended from May 1, 2021 to April 30, ~~2026.~~2026. The commencement date for this amendment was July 15, 2017.

In January 2016, the Company entered into a lease agreement for 2,237 square feet of commercial office space in Germantown, Maryland for its Maryland employees. The Germantown lease, as amended, was set to expire at the end of January ~~2017.~~2018. In ~~December 2016,~~November 2017, the Company entered into a ~~first~~second amendment to the lease agreement extending the lease through the end of January ~~2018.~~2019. In November 2018, the Company entered into a third amendment to the lease agreement extending the lease through the end of January 2022.

In May 2017, the Company entered into a lease agreement for 5,838 square feet of floor space in Waukesha, Wisconsin for its inventory warehousing operations. The Waukesha lease expires in May ~~2027.~~2024.

~~Commitments~~The Company determines if an arrangement is a lease at inception. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified fixed asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. The Company does not separate non-lease components from lease components to which they relate and accounts for the combined lease and non-lease components as a single lease component.

Operating leases are included in our Condensed Consolidated Balance Sheet as right-of-use assets, operating lease liabilities – current and operating lease liabilities – long-term. We do not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less. Our current operating leases are for facilities. Our leases may contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs. Some of our lease agreements may contain rent escalation clauses, rent holidays, capital improvement funding, or other lease concessions.

In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum ~~rentals under non-cancelable~~lease payments within each lease agreement. ASC 842 requires us to use the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. When we cannot readily determine the discount rate implicit in the lease agreement, we utilize our current borrowing rate on our outstanding line of credit. The Company’s line of credit utilizes market rates to assess an interest rate. Refer to Note G for further discussion.

We recognize our minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. Payments are set on a pre-determined schedule within each lease agreement. We amortize this expense over the term of the lease beginning with the date of the standard adoption for current leases and beginning with the date of initial possession, which is the date we enter the leased space and begin to make improvements in the preparation for its intended use, for future leases. Variable lease components represent amounts that are not fixed in nature and are not tied to an index or rate and are recognized as incurred. Variable lease components consist primarily of the Company's proportionate share of common area maintenance, utilities, taxes and insurance and are presented as operating expenses in the Company’s statements of operations in the same line item as expense arising from fixed lease payments.

The components of lease expense for the nine months ended September 30, were as follows:

Components of lease expense
	2021		2020
Operating lease expense:
Operating lease cost – fixed	$	172,161	$	173,556
Variable lease cost		91,688		101,725
Total operating lease cost	$	263,849	$	275,281

Other information related to leases as of September 30, ~~2017 are~~was as follows:

Other information related to leases
	2021		2020
Operating lease liability – current	$	209,574	$	237,048
Operating lease liability – long-term	$	493,284	$	636,622
Operating cash outflows from operating leases	$	180,134	$	166,918

Weighted-average remaining lease term of operating leases		4.23 years		5.01 years
Weighted-average discount rate of operating leases		8.5%		8.5%

2017 (remainder of) $ 43,738
2018 153,063
2019 154,496
2020 164,903
2021 182,512
2022 and thereafter 764,024
Total $ 1,462,736

Future annual minimum operating lease payments as of September 30, 2021 were as follows:

Future annual minimum operating lease payments
2021 (excluding the nine months ended September 30, 2021)	$	62,169
2022		195,176
2023		193,169
2024		172,424
2025 and thereafter		211,694
Total minimum lease payments		834,632
Less imputed interest		(131,774	)
Total	$	702,858

Rental expenses charged to ~~continuing~~ operations for the three months ended September 30, 2021 and 2020 were $87,600 and $86,329, respectively. Rental expenses charged to operations for the nine months ended September 30, ~~2017~~2021 and ~~2016 was $86,649~~2020 were $263,849 and ~~$42,271 and $200,816 and $127,537,~~$275,281, respectively.

Litigation

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, other than the Sipco Lawsuit discussed below, and which has been terminated, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.

~~Sales Tax~~Sipco Litigation and License Agreement

~~During 2012,~~On June 30, 2020, Sipco, LLC (“Sipco”) filed a lawsuit against the Company ~~engaged a sales tax consultant~~in the United States District Court for the Eastern District of Wisconsin (Case No. 20-CV-00981) (the “Sipco Lawsuit”) alleging infringement on multiple essential wireless mesh (“EWM”) patents held by the Sipco. The EWM patent portfolio covers technologies used in multi-hop wireless networks utilizing wireless protocols such as, but not limited to, ~~assist in determining the extent of its potential sales tax exposure. Based upon this analysis, management determined~~Zigbee. The portfolio also covers applications including, but not limited to, home and building automation and industrial controls. The complaint contended that the Company ~~had probable exposure for certain unpaid obligations, including~~sold, and was continuing to sell, various automated networked products designed to manage energy, lighting and temperature and those products employ wireless mesh network communication utilizing Zigbee enabled technology. The complaint alleged patent infringement and sought damages, costs, expenses, pre-judgment and post-judgment interest and ~~penalty,~~post-judgment royalties. The complaint also alleged that the infringement was willful and that this is an “exceptional case” and requested treble damages and attorneys’ fees.

On November 30, 2020, the Company entered into a Wireless Network Patent License Agreement (the “License Agreement”) with SIPCO, LLC (“Sipco”) and IPCO, LLC dba IntusIQ (collectively, the “Licensors”) in order to settle the Sipco Lawsuit, without the expense of ~~approximately $1,100,000 including and prior~~costly litigation. Pursuant to the ~~year~~terms of the License Agreement, on November 30, 2020, Sipco and the Company filed a Stipulation of Dismissal in the United States District Court for the Eastern District of Wisconsin to stipulate to the dismissal of the Sipco Lawsuit in its entirety, with prejudice.

Under the terms of the License Agreement, the Company is required to pay the Licensors royalties on (a) all Licensed Products (as defined in the License Agreement) sold by Telkonet or its affiliates from July 1, 2020 to December 31, 2024 and (b) all Licensed Products in Telkonet or its affiliates’ possession, but not sold, as of December 31, 2024. Specifically, the Company is required to pay a royalty fee, calculated quarterly, equal to 3.50% of applicable sales for the period beginning on July 1, 2020 and continuing until December 31, 2021 (the “First Period”). There was also an upfront payment of $40,000 that was paid in the fourth quarter of 2020. Based on the Company and its affiliates’ applicable sales in the three months ended September 30, 2020, the three months ended December 31, ~~2011.~~2020, the three months ended March 31, 2021, the three months ended June 30, 2021, and the three months ended September 30, 2021, the royalty fees were approximately $59,000 for the third quarter of 2020, approximately $28,000 for the fourth quarter of 2020, approximately $31,000 for the first quarter of 2021, approximately $43,000 for the second quarter of 2021, and approximately $27,000 for the third quarter of 2021. The royalty fees for the remaining quarters in the First Period will be dependent on the Company ~~has approximately $72,000~~ and ~~$275,000 accrued~~its affiliates’ sales of applicable products. Beginning on January 1, 2022 and continuing until June 30, 2023, the Company is required to pay a quarterly royalty fee equal to 3.75% of applicable sales or $35,000, whichever is greater. Beginning on July 1, 2023 and continuing until December 31, 2024, the Company is required to pay a royalty fee, calculated quarterly, equal to 4% of applicable sales or $40,000, whichever is greater. Finally, the Company is required to pay a closing payment of $50,000 no later than January 31, 2025. Upon termination of the License Agreement, Telkonet and its affiliates have six months to sell off any unsold inventory of Licensed Products as of ~~September 30, 2017~~date of termination, paying the appropriate royalty on a quarterly basis as the Licensed Products are sold, and then pay a final royalty on any such inventory of Licensed Products still unsold after six months.

The minimum payments required under the License Agreement have been accrued for on the Company’s Condensed Consolidated Balance Sheet in accordance with GAAP, which specifies that when a liability is probable and the amount can be reasonably estimated, said liability should be recorded in the current reporting period. Per the License Agreement, the contractual minimum payments begin on January 1, 2022 and continue until December 31, ~~2016, respectively.~~

~~During~~2024, thus satisfying both criteria of probable and reasonably estimable. Accordingly, a long-term liability was recorded representing the ~~year ended December 31, 2016, the State~~sum of ~~Wisconsin performed a sales and use tax audit covering the period from January 1, 2012 through December 31, 2015. The audit resulted in approximately $120,000 in additional use tax and interest.~~those contractual minimums. As of September 30, ~~2017,~~2021, the Company ~~paid~~had a current liability of approximately $132,000 and a non-current liability of $395,000 included in ~~full the additional use tax liability and interest associated with the sales and use tax audit~~.

accrued royalties – long-term recorded on its Condensed Consolidated Balance Sheet.

1922

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER~~All quarterly payments are due within thirty days of the end of the relevant three-month period (with the exception of the payment for the quarter ended September 30, ~~2017~~

2020, which was due by December 31, 2020). In the event (a) the Company fails to make the payments and provide the statements required under the License Agreement and such breach is not cured within thirty days of written notice from the Licensors and (b) the Licensors elect not to terminate the License Agreement, the Licensors are entitled to an immediate and accelerated payment of any remaining payments due under the License Agreement. In addition to the payment terms described above, the License Agreement contains representations and warranties and other provisions customary to agreements of this nature.~~(UNAUDITED~~)

~~Prior to 2017,~~Sales Tax

Unless provided with a resale or tax exemption certificate, the Company ~~successfully executed~~assesses and ~~paid in full VDAs in thirty six states totaling approximately $765,000~~collects sales tax on sales transactions and records the amount as a liability. It is ~~current with~~recognized as a liability until remitted to the ~~subsequent filing requirements.~~applicable state. Total revenues do not include sales tax as the Company is considered a pass through conduit for collecting and remitting sales taxes.

The following table sets forth the change in the sales tax accrual as of September 30, ~~2017~~2021 and December 31, ~~2016:~~2020:

Sales tax accrual
	September 30, 2017			December 31, 2016			September 30, 2021			December 31, 2020
Balance, beginning of year	$	274,869		$	229,768		$	31,396		$	26,957
Sales tax collected		235,091			452,016			58,872			94,904
Provisions (reversals)		(52,000	)		151,000			(5,572	)		27,916
Interest and penalties		-			(3,017	)
Payments		(385,629	)		(554,898	)		(59,108	)		(118,381	)
Balance, end of period	$	72,331		$	274,869		$	25,588		$	31,396

NOTE KJ – BUSINESS CONCENTRATION

For the nine months ended September 30, ~~2017 and 2016, no single~~2021, one customer represented ~~10% or more~~approximately 21% of total net revenues. For the nine months ended September 30, 2020, two customers represented approximately 33% of total net revenues.

As of September 30, ~~2017,~~2021, one customer accounted for approximately ~~10%~~37% of the Company’s net accounts receivable. As of December 31, ~~2016, two customers accounted for approximately 24%~~2020, one customer represented 21% of the Company’s net accounts receivable.

Purchases from one supplier approximated ~~$2,122,000,~~$1,228,000, or ~~86%~~86%, of total purchases for the nine months ended September 30, ~~2017~~2021 and ~~$1,907,000,~~approximately $1,973,000, or ~~77%~~90%, of total purchases for the nine months ended September 30, ~~2016. Total~~2020. Deposits paid to this vendor were in excess of total accounts payable due to this supplier in the amount of $91,000 as of September 30, 2021. The amount due to this supplier, net of deposits paid, was approximately ~~$525,858 as of September 30, 2017, and $45,037~~$470,000 as of December 31, ~~2016.~~2020.

NOTE LK – ~~DISCONTINUED OPERATIONS~~SUBSEQUENT EVENT

InAt the Special Meeting of Stockholders held on October ~~of 2016, the Company, under the direction and authority of the Board of Directors, committed to a plan to offer for sale EthoStream,~~27, 2021, the Company’s ~~wholly–owned High-Speed Internet Access (“HSIA”) subsidiary. As a result~~stockholders approved (1) an amendment to the Company’s Amended and Restated Articles of ~~this decision~~Incorporation to ~~sell EthoStream,~~increase the ~~operating results~~authorized shares of ~~EthoStream as~~Company common stock from 190,000,000 shares to 475,000,000 shares and (2) the issuance of ~~and for~~shares of Company common stock to accommodate the year ended December 31, 2016 were reclassified as discontinued operations and as assets and liabilities held for sale in the consolidated financial statements as detailed in the table below. During the nine months ended September 30, 2017, the Company, and EthoStream, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with DCI-Design Communications LLC (“DCI”), a Delaware limited liability company, whereby DCI acquired allwarrant issued to VDA to purchase 105,380,666 additional shares of the assets and certain liabilities of EthoStream for a base purchase price of $12,750,000. The Purchase Agreement includes that proceeds of $900,000 are to be withheld from the $12,750,000 base purchase price and placed into an escrow account to support potential indemnification obligations of up to $800,000 and net working capital adjustments of up to $100,000. The escrow amount, net of potential claims, would be fully released after an escrow period not to exceed 12 months after closing. Another $93,000 is classified in other current assets as a net working capital receivable. The assets included, among other items, certain inventory, contracts and intellectual property. DCI acquired only the liabilities provided for in the Purchase Agreement. On March 29, 2017,common stock pursuant to the terms ~~and the conditions~~ of the ~~Purchase Agreement, the Company closed on the sale.~~

~~On September 27, 2017, the Company reached a final settlement with DCI on net working capital as set forth in the~~Stock Purchase Agreement. On September 29, 2017, the Company received $100,000 from the escrow account for the portion of the escrow account set aside for net working capital adjustments and cash proceeds of $311,000 from DCI in the settlement of net working capital adjustments. The net working capital receivable of $93,000 in other current assets was applied against the cash proceeds of $311,000 received on September 29, 2017 resulting in a gain from sale of discontinued operations of $218,000 recognized during the three months ended September 30, 2017.

2023

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~)

~~The following table summarizes the balance sheet information for discontinued operations.~~

September 30, December 31,
2017 2016

Accounts receivable, net $ – $ 456,478
Inventories – 350,506
Other current assets – 12,980
Other asset – goodwill – 5,796,430
Other asset – intangible asset, net – 533,577
Current assets of discontinued operations – 7,149,971

Accounts payable – 465,346
Accrued liabilities and expenses – 90,187
Deferred revenues – 37,509
Customer deposits – 200,466
Deferred lease liability – 76,096
Current liabilities of discontinued operations – 869,604

Net assets of discontinued operations $ – $ 6,280,367

~~The following table summarizes the statements of operations information for discontinued operations.~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017 2016 2017 2016
Revenues, net:
Product $ – $ 995,425 $ 653,839 $ 2,749,001
Recurring – 1,038,585 925,837 2,985,550
Total Net Revenue – 2,034,010 1,579,676 5,734,551

Cost of Sales:
Product (11,600 ) 565,276 403,004 1,753,994
Recurring – 242,678 209,868 697,541
Total Cost of Sales (11,600 ) 807,954 612,872 2,451,535

Gross Profit 11,600 1,226,056 966,804 3,283,016

Operating Expenses:
Selling, general and administrative 197 315,437 252,307 896,385
Depreciation and amortization – 60,420 60,420 181,697
Total Operating Expenses 197 375,857 312,727 1,078,082

Income from Discontinued Operations before Provision for Income Taxes 11,403 850,199 654,077 2,204,934

Provision for Income Taxes – 51,312 52,017 153,936
Income from Discontinued Operations (net of tax) $ 11,403 $ 798,887 $ 602,060 $ 2,050,998

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~)

The consolidated statements of cash flows do not present the cash flows from discontinued operations for investing activities or financing activities because there were no investing or financing activities associated with the discontinued operations in three and nine months ended September 30, 2017 and 2016.

~~NOTE M - SUBSEQUENT EVENT~~

On October 24, 2017, the Company announced a share repurchase program authorized by its Board of Directors. The share repurchase program does not obligate the Company to acquire any specific number of shares, but authorizes the Company to repurchase up to ten million shares of the Company’s common stock. Under the program, shares may be repurchased in privately negotiated and/or open market transactions. The program does not have a specific expiration date and may be suspended or discontinued at any time. As of the date of this filing, no shares have been repurchased under the program.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the accompanying condensed consolidated financial statements and related notes thereto for the three ~~and nine~~ months ended September 30, ~~2017,~~2021, as well as the Company’s consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations in the Company’s Form 10-K for the year ended December 31, ~~2016,~~2020, filed with the ~~U.S.~~US. Securities and Exchange Commission (the “SEC”) on ~~April 3, 2017.~~September 30, 2021.

Business

Telkonet, Inc. (the “Company”, or “Telkonet”~~, “we”, “our”~~), formed in 1999 and incorporated under the laws of the state of Utah, is the creator of the EcoSmart ~~Platform~~and Rhapsody Platforms of intelligent automation solutions designed to optimize energy efficiency, comfort and analytics in support of the emerging Internet of Things (“IoT”).

~~In October of 2016, the Company, under the direction and authority of the Board of Directors, committed to~~ We currently operate in a plan to offer for sale EthoStream LLC (“EthoStream”), its wholly-owned High-Speed Internet Access (“HSIA”) subsidiary. The sale will enable the Company to focus on its higher growth potential EcoSmart Platform line. As a result of this decision to sell EthoStream, the operating results of EthoStream for the three and nine months ended September 30, 2017 and 2016 have been reclassified as discontinued operations in the condensed consolidated statement of operations and as assets and liabilities of discontinued operations in the condensed consolidated balance sheet for the year ended December 31, 2016. The transaction closed on March 29, 2017.single reportable business segment.

The Company’s direct sales effort targets the hospitality, education, commercial, utility and government/military markets. ~~Taking advantage of legislation, including the Energy Independence and Security Act of 2007, or EISA, the Energy Policy Act of 2005, and the American Recovery and Reinvestment Act the~~The Company is focusing its sales efforts in areas with available public funding and incentives, such as rebate programs offered by utilities for efficiency upgrades. Through the Company’s proprietary ~~platform,~~platforms, technology and partnerships with energy efficiency providers, the Company’s management intends to position the Company as a leading provider of energy management solutions.

Forward-Looking Statements

In accordance with the Private Securities Litigation Reform Act of 1995, the Company can obtain a “safe-harbor” for forward-looking statements by identifying those statements and by accompanying those statements with cautionary statements which identify factors that could cause actual results to differ materially from those in the forward-looking statements. Accordingly, the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may contain certain forward-looking statements regarding strategic growth initiatives, growth opportunities and management’s expectations regarding orders and financial results for the remainder of ~~2017~~2021 and future periods. These forward-looking statements are based on current expectations and current assumptions which management believes are reasonable. However, these statements involve risks and uncertainties that could cause actual results to differ materially from any future results encompassed within the forward-looking statements. Factors that could cause or contribute to such differences include those risks ~~affecting the Company’s business~~ as described in the Company’s filings with the SEC, including the current reports on Form 8-K, which factors are incorporated herein by reference. The Company expressly disclaims a duty to provide updates to forward-looking statements, whether as a result of new information, future events or other occurrences.

Critical Accounting Policies and Estimates and New Accounting Pronouncements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, the Company evaluates significant estimates used in preparing its condensed consolidated financial statements including those related to revenue recognition and allowances for uncollectible accounts receivable, inventory obsolescence, depreciation and amortization, long-lived asset valuations, impairment assessments, taxes and related valuation allowance, income tax provisions, stock-based compensation, and contingencies. The Company bases its estimates on historical experience, underlying run rates and various other assumptions that the Company believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates. The following are critical judgments, assumptions, and estimates used in the preparation of the condensed consolidated financial statements.

~~Revenue Recognition~~

For revenue from product sales, the Company recognizes revenue in accordance with ASC 605-10, “Revenue Recognition” and ASC 605-10-S99 guidelines that require that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Assuming all conditions for revenue recognition have been satisfied, product revenue is recognized when products are shipped and installation revenue is recognized when the services are completed. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The guidelines also address the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.

~~Multiple-Element Arrangements (“MEAs”):~~ The Company accounts for contracts that have both product and installation under the MEAs guidance in ASC 605-25. Arrangements under such contracts may include multiple deliverables consisting of a combination of equipment and services. The deliverables included in the MEAs are separated into more than one unit of accounting when (i) the delivered equipment has valuePlease refer to the ~~customer on a stand-alone basis,~~Company’s Form 10-K filed March 31, 2021 for critical accounting policies and (ii) delivery of the undelivered service element(s) is probable and substantially in the Company’s control. Arrangement consideration is then allocated to each unit, delivered or undelivered, based on the relative selling price of each unit of accounting based first on vendor-specific objective evidence (“VSOE”) if it exists, second on third-party evidence (“TPE”) if it exists and on estimated selling price (“ESP”) if neither VSOE or TPE exist.

VSOE – In most instances, products are sold separately in stand-alone arrangements. Services are also sold separately through renewals of contracts with varying periods. The Company determines VSOE based on pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or stand-alone prices for the service element(s).

TPE – If the Company cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, the Company uses third-party evidence of selling price. The Company determines TPE based on sales of a comparable amount of similar product or service offered by multiple third parties considering the degree of customization and similarity of product or service sold.

ESP – The estimated selling price represents the price at which the Company would sell a product or service if it were sold on a stand-alone basis. When neither VSOE nor TPE exists for all elements, the Company determines ESP for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on the Company’s pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining ESP.

The Company provides call center support services to properties installed by the Company. The Company receives monthly service fees from such properties for its services. The Company recognizes the service fee ratably over the term of the contract. The prices for these services are fixed and determinable prior to delivery of the service. The fair value of these services is known due to objective and reliable evidence from standalone executed contracts. The Company reports such revenues as recurring revenues. Deferred revenue includes deferrals for the monthly support service fees. Long-term deferred revenue represents support service fees to be earned or provided beginning after September 30, 2018. Revenue recognized that has not yet been billed to a customer results in an asset as of the end of the period. As of September 30, 2017 and December 31, 2016, there was $68,855 and $193,400 recorded within accounts receivable, respectively, related to revenue recognized that has not yet been billed.

~~New Accounting Pronouncements~~

estimates. For information regarding recent accounting pronouncements and their effect on the Company, see “New Accounting Pronouncements” in Note B of the Notes to Unaudited Condensed Consolidated Financial Statements contained herein.

Revenues

The table below outlines product versus recurring revenues for comparable periods:

Three Months Ended
September 30, 2017 September 30, 2016 Variance

Product $ 1,904,571 94% $ 1,360,887 90% $ 543,684 40%
Recurring 131,665 6% 143,028 10% (11,363 ) -8%
Total $ 2,036,326 100% $ 1,503,915 100% $ 532,321 35%

	Three Months Ended
	September 30, 2021			September 30, 2020			Variance

Product	$	1,290,389	89%	$	2,050,170	92%	$	(759,781	)	(37%	)
Recurring		163,679	11%		189,801	8%		(26,122	)	(14%	)
Total	$	1,454,068	100%	$	2,239,971	100%	$	(785,903	)	(35%	)

Nine Months Ended

September 30, 2017 September 30, 2016 Variance

Product $ 5,728,878 94% $ 6,356,437 95% $ (627,559 ) -10%
Recurring 344,708 6% 340,412 5% 4,296 1%
Total $ 6,073,586 100% $ 6,696,849 100% $ (623,263 ) -9%

	Nine Months Ended
	September 30, 2021			September 30, 2020			Variance

Product	$	4,071,159	88%	$	4,762,802	89%	$	(691,643	)	(15%	)
Recurring		532,607	12%		562,274	11%		(29,667	)	(5%	)
Total	$	4,603,766	100%	$	5,325,076	100%	$	(721,310	)	(14%	)

Product Revenue

Product revenue principally arises from the sale and installation of ~~the EcoSmart~~ energy management ~~platform.~~platforms. The ~~EcoSmart Suite~~suite of products consists of thermostats, sensors, controllers, wireless networking products, switches, outlets and a control platform.

For the three months ended September 30, ~~2017,~~2021, product ~~revenue~~revenues decreased by 37% or $0.76 million when compared to the prior year. Hospitality revenues decreased 37% to $1.20 million, educational revenues decreased 36% to $0.04 million, governmental revenues decreased 77% to $0.02 million while MDU revenues increased ~~by 40% or $0.5~~1519% to $0.03 million and ~~for~~healthcare revenues were unchanged at $0.00 million. Product revenues derived from channel partners decreased 45% to $0.93 million compared to the prior year period. The decrease was primarily driven by two customers. International revenues decreased 86% to $0.07 million. The decrease in international revenues was primarily driven by one customer.

For the nine months ended September 30, ~~2017,~~2021, product ~~revenue~~revenues decreased by 15% or $0.69 million when compared to the prior year. Hospitality revenues decreased 15% to $3.46 million, educational revenues decreased 68% to $0.12 million, governmental revenues decreased 17% to $0.14 million, while MDU revenues increased 120% to $0.29 million and healthcare revenues increased 100% to $0.05 million. Product revenues derived from channel partners decreased 10% ~~or $0.6 million. For the three months ended September 30, 2017, the hospitality market comprised $1.3~~to $3.24 million ~~of product sales for the three months ended September 30, 2017, a $0.1 million decrease from~~compared to the prior year period. The ~~education market sales for the three months ended September 30, 2017 increased $0.3~~decrease was not driven by any specific customer. International revenues decreased 25% to $0.47 million when compared to ~~$0.4 million from $0.1 million for~~ the prior year period. The Multiple Dwelling Unit (“MDU”) market increased $0.2 million from $0.0 million during the three months ended September 30, 2016. The hospitality market sales for the nine months ended September 30, 2017 decreased $0.7 million to $4.2 million from $4.9 million for the prior year period. The education market sales for the nine months ended September 30, 2017 increased $0.1 million to $1.0 million from $0.9 million for the prior year period and the Commercial and MDU market sales for the nine months ended September 30, 2017 remained at $0.5 million for the nine months ended September 30, 2017 and 2016. The Company’s distribution channels through resellers and value added distribution partners decreased fromdecrease in international revenues was primarily driven by one customer offset by increases in two others.

Backlogs were approximately $3.1 million ~~for the nine months ended September 30, 2016 to $2.8~~and $2.7 million at September 30, ~~2017.~~2021 and 2020, respectively. Beginning in the current quarter, global supply chain disruptions have created delays in our order fulfillment. These disruptions are ongoing and order cancellations could result if these issues persist.

Recurring Revenue

Recurring revenue is attributed to our call center support services. The Company recognizes revenue ratably over the service ~~month~~period for monthly support revenues and defers revenue for annual support services over the term of the service period. Recurring revenue consists of Telkonet’s ~~EcoCare~~ service and support ~~program.~~programs for its energy management platforms.

For the three and nine months ended September 30, ~~2017,~~2021, recurring revenue decreased by 8%14% and ~~increased by 1%~~5%, respectively when compared to the prior year period. The decrease was related to decreased unit sales of call center support services.

Cost of Sales

Three Months Ended
September 30, 2017 September 30, 2016 Variance

Product $ 1,160,019 61% $ 770,830 57% $ 389,189 50%
Recurring 55,702 42% 36,618 26% 19,084 52%
Total $ 1,215,721 60% $ 807,448 54% $ 408,273 51%

The table below outlines product versus recurring cost of sales, along with respective amounts of those costs as a percentage of revenue for the comparable periods:

Nine Months Ended
September 30, 2017 September 30, 2016 Variance

Product $ 3,233,978 56% $ 3,194,094 50% $ 39,884 1%
Recurring 118,347 34% 92,324 27% 26,023 28%
Total $ 3,352,325 55% $ 3,286,418 49% $ 65,907 2%

	Three Months Ended
	September 30, 2021			September 30, 2020			Variance

Product	$	851,873	66%	$	1,131,205	55%	$	(279,332	)	(25%	)
Recurring		13,646	8%		16,468	9%		(2,822	)	(17%	)
Total	$	865,519	60%	$	1,147,673	51%	$	(282,154	)	(25%	)

	Nine Months Ended
	September 30, 2021			September 30, 2020			Variance

Product	$	2,164,586	53%	$	2,933,679	62%	$	(769,093	)	(26%	)
Recurring		36,868	7%		65,037	13%		(28,169	)	(43%	)
Total	$	2,201,454	48%	$	2,998,716	56%	$	(797,262	)	(27%	)

Costs of Product Revenue

Costs of product revenue include ~~equipment~~materials and installation labor related to ~~EcoSmart technology.~~Telkonet’s platform technologies. For the three and nine months ended September 30, ~~2017,~~2021, product costs ~~increased by 50%~~decreased 25% and 1%26%, respectively, compared to the prior year ~~periods.~~ period.

For the three month comparison, the ~~materials~~variance was primarily attributable to decreases in material costs of $0.32 million as a result of a decrease in revenues, inventory adjustments of $0.03 million and logistical expenses of $0.07 million, partially offset by an increase in the use of installation subcontractors of $0.09 million. Material costs as a percentage of product ~~sales increased~~revenues were 40%, an increase of 2%, compared to ~~45% for~~ the three month ended September 30, 2017 from 43% for the three months ended September 30, 2016. The cost of materials increased $0.15 million, freight and warranty expense increased $0.04 million and inventory adjustments increased $0.08 million. For the three months ended September 30, 2017, the Company’s increased use of outside contractors for installations resulted in a $0.19 million variance in contractor services costs, consequently, salary, benefits and travel costs related to installations decreased by $0.07 million.prior year period.

For the nine month comparison, the ~~use~~variance was primarily attributable to decreases in material costs of ~~outside contractors for installations resulted in~~$0.46 million as a ~~$0.20 million~~result of a decrease in ~~salary, wages~~revenues, logistical expenses of $0.17 million and ~~travel expense. These decreases~~inventory adjustments of $0.11 million. Material costs as a percentage of product revenues were ~~offset by~~38%, a $0.16 million adjustment in inventory costs, a $0.03 million increase in freight costs, a $0.03 million increase in outside services and a $0.02 million increase in parts and supplies and warranty expense.decrease of 2%, compared to the prior year period.

Costs of Recurring Revenue

Recurring revenue costs are comprised primarily of ~~labor and telecommunication services for our customer service department.~~call center support labor. For the three and nine months ended September 30, ~~2017,~~2021, recurring revenue costs ~~increased~~decreased by ~~52%~~17% and ~~28%~~43%, respectively, when compared to the prior year ~~periods.~~period. The ~~three~~variance was primarily due to decreases in call center staffing as the Company migrated to a combination of internal and ~~nine month variances are the result of a $0.02 million and a $0.03 million increase in salary and benefit costs~~external solutions.

Gross Profit

The table below outlines product versus recurring gross profit, along with respective actual gross profit percentages for the ~~period~~comparable periods:

	Three Months Ended
	September 30, 2021			September 30, 2020			Variance

Product	$	438,516	34%	$	918,965	45%	$	(480,449	)	(52%	)
Recurring		150,033	92%		173,333	91%		(23,300	)	(13%	)
Total	$	588,549	40%	$	1,092,298	49%	$	(503,749	)	(46%	)

	Nine Months Ended
	September 30, 2021			September 30, 2020			Variance

Product	$	1,906,573	47%	$	1,829,124	38%	$	77,449		4%
Recurring		495,739	93%		497,236	88%		(1,497	)	(0%	)
Total	$	2,402,312	52%	$	2,326,360	44%	$	75,952		3%

Gross Profit on Product Revenue

Gross profit on product revenue for the three months ended September 30, ~~2017.~~2021 decreased 52% or $0.48 million when compared to the prior year period. The ~~Company added~~decrease in gross profit was primarily attributable to a ~~support services supervisor.~~decrease in revenues of $0.76 million and an increase in the use of installation subcontractors of $0.09 million, partially offset by decreases in logistical expenses of $0.07 million and inventory adjustments of $0.03 million. For the three months ended September 30, 2021, the actual gross profit percentage decreased by 11% to 34% compared to the prior year period. Tariffs imposed on Chinese imports resulted in an adverse impact of approximately 8% on the actual gross profit percentage for the three months ended September 30, 2021, unchanged when compared to the prior year period. Tariffs will fluctuate based upon volume of goods imported, which is contingent upon expected inventory supply and demand.

~~Gross Profit~~

Three Months Ended
September 30, 2017 September 30, 2016 Variance

Product $ 744,552 39% $ 590,057 43% $ 154,495 26%
Recurring 75,963 58% 106,410 74% (30,447 ) -29%
Total $ 820,515 40% $ 696,467 46% $ 124,048 18%

Nine Months Ended
September 30, 2017 September 30, 2016 Variance

Product $ 2,494,900 44% $ 3,162,343 50% $ (667,443 ) -21%
Recurring 226,361 66% 248,088 73% (21,727 ) -9%
Total $ 2,721,261 45% $ 3,410,431 51% $ (689,170 ) -20%

~~Gross Profit on Product Revenue~~

Gross profit for the three and nine months ended September 30, 2017 increased by 26% and decreased by 21%, respectively, when compared to the prior year periods. For the three months ended September 30, 2017, the actual gross profit percentage declined to 39% from 43%. The majority of the variance was due to an approximate increase of 20% for outside services. For the nine months ended September 30, 2017, the actual gross profit percentage declined to 44% from 50%. Material costs as a percentage of sales increased 3%on product revenue for the nine months ended September 30, ~~2017~~2021 increased 4% or $0.08 million when compared to the prior year period. The increase in gross profit was primarily attributable to decreases in material costs of $0.46 million, logistical expenses of $0.17 million and inventory ~~valuation adjustment variance~~adjustments of ~~$0.16~~$0.11 million, ~~during~~partially offset by profit contraction resulting from a decrease in revenues. For the nine months ended September 30, ~~2017 when~~2021, the actual gross profit percentage increased by 9% to 47% compared to the prior year ~~period also contributed to~~period. Tariffs imposed on Chinese imports resulted in an adverse impact of approximately 4% on the actual gross profit ~~decline.~~percentage for the nine months ended September 30, 2021, compared to approximately 7% for the prior year period.

Gross Profit on Recurring Revenue

~~The gross~~Gross profit ~~associated with~~on recurring revenue ~~decreased by 29% and 9%, respectively,~~ for the three and nine months ended September 30, ~~2017~~2021 decreased 13% and 0%, respectively, when compared to the prior year ~~periods.~~period. Decreases in unit sales of call center support services were partially offset by decreases in call center staffing as the Company migrated to a combination of internal and external solutions. For the three and nine months ended September 30, ~~2017,~~2021, the actual gross profit percentage ~~decreased 16%~~increased 1% and 5%, respectively, when compared to the prior year period, from 74% to 58%. The primary reason was a manager was added to the Company’s support department, increasing wages and benefits. For the nine months ended September 30, 2017, the actual gross profit percentage decreased 7% compared to the prior year period, from 73% to 66%.period.

Operating Expenses

Three Months Ended September 30,
2017 2016 Variance

Total $ 1,704,177 $ 1,870,493 $ (166,316 ) -9%

The tables below outline operating expenses for the comparable periods, along with percentage change:

Nine Months Ended September 30,
2017 2016 Variance

Total $ 5,754,741 $ 6,357,622 $ (602,881 ) -9%

	Three Months Ended September 30,
	2021		2020		Variance

Total	$	1,479,832	$	1,764,661	$	(284,829	)	(16%	)

	Nine Months Ended September 30,
	2021		2020		Variance

Total	$	4,273,474	$	4,582,621	$	(309,147	)	(7%	)

The Company’s operating expenses are comprised of research and development, selling, general and administrative expenses and depreciation and amortization expense. During the three and nine months ended September 30, ~~2017,~~2021, operating expenses decreased by 9%16% and 7%, respectively, when compared to the prior year ~~periods~~period as outlined below.

Research and Development

Three Months Ended September 30
2017 2016 Variance

Total $ 500,656 $ 429,622 $ 71,034 17%

	Three Months Ended September 30,
	2021		2020		Variance

Total	$	268,917	$	231,088	$	37,829	16%

Nine Months Ended September 30,
2017 2016 Variance

Total $ 1,323,669 $ 1,321,007 $ 2,662 0%

	Nine Months Ended September 30,
	2021		2020		Variance

Total	$	876,778	$	892,179	$	(15,401	)	(2%	)

Research and development costs are related to both present and future ~~products~~product development and integration and are expensed in the period incurred. ~~Current research and development costs are associated with product development and integration.~~ During the three and nine months ended September 30, ~~2017,~~2021, research and development costs increased ~~by 17%~~16% and 0%decreased 2%, respectively, when compared to the prior year periods. For the three month comparison, the variance is ~~due~~primarily attributable to an ~~approximate $0.04 million~~ increase in ~~expenditures for consulting, a $0.01 increase in personnel recruiting and an increase~~payroll expenses of ~~$0.02 million for salary and benefits.~~$0.03 million. For the nine month comparison, ~~overall expense remained unchanged however there were changes within~~ the research and development category. For the nine months ended September 30, 2017, a $0.06 million decrease was the result of retooling charges related to new product development for the prior year period. This was offsetvariance is not primarily driven by ~~a $0.04 million increase in consulting and a $0.02 million increase for new product certification expenses for the nine months ended September 30, 2017.~~any specific expense.

Selling, General and Administrative Expenses

Three Months Ended September 30,
2017 2016 Variance

Total $ 1,188,905 $ 1,432,489 $ (243,584) -17%

	Three Months Ended September 30,
	2021		2020		Variance

Total	$	1,200,569	$	1,518,915	$	(318,346	)	(21%	)

Nine Months Ended September 30,
2017 2016 Variance

Total $ 4,396,667 $ 5,012,249 $ (615,582) -12%

	Nine Months Ended September 30,
	2021		2020		Variance

Total	$	3,362,761	$	3,646,246	$	(283,485	)	(8%	)

During the three and nine months ended September 30, ~~2017,~~2021, selling, general and administrative expenses decreased 21% and 8% over the prior year periods, ~~by 17% and 12%,~~ respectively.

For the three month comparison, ~~due~~the variance is primarily attributable to ~~the sale~~decreases in royalty fees of ~~EthoStream, the Company was able to decrease executive, accounting~~$0.57 million and ~~sales~~payroll taxes of $0.10 million, partially offset by increases in salaries ~~wages and benefits by $0.20 million. A~~of $0.07 million, trade shows of $0.09 million, public company fees of $0.07 million and legal fees of $0.14 million. The payroll tax decrease was ~~a result of a refund received from a utility. The Company had a $0.09 million decrease in sales and use tax,~~primarily the result of an Employee Retention Credit (“ERC”), allowed under the CARES Act, which is a ~~$0.10 million State~~refundable payroll tax credit that encouraged businesses to keep employees on the payroll during the COVID-19 pandemic. The royalty fees were made under the License Agreement entered into on November 30, 2020. See Note I – Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements under Item 1 of ~~Wisconsin audit assessment during 2016 as well as a $0.06 million decrease in bad debt expense,~~Part I of this Form 10-Q for summary of the ~~result~~terms of a collection previously reserved. These decreases were offset by increases for legal expense of $0.03 million, hardware/software expenses of $0.06 million, marketing and trade show expense of $0.05 million, rent expense of $0.04 million and commissions of $0.02 million.the License Agreement, including future payment obligations.

For the nine month comparison, ~~$0.29 million of~~ the variance is ~~attributed~~primarily attributable to ~~the costs associated with the contested 2016 proxy contest as discussed~~decreases in ~~detail~~royalty fees of $0.50 million, a 401(k) employer match of $0.05 million, sales and use taxes of $0.04 million and payroll taxes of $0.44 million, partially offset by increases in ~~the June 30, 2017 Form 10-Q as well as an additional $0.10~~salaries of $0.04 million, intrade shows of $0.09 million, public company fees of $0.10 million, legal fees of $0.41 million and audit fees of $0.08 million. The payroll tax decrease was primarily the result of an Employee Retention Credit (“ERC”), allowed under the CARES Act, which is a refundable payroll tax credit that encouraged businesses to keep employees on the payroll during the COVID-19 pandemic. The royalty fees were made under the License Agreement entered into on November 30, 2020. See Note I – Commitments and Contingencies in ~~2016. Due~~the Notes to the ~~sale~~Condensed Consolidated Financial Statements under Item 1 of ~~EthoStream,~~Part I of this Form 10-Q for summary of the terms of the License Agreement, including future payment obligations.

Operating Loss

During the three and nine months ended September 30, 2021, the Company ~~was able~~had an operating loss of $0.89 million and $1.87 million, respectively, compared to ~~decrease temporary staffing, executive, accounting~~an operating loss of $0.67 million and ~~sales salaries, wages and benefits of $0.61~~$2.26 million, ~~$0.11 million for sales and use tax, related~~respectively, during the prior year periods.

The three month operating loss variance is primarily due to the ~~State~~decrease in gross profit, offset by a decrease in selling, general and administrative expenses discussed above. The nine month operating loss variance is primarily due to the increase in gross profit and a decrease in selling, general and administrative expenses discussed above.

Net Income (Loss)

During the three months ended September 30, 2021, the Company had net income of ~~Wisconsin audit discussed above,~~$0.02 million compared to a ~~utility refund~~net loss of ~~$0.07~~$0.68 million ~~$0.03~~during the prior year period. For the nine months ended September 30, 2021, the Company had a net loss of $0.06 million ~~for director fees, $0.04~~compared to a net loss of $2.28 million ~~for insurance expense. These reductions~~during the prior year period.

The three month net income variance is primarily due to a $0.92 million non-cash gain on debt extinguishment in ~~expense were offset by~~connection with the full forgiveness of the Second PPP Loan. The nine month net loss variance is primarily due to a $1.8 million non-cash gains on debt extinguishment in connection with full forgiveness of the First and Second PPP Loans, an increase in ~~stock option expense of $0.31 million, marketing~~gross profit, and ~~trade show~~a relatively unchanged selling, general and administrative expenses ~~of $0.14 million, rent expense of $0.07 million, commissions of $0.02 million and hardware/software costs of $0.05 million.~~

discussed above.

~~Income from Discontinued Operations, Net of Tax~~

Three Months Ended September 30,
2017 2016 Variance

Total $ 11,403 $ 798,887 $ (787,484) -99%

Nine Months Ended September 30,

2017 2016 Variance

Total $ 602,060 $ 2,050,998 $ (1,448,938) -71%

Income from discontinued operations decreased $0.79 million or 99% and $1.45 million or 71% for the three and nine months ended September 30, 2017 over the prior year periods. On March 29, 2017, pursuant to the terms and the conditions of the Purchase Agreement, the Company closed on the sale of EthoStream. The income from discontinued operations (net of tax) represents the activity of EthoStream from January 1, 2017 through the date of the sale on March 28, 2017. After March 28, 2017, certain liabilities retained by the Company will be adjusted in future periods as these liability balances are paid.

~~EBITDA from Continuing Operations~~Non-GAAP Financial Measures

Management believes that certain non-GAAP financial measures may be useful to investors in certain instances to provide additional meaningful comparisons between current results and results in prior operating periods. Adjusted earnings before interest, taxes, depreciation, amortization and ~~amortization~~stock-based compensation (“Adjusted EBITDA”) is a metric used by management and frequently used by the financial community. Adjusted EBITDA provides insight into an organization’s operating trends and facilitates comparisons between peer companies, since interest, taxes, depreciation, amortization and ~~amortization~~stock-based compensation can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA is one of the measures used for determining our debt covenant compliance. Adjusted EBITDA excludes certain items that are unusual in nature or not comparable from period to period. While management believes that non-GAAP measurements are useful supplemental information, such adjusted results are not intended to replace our GAAP financial results. Adjusted EBITDA is not, and should not be considered, an alternative to net income (loss), operating income (loss) ~~from operations,~~, or any other measure for determining operating performance ofor liquidity, as determined under accounting principles generally accepted in the United States (GAAP). In assessing the overall health of its business for the three ~~and nine~~ months ended September 30, ~~2017~~2021 and ~~2016,~~2020, the Company excluded items in the following general ~~category~~categories described below:

·	·	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 the previous ~~period.~~

Bonuses paid to executives upon sale of discontinued operations: The Company does not consider the bonuses of $87,750 associated with the sale of EthoStream to be indicative of current or future operating performance. Therefore, the Company does not consider the inclusion of these costs helpful in assessing its current financial performance compared to the previous year.

RECONCILIATION OF NET INCOME (LOSS)

TO ADJUSTED EBITDA

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020

Net Income (loss)	$	17,240		$	(676,755	)	$	(55,616	)	$	(2,279,353	)
Gain on debt extinguishment		(916,107	)		–			(1,836,780	)		–
Interest expense, net		7,584			4,392			19,286			19,976
Income tax provision		–			–			1,948			3,116
Depreciation and amortization		10,346			14,658			33,935			44,196
EBITDA		(880,937	)		(657,705	)		(1,837,227	)		(2,212,065	)
Adjustments:
Stock-based compensation		1,815			1,815			5,446			5,446
Adjusted EBITDA	$	(879,122	)	$	(655,890	)	$	(1,831,781	)	$	(2,206,619	)

Liquidity and Capital Resources

For the nine-month period ended September 30, 2021, the Company reported a net loss of $55,616, cash used in operating activities of $1,310,788 and ended the period with an accumulated deficit of $128,311,007 and total current assets in excess of current liabilities of $1,594,886. At September 30, 2021, the Company had $2,613,090 of cash and approximately $330,000 of availability on its Credit Facility. The Credit Facility is a $2,000,000 line of credit, which is subject to a borrowing base calculation based on the Company’s eligible accounts receivable and eligible inventory each multiplied by an applicable advance rate, with an overall limitation tied to the Company’s eligible accounts receivable as well as financial covenants including a requirement to maintain a minimum unrestricted cash balance of $2,000,000. As of September 30, 2021, we had a total borrowing base of approximately $646,000, an outstanding balance of $266,293, and a cash management services reserve of $50,000, resulting in the approximate availability of $330,000 on the Credit Facility.

~~RECONCILIATION OF NET LOSS FROM~~

~~CONTINUING OPERATIONS TO ADJUSTED EBITDA~~

~~(Unaudited)~~Since inception through September 30, 2021, we have incurred cumulative losses of $128,311,007 and have never generated enough cash through operations to support our business. For the nine-month period ended September 30, 2021, we used cash in operations of $1,310,788. The Company has made significant investments in the engineering, development and marketing of its intelligent automation platforms, including but not limited to, hardware and software enhancements, support services and applications. The funding for these development efforts has contributed to, and continues to contribute to, the ongoing operating losses and use of cash. Operating losses have been financed by debt and equity transactions, Credit Facility capacity, the sale of a wholly-owned subsidiary, and the management of working capital levels. The Company’s ability to continue as a going concern is dependent upon generating profitable operations in the future and obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017 2016 2017 2016

Net loss from continuing operations $ (871,340 ) $ (1,192,083 ) $ (3,034,984 ) $ (2,995,699 )
Interest (income) expense, net (8,722 ) 15,482 (2,797 ) 45,308
Provision (benefit) for income taxes (3,600 ) 2,575 4,301 3,200
Depreciation and amortization 14,616 8,382 34,405 24,366
EBITDA – continuing operations (869,046 ) (1,165,644 ) (2,999,075 ) (2,922,825 )
Adjustments:
Stock-based compensation 2,343 2,703 320,545 10,204
Bonuses paid to executives upon sale of discontinued operations – – 87,750 –
Adjusted EBITDA $ (866,703 ) $ (1,162,941 ) $ (2,590,780 ) $ (2,912,621 )

To that end, Company anticipates closing on the contribution of $5 million to the Company by VDA in exchange for the issuance by the Company to VDA of (i) 162,900,947 shares of Company common stock, par value $0.001 per share; and (ii) a warrant to purchase 105,380,666 additional shares of common stock pursuant to the terms of the Stock Purchase Agreement during the fourth quarter of this year.

~~Liquidity~~The Company’s operations and ~~Capital Resources~~financial results have also been impacted by the COVID-19 pandemic. Both the health and economic aspects of the COVID-19 pandemic are highly fluid and the future course of each is uncertain. We cannot predict whether the outbreak of COVID-19 will be effectively contained on a sustained basis. Depending on the length and severity of the COVID-19 pandemic, the demand for our products, our customers’ ability to meet payment obligations to the Company, our supply chain and production capabilities, and our workforces’ ability to deliver our products and services could be impacted. Management is actively monitoring the impact of the global situation on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce. While we expect this disruption to continue to have a material adverse impact on our results of operations, financial condition, cash flows, and liquidity, the Company is unable to reasonably determine the full extent of the impact at this time.

Due to travel restrictions and social distancing edicts, the hospitality industry, our largest market that generally accounts for a majority of our revenue, has suffered as much as any. Rising cases of COVID-19 in certain areas, the emergence of new virus strains, including the more transmissible Delta variant and a stagnation of vaccinations has exacerbated the uncertainty of the pandemic’s length and severity Although certain of these restrictions have been lessened or eliminated, business travel, which comprises the largest source of hotel revenue, remains limited. Business travel is not expected to return to 2019 levels until at least 2023.^[1] According to an STR forecast, until group, business and international demand returns, U.S. hotel occupancy rates will not exceed 50% in 2021. Moreover, full recovery of revenue per available room (RevPAR) is unlikely to return to pre-pandemic levels until the end of 2024.^[2]

In addition, on November 30, 2020, the Company entered into the License Agreement with Sipco and IPCO, LLC dba Intus^IQ in order to settle a patent infringement lawsuit without the expense of costly litigation. As of September 30, 2021, the Company had a current liability of approximately $132,000, which $27,000 is included in accounts payable and $105,000 in other accrued liabilities (See Note F – Current Accrued Liabilities in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for further breakdown of accrued liabilities), along with a non-current liability of $395,000 included in accrued royalties – long-term recorded on its Condensed Consolidated Balance Sheet. The corresponding expense was recorded in the selling, general and administrative line of the Condensed Consolidated Statement of Operations at the time the related liability was recorded. The payment of the royalty fees is expected to have a material and adverse impact on the Company’s results of operations and liquidity. See Note I – Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for a discussion of the patent infringement lawsuit and the License Agreement.

__________________

^[1] Fox, Jena Tesse. “AHLA report ties recovery to optimistic leisure travelers.” Hotel Management January/February 2021: 10.

^[2]Fox, Jena Tesse. “STR, HVS chart “slow climb’ to full hotel industry recovery.” Hotel Management December 2020: 6.

The Company took and continues to take a number of actions to preserve cash. These actions include suspending the use of engineering consultants and cancelling all non-essential travel and the Company’s attendance at tradeshows (implemented prior to applicable government stay-at-home orders being put in place). In early April of 2020, management made the decision to furlough certain employees, instituted pay cuts for certain other employees and suspended the Company’s 401(k) match through the end of 2020. With the receipt of the First PPP Loan on April 17, 2020 (discussed below), the Company was able to bring back the furloughed employees, restore payroll to prior levels and delay suspension of the 401(k) match. However, the pandemic continued to impact the Company’s operations and financial results, and consequently, in late June of 2020 management once again made the decision to furlough certain employees, instituted pay cuts for certain other employees and suspended the Company’s 401(k) match through the end of 2020. The furloughs and pay cuts continued through September 2020, at which time management determined it was necessary to discontinue the furloughs and pay cuts in order to retain necessary personnel for the Company’s ongoing operations.

The more recent actions described above are in addition to the cost elimination and liquidity management actions that the Company began implementing in the second half of 2019, including reviewing opportunities to decrease spend with third party consultants and providers, strategically reviewing whether or not to fill employee positions in the event of vacancies, and implementing sales campaigns to sell slow-moving inventory and reduce existing inventory volumes. There is no guarantee, however, that these actions, nor any other actions identified, will yield profitable operations in the foreseeable future.

In addition to the actions noted above, the Company has received two loans under the PPP administered by the SBA and authorized by the Keeping American Workers Employed and Paid Act, which is part of the CARES Act, enacted on March 27, 2020. On April 17, 2020, the Company entered into an unsecured promissory note for $913,063 for the First PPP Loan. In January 2021, the Company applied for forgiveness of the amount due on the First PPP Loan. On February 16, 2021, Heritage Bank confirmed that the First PPP Loan granted to the Company, in the original principal amount of $913,063 plus accrued interest of $7,610 thereon, was forgiven in full.

On April 27, 2021, the Company entered into an unsecured promissory note, dated as of April 26, 2021, with Heritage Bank for the Second PPP Loan. The principal amount of the Second PPP Loan is $913,063, and it bears interest of 1.0% per annum and has a maturity date of April 27, 2026. In September 2021, the Company applied for forgiveness of the amount due on the Second PPP Loan. On September 15, 2021, Heritage Bank confirmed that the Second PPP Loan granted to the Company, in the original principal amount of $913,063 plus accrued interest of $3,044 thereon, was forgiven in full. The loan forgiveness amounts are accounted for as gains on debt extinguishment in accordance with ASU 2020-09 and reported as a separate component of operating activities in the condensed consolidated statements of cash flows.

The Company also has ~~financed~~a $2 million revolving credit facility with Heritage Bank (the “Credit Facility”). The Company is currently in compliance with the financial covenants in the loan agreement for the Credit Facility. However, based on the Company’s current level of operations and forecasted cash flow analysis for the twelve-month period subsequent to the date of this filing, without further cost cutting measures, working capital management, and/or enhanced revenues, the Company believes it is reasonably likely that it will breach the covenant to maintain a minimum unrestricted cash balance of $2 million at some time during 2021. Violation of any covenant under the Credit Facility provides Heritage Bank with the option to accelerate repayment of amounts borrowed, terminate its commitment to extend further credit, and foreclose on the Company’s assets. As of September 30, 2021, the outstanding balance on the Credit Facility was $330,000.

On September 30, 2021, the Company entered into a Twelfth Amendment to the Heritage Bank Loan Agreement (the “Amendment”) to extend the revolving maturity date from September 30, 2021 to December 31, 2021, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement. The Company is in discussions with Heritage Bank about the possibility of a waiver or a change to the financial covenant with Heritage Bank. Any covenant waiver or amendment could lead to increased costs, increased interest rates, and a decrease in the size of the line of credit, additional restrictive covenants, or other lender protections. There is no assurance, however, that the Company will be able to further extend the maturity date of the Credit Facility. There is also no assurance that the Company will be able to obtain a covenant waiver or amendment, in which case Heritage Bank could immediately declare all amounts due under the Credit Facility, terminate the Credit Facility, and foreclose on the Company’s assets. Currently, the Company has sufficient cash balances to pay the amounts due under the Credit. However, depending on the timing of a default and the Company’s ongoing use of cash reserves and the Credit Facility to finance its near-term working capital needs, there is no assurance that at the time of a default that the Company would have sufficient cash balances to pay the amount due at such time. The Company may also seek additional financing from alternative sources, but there is no assurance that such financing will be available at commercially reasonable terms, if at all.

The Company currently expects to draw on its cash reserves and utilize the Credit Facility to finance its near-term working capital needs. It expects to continue to incur operating losses and negative operating cash flows for at least one year beyond the date of these financial statements. The Credit Facility provides the Company with needed liquidity to assist in meeting its obligations. However, as discussed above, without further cost cutting measures, working capital management, and/or enhanced revenues, the Company believes it is reasonably likely that it will breach a financial covenant under the Credit Facility at some time during 2021, in which case, without a waiver or amendment, the Credit Facility could be terminated, and without additional financing, the Company may be unable to meet its obligations or fund its operations ~~since inception primarily through private~~within the next twelve months. As disclosed previously, the Company’s Board has also been considering strategic alternatives to maximize shareholder value, including but not limited to, a sale of the Company, an investment in the Company, a merger or other business combination, a sale of all or substantially all assets or a strategic joint venture.

If cash resources become insufficient to meet the Company’s ongoing obligations, the Company may be required to scale back or discontinue portions of its operations or discontinue operations entirely, pursue a sale of the Company or its assets at a price that may result in a significant or complete loss on investment for its shareholders, file for bankruptcy or seek other protection from creditors, or liquidate all its assets. In addition, if the Company defaults under the Credit Facility and ~~public offerings~~is unable to pay the outstanding balance, Heritage Bank could foreclose on the Company’s assets. The Company’s shareholders may lose some or all of their investment as a result of any of these outcomes. Accordingly, and in light of the Company’s ~~equity securities,~~historic losses and potential inability to access sources of liquidity to continue its operations, there is substantial doubt about the ~~issuance of various debt instruments and asset based lending, and the sale of assets.~~Company’s ability to continue as a going concern.

Working Capital

Working capital (current assets in excess of current liabilities) ~~from continuing operations increased~~decreased by ~~$9,840,658~~$106,798 during the nine months ended September 30, ~~2017~~2021 from working capital ~~deficit~~ of ~~$26,859~~$1,701,684 at December 31, ~~2016~~2020 to a working capital of ~~$9,813,799~~$1,594,886 at September 30, ~~2017.~~2021. Working capital remained relatively unchanged during the nine months ended September 30, 2021.

See discussion below in the ‘Cash Flow Analysis” section for a further discussion of working capital.

~~Kross Promissory Note~~

Revolving Credit Facility

On September 30, 2014, the Company ~~and its wholly-owned subsidiary, EthoStream, as co-borrowers (collectively, the “Borrowers”),~~ entered into ~~a loan and security agreement (the “Heritage~~the Heritage Bank Loan ~~Agreement”),~~Agreement, with Heritage Bank, ~~of Commerce, a California state chartered bank (“Heritage Bank”),~~ governing a ~~new~~ revolving credit facility in a principal amount not to exceed ~~$2,000,000 (the “Credit Facility”).~~$2,000,000. Availability of borrowings under the Credit Facility ~~from time to time~~ is subject to a borrowing base calculation based on the Company’s eligible accounts receivable and eligible inventory each multiplied by an applicable advance rate, with an overall limitation tied to the Company’s eligible accounts receivable. The Heritage Bank Loan Agreement is available for working capital and other general business purposes.

The outstanding principal balance of the Credit Facility bears interest at the Prime Rate plus 3.00%, which was ~~7.25%~~6.25% at both September 30, ~~2017~~2021 and ~~6.75% at~~ December 31, ~~2016.~~2020. On October 9, 2014, as part of the Heritage Bank Loan Agreement, Heritage Bank was granted a warrant to purchase 250,000 shares of Telkonet common stock. The warrant has an exercise price of $0.20 and expires October 9, 2021. On ~~February 17, 2016, an~~November 6, 2019, the eleventh amendment to the Credit Facility was executed ~~extending~~to extend the maturity date to September 30, ~~2018,~~2021, unless earlier accelerated under the terms of the Heritage Bank Loan ~~Agreement.~~Agreement, and eliminate the maximum EBITDA loss covenant. The eleventh amendment was effective as of September 30, 2019.

On September 30, 2021, the Company entered into a Twelfth Amendment to the Heritage Bank Loan Agreement (the “Amendment”) to extend the revolving maturity date to December 31, 2021, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement. In addition, subject to certain conditions as specified in the Amendment, Heritage Bank consented to the proposed transaction (as described above under the “Going Concern and Management’s Plan" section in Note A – Basis of Presentation and Significant Accounting Policies) between the Company and VDA and acknowledged and agreed that certain events occurring in connection with the transaction, including the change of control of the Company resulting from the Transaction, do not constitute Events of Default as defined in the Loan Agreement.

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The Heritage Bank Loan Agreement ~~also~~ contains ~~financial~~ covenants that place restrictions on, among other things, the incurrence of debt, granting of liens and sale of assets. The Heritage Bank Loan Agreement also contains financial covenants. As discussed above, the EBITDA loss covenant was eliminated in the eleventh amendment to the Credit Facility. The sole financial covenants ~~that require the Borrowers to maintain a minimum EBITDA level, measured quarterly, and~~are a minimum asset coverage ratio and a minimum unrestricted cash balance of $2 million, both of which are measured ~~monthly.~~at the end of each month. A violation of ~~any~~either of these covenants could result in an event of default under the Heritage Bank Loan Agreement. Upon the occurrence of such an event of default or certain other customary events of defaults, payment of any outstanding amounts under the Credit Facility may be accelerated and Heritage Bank’s commitment to extend credit under the Heritage Bank Loan Agreement may be terminated. The Heritage Bank Loan Agreement contains other representations and warranties, covenants, and other provisions customary to transactions of this nature.

The outstanding balance ofon the ~~revolving credit facility~~Credit Facility was ~~$79,953 as of~~$266,293 and $267,289 at September 30, ~~2017~~2021 and December 31, 2020 and the remaining available borrowing capacity was approximately ~~$1,304,000.~~$330,000 and $442,000, respectively. As of September 30, ~~2017,~~2021, the Company was in compliance with all financial covenants.

~~On March 28, 2017,~~See the ~~Company~~“Going Concern and Management’s Plan” section in Note A – Basis of Presentation and Significant Accounting Policies in the Company’s wholly-owned subsidiary, EthoStream, entered into an Asset Purchase Agreement with DCI-Design Communications LLC (“DCI”), whereby DCI acquired all of the assets and certain liabilities of EthoStream. Heritage Bank provided the Company with its consentNotes to the ~~sale transaction. Upon closing~~Condensed Consolidated Financial Statements under Item 1 of ~~the sale transaction on March 29, 2017, the entire balance outstanding on~~Part I of this Form 10-Q for a discussion of a potential default under the Credit ~~Facility was repaid. On March 29, 2017an amendment to the Credit Facility was executedamending the quarterly and year to date EBITDA compliance measurements for 2017.~~

Cash Flow Analysis

Cash used in ~~continuing~~ operations was ~~$2,459,746~~$1,310,788 and ~~$2,768,301~~$795,754, during the nine months ended September 30, ~~2017~~2021 and ~~2016,~~2020, respectively. As of September 30, ~~2017,~~2021, our primary capital needs included costs incurred to increase energy management sales, inventory procurement and managing current liabilities. The working capital changes during the nine months ended September 30, ~~2017~~2021 were primarily ~~related to an approximate $380,500~~a result of a $534,000 decrease in net inventories, a $233,000 increase in ~~accounts~~contract liabilities, a $235,000 increase in accrued liabilities, a $106,000 decrease in income tax receivable, a ~~$305,000 increase in inventory, a $305,000~~$85,000 increase in accounts payable, partially offset by a ~~$330,000~~$474,000 increase in ~~deferred revenue and~~prepaid expenses, a ~~$168,000~~$77,000 increase in ~~accrued liabilities and expenses.~~contract assets. The working capital changes during the nine months ended September 30, ~~2016~~2020 were primarily ~~related to an approximately $469,000~~a result of a $701,000 decrease in net accounts receivable, a ~~$410,000~~$275,000 increase in accrued liabilities, a $142,000 decrease in contract assets, partially offset by a $95,000 increase in net inventory, a ~~$535,000~~$71,000 decrease in accounts payable, and a ~~$300,000 increase~~$56,000 decrease in ~~accrued liabilities and expenses.~~contract liabilities. Accounts receivable ~~fluctuates~~balances fluctuate based on the negotiated billing terms with customers and collections. We purchase inventory based on forecasts and orders, and when those forecasts and orders change, the amount of inventory may also fluctuate. Accounts payable ~~fluctuates~~balances fluctuate with changes in inventory levels, volume of inventory purchases, and negotiated supplier and vendor terms.

~~Cash~~There was no cash used in or provided by investing activities during either of the nine months ended September 30, 2021 or 2020.

Cash provided by financing activities was ~~$11,092,051~~$912,067 and $354,033 during the nine months ended September 30, ~~2017~~2021 and 2020, respectively. Proceeds from the PPP2 loan were $913,063, proceeds borrowed from the line of credit were $5,357,000 and cash used ~~in investing activities was $2,352~~for payments on the line of credit were $5,357,996 during the nine months ended September 30, ~~2016, respectively. During~~2021. Proceeds from the ~~nine months ended September 30, 2017,~~PPP loan were $913,063, proceeds borrowed from the ~~cash provided by investing activities reflects the proceeds less adjustments associated with the sale~~line of the assets and certain liabilities assumed of the Company’s wholly-owned subsidiary, EthoStream and a decrease of $142,572 associated with the purchase of computer equipment and furniture, fixtures and equipment. Due to the sale of EthoStream, the Company extended the Waukesha lease, as discussed in Note J, and refurbished the corporate office to accommodate employee’s previously working at the Milwaukee operations office. During the nine months ended September 30, 2016, the Company purchased $33,629 of computer equipment and had $31,277 of restricted cash related to a bonding requirement released.

~~Cash used in financing activities was $982,176~~credit were $5,425,000 and cash ~~provided by financing activities was $707,637~~used for payments on the line of credit were $5,984,030 during the nine months ended September 30, ~~2017 and 2016, respectively. The Heritage Bank Loan Agreement for the Company’s line of credit included~~the Company and EthoStream as co borrowers. Upon closing the EthoStream sale transaction on March 29, 2017, the entire balance outstanding on the Credit Facility, $1,062,129, was repaid and a net balance of $79,953 was subsequently borrowed during the three months ended September 30, 2017. During the nine months ended September 30, 2016, 5,211,542 warrants were exercised for an aggregate of 5,211,542 shares of the Company’s common stock at $0.13 per share. These warrants were originally granted to shareholders of the April 8, 2011 Series B preferred stock issuance. Total proceeds received were $677,501. Cash used in financing activities to repay indebtedness was $79,864 and net cash paid on the line of credit was $110,000 during the nine months ended September 30, 2016.2020.

~~We are working to manage~~See the discussion above in the ‘Liquidity and Capital Resources” section for a discussion of our ~~current liabilities while we continue to make changes in operations to improve our cash flow and liquidity position.~~

Management expects that global economic conditions, in particular the decreasing price of energy, along with competition will continue to present a challenging operating environment through 2017; therefore working capital management will continue to be a high priority for 2017. The Company’s estimated cash requirements for our operations for the next 12 months is not anticipated to differ significantly from our present cash requirements for our operations.liquidity.

Off-Balance Sheet Arrangements

The Company has no material off-balance sheet arrangements.

Acquisition or Disposition of Property and Equipment

The Company does not anticipate significant purchases of property or equipment during the next twelve months. The ~~amended and expanded~~ Waukesha, Wisconsin lease ~~requires~~may require additional furniture, shelving, computer equipment and peripherals to be used in the Company’s day-to-day operations.

Item 4. Controls and Procedures.

AsEvaluation of ~~September 30, 2017, the Company performed an evaluation,~~Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the ~~supervision~~Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and ~~with~~reported within the ~~participation~~time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. The Company’s Chief Executive Officer and Chief Financial Officer each evaluated the effectiveness of ~~management, including~~our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2021. Based on these evaluations, the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Management has identified control deficiencies regarding the lack of segregation of duties due to the limited size of the Company’s accounting department, a failure to implement adequate internal control over financial reporting including in our IT general control environment, and the need for a stronger internal control environment particularly in our financial reporting and close process. We lack sufficient personnel resources and technical accounting and reporting expertise to appropriately address certain accounting and financial reporting matters in accordance with generally accepted accounting principles. We did not have an adequate process or appropriate controls in place to support the accurate reporting of our financial results and disclosures on our Form 10-Q. Management of the Company believes that these material weaknesses are due to the small size of the Company’s accounting staff. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation. The Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures required by paragraph (b) of Rule 13a-15 and 15d-15 were ~~ineffective~~not effective as of ~~the end~~September 30, 2021 as a result of the ~~period covered by this report.~~material weaknesses discussed below.

~~During~~Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the ~~nine months~~Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of the financial statements of the Company in accordance with U.S. generally accepted accounting principles, or GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

With the participation of our Chief Executive Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation and the material weaknesses described below, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2020 based on the COSO framework criteria.

Management did not properly design or maintain effective controls over certain aspects of the control environment and monitoring components of COSO. We did not have a sufficient complement of accounting and financial personnel with an appropriate level of knowledge to address technical accounting and financial reporting matters in accordance with GAAP and the Company’s overall financial reporting requirements. We also lack sufficient information technology resources to address our IT general control environment requirements. The failures within the control environment and monitoring components contributed to the following control activity level material weaknesses:

	·	Revenues – We did not properly design or maintain effective controls over the recording of revenue recognition for contracts whose performance obligations are fulfilled over time.

	·	Financial Statement Close and Reporting – We did not properly design or maintain effective controls over the period end financial close and reporting process. Specifically, we lacked control over the review of account reconciliations, journal entries, identification of related party transactions, and reporting of our financial results and disclosures.

	·	Information Technology – We did not properly design or maintain effective controls to prevent unauthorized access to certain systems, programs and data, and provide for periodic review and monitoring of access and changes in programs, including review of security logs and analysis of segregation of duties conflicts.

	·	Segregation of Duties – We did not maintain adequate segregation of duties within the Company’s business processes, financial applications, and IT systems. Specifically, we did not have appropriate controls in place to adequately assess the segregation of job responsibilities and system user access for initiating, authorizing, and recording transactions.

These control deficiencies could result in a misstatement of account balances resulting in a more than remote likelihood that a material misstatement to our financial statements may not be prevented or detected on a timely basis. Accordingly, we have determined that these control deficiencies as described above constitute material weaknesses.

As we continue to evaluate and work to improve our internal controls over financial reporting, our senior management may determine to take additional measures to address deficiencies or modify the remediation efforts. Until the remediation efforts that our senior management may identify as necessary, are completed, tested and determined effective, the material weaknesses described above will continue to exist. At present, the Company does not expect to hire additional personnel to remediate these control deficiencies in the near future.

In light of these material weaknesses, we performed additional analyses and procedures in order to conclude that our consolidated financial statements as of and for the year ended December 31, 2020, included in the Annual Report on Form 10-K were fairly stated in accordance with U.S. GAAP. Notwithstanding the identified material weaknesses, our management has concluded that the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2020 and the unaudited condensed consolidated financial statements included in this quarterly filing fairly represent, in all material respects, our financial position, results of operations, cash flows, and changes in stockholders’ equity as of and for the periods presented in accordance with U.S. GAAP.

Under applicable Securities Law, the Company is not required to obtain an attestation report from the Company's independent registered public accounting firm regarding internal control over financial reporting, and accordingly, such an attestation has not been obtained or included in the Annual Report on Form 10-K for the year ended December 31, 2020.

Changes in Internal Controls

Other than the material weaknesses discussed above, during the quarter ended September 30, ~~2017,~~2021, there ~~were~~have been no changes in ~~the Company’s~~our internal control over financial reporting that have materially affected or are reasonably likely to materially affect ~~the Company’s~~our internal ~~control~~controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, other than the Sipco Lawsuit, which is discussed in Note I – Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q and was terminated in the fourth quarter of 2020, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.

Item 1A. Risk Factors.

There ~~have been~~were no material changes during the quarter to ~~risk factors previously~~the Risk Factors disclosed in Item 1A – “Risk Factors” in our annual report on Form 10-K for the year ended December 31, ~~2016 in response to Item 1A of Form 10-K.~~2020.

Item 6. Exhibits.

Exhibit Number		Description Of Document
~~31.1~~10.1		Stock Purchase Agreement, dated August 6, 2021, between Telkonet, Inc. and VDA Group S.p.A. (incorporated by reference to our Form 8-K (File No. 000-31972) filed August 10, 2021)
10.2		Form of Common Stock Purchase Warrant(incorporated by reference to our Form 8-K (File No. 001-31972) filed August 10, 2021)
10.3		Form of Voting Agreement(incorporated by reference to our Form 8-K (File No. 001-31972) filed August 10, 2021)
10.4		Registration Rights Agreement, dated August 6, 2021, between Telkonet, Inc. and VDA Group S.p.A.(incorporated by reference to our Form 8-K (File No. 001-31972) filed August 10, 2021)
10.5		Twelfth Amendment to Loan and Security Agreement entered into as of September 30, 2021, by and among Telkonet, Inc. and Heritage Bank of Commerce.(incorporated by reference to our Form 8-K (File No. 000-31972) filed October 6, 2021)
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jason L. Tienor
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Richard E. Mushrush
32.1		Certification of Jason L. Tienor pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Richard E. Mushrush pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101).

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SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Telkonet, Inc. Registrant

Date: November ~~14, 2017~~15, 2021	By:	/s/ Jason L. Tienor
		Jason L. Tienor Chief Executive Officer (principal executive officer)

Date: November ~~14, 2017~~15, 2021

By:

/s/ Richard E. Mushrush

Richard E. Mushrush

Chief Financial Officer

(principal financial officer)

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Utah	87-0627421
(State or ~~Other Jurisdiction~~other jurisdiction of Incorporation or Organization)	(I.R.S. Employer ~~Identification~~identification No.)


20800 Swenson Drive, Suite 175, Waukesha, WI	53186
(Address of ~~Principal Executive Offices)~~principal executive offices)	(Zip Code)

Large accelerated ~~filer~~oFiler ☐	Accelerated ~~filer~~oFiler ☐
Non-accelerated ~~filer~~o~~(Do not check if a smaller reporting company)~~Filer ☒	Smaller reporting companyx☒
Emerging ~~growth company~~oGrowth Company ☐



	September 30, 2017			December 31, 2016			September 30, 2021			December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	8,959,229		$	791,858		$	2,613,090		$	3,011,811
Restricted cash on deposit		800,000			–
Accounts receivable, net		1,769,221			1,403,772			858,416			865,174
Inventories		1,082,289			777,202
Prepaid expenses and other current assets		260,269			205,328
Current assets of discontinued operations		–			7,149,971
Inventories, net								854,614			1,388,262
Contract assets								181,761			104,989
Prepaid expenses								617,103			142,733
Income taxes receivable								0			105,745
Total current assets		12,871,008			10,328,131			5,124,984			5,618,714

Property and equipment, net		318,767			143,907			93,737			127,672

Other assets:
Deposits		17,130			–			7,000			7,000
Operating lease right of use assets								613,742			737,551
Total other assets		17,130			–			620,742			744,551

Total Assets	$	13,206,905		$	10,472,038		$	5,839,463		$	6,490,937

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,137,632		$	765,617		$	1,127,740		$	1,043,007
Accrued liabilities and expenses		1,094,054			925,581
Related party payable		–			97,127
Accrued liabilities								787,782			563,312
Line of credit		79,953			1,062,129			266,293			267,289
Deferred revenues - current		444,110			184,793
Deferred lease liability – current		–			3,942
Customer deposits		215,576			165,830
Contract liabilities – current								1,131,200			888,060
Operating lease liabilities – current								209,574			242,299
Note payable – current								0			913,063
Income taxes payable		85,884			–			7,509			0
Deferred income taxes		–			933,433
Current liabilities of discontinued operations		–			869,604
Total current liabilities		3,057,209			5,008,056			3,530,098			3,917,030

Long-term liabilities:
Deferred revenue - long term		190,896			120,421
Deferred lease liability - long term		40,508			23,761
Contract liabilities – long-term								153,992			164,307
Operating lease liabilities – long-term								493,284			592,341
Accrued royalties – long-term								395,000			500,000
Total long-term liabilities		231,404			144,182			1,042,276			1,256,648
Total liabilities							$	4,572,374		$	5,173,678

Commitments and contingencies								–			–

Stockholders’ Equity
Series A, par value $.001 per share; 215 shares issued, 185 shares outstanding at September 30, 2017 and December 31, 2016, preference in liquidation of $1,507,481 and $1,452,114 as of September 30, 2017 and December 31, 2016, respectively		1,340,566			1,340,566
Series B, par value $.001 per share; 538 shares issued, 52 shares outstanding at September 30, 2017 and December 31, 2016, preference in liquidation of $409,009 and $393,435 as of September 30, 2017 and December 31, 2016, respectively		362,059			362,059
Common stock, par value $.001 per share; 190,000,000 shares authorized; 133,440,111 and 132,774,475 shares issued and outstanding at September 30, 2017 and December 31, 2016 , respectively		133,440			132,774
Preferred stock Series A, par value $.001 per share; 215 shares authorized, 185 shares outstanding at September 30, 2021 and December 31, 2020, preference in liquidation of $1,803,790 and $1,748,423 as of September 30, 2021 and December 31, 2020, respectively.								1,340,566			1,340,566
Preferred stock Series B, par value $.001 per share; 567 shares authorized, 52 shares outstanding at September 30, 2021 and December 31, 2020, preference in liquidation of $492,356 and $476,782 as of September 30, 2021 and December 31, 2020, respectively.								362,059			362,059
Common stock, par value $.001 per share; 190,000,000 shares authorized; 136,311,335 and 136,311,335 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively.								136,311			136,311
Additional paid-in-capital		127,383,314			126,955,435			127,739,160			127,733,714
Accumulated deficit		(119,301,087	)		(123,471,034	)		(128,311,007	)		(128,255,391	)
Total stockholders’ equity		9,918,292			5,319,800			1,267,089			1,317,259

Total Liabilities and Stockholders’ Equity	$	13,206,905		$	10,472,038		$	5,839,463		$	6,490,937

	For the Nine Months Ended
	September 30,
	2017			2016
Cash Flows from Operating Activities:
Net income (loss)	$	4,169,947		$	(944,701	)
Less: Net income from discontinued operations		(602,060	)		(2,050,998	)
Gain on sale of discontinued operations		(6,602,871	)		–
Net loss from continuing operations		(3,034,984	)		(2,995,699	)

Adjustments to reconcile net loss from continuing operations to cash used in operating activities of continuing operations:
Stock-based compensation expense		320,545			10,204
Stock issued to directors as compensation		108,000			36,000
Amortization of deferred financing costs		–			14,210
Depreciation		34,405			24,366
Provision for doubtful accounts, net of recoveries		15,013			7,047
Related party payable		–			161,075

Changes in operating assets and liabilities:
Accounts receivable		(380,462	)		468,589
Inventories		(305,087	)		(410,202	)
Prepaid expenses and other current assets		(54,941	)		60,271
Deposits and other long term assets		(17,130	)		23,871
Accounts payable		305,322			(535,016	)
Accrued liabilities and expenses		168,473			299,919
Deferred revenue		329,792			56,825
Related party payable		(97,127	)		(15,928	)
Customer deposits		49,746			27,985
Income taxes payable		85,884			–
Deferred lease liability		12,805			(1,818	)
Net Cash Used In Operating Activities of Continuing Operations		(2,459,746	)		(2,768,301	)
Net Cash Provided By Operating Activities of Discontinued Operations		517,242			2,023,820
Net Cash Used In Operating Activities		(1,942,504	)		(744,481	)

Cash Flows From Investing Activities:
Purchase of property and equipment		(142,572	)		(33,629	)
Net proceeds from sale of subsidiary		12,034,623			–
Change in restricted cash		(800,000	)		31,277
Net Cash Provided By (Used In) Investing Activities of Continuing Operations		11,092,051			(2,352	)

Cash Flows From Financing Activities:
Payments on notes payable		–			(79,864	)
Proceeds from exercise of warrants		–			677,501
Proceeds from line of credit		3,572,500			4,327,068
Payments on line of credit		(4,554,676	)		(4,217,068	)
Net Cash (Used In) Provided By Financing Activities of Continuing Operations		(982,176	)		707,637

Net increase (decrease) in cash and cash equivalents		8,167,371			(39,196	)
Cash and cash equivalents at the beginning of the period		791,858			951,249
Cash and cash equivalents at the end of the period	$	8,959,229		$	912,053

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
None	None	None

	Page

PART I. FINANCIAL INFORMATION	3

Item 1. Financial Statements	3

Condensed Consolidated Balance Sheets (Unaudited): September 30, ~~2017~~2021 and December 31, ~~2016~~2020	3

Condensed Consolidated ~~Statements~~Statement of Operations (Unaudited): Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020	4

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited): January 1, ~~2017~~ through September 30, ~~2017~~2021 and 2020	5

Condensed Consolidated Statements of Cash Flows (Unaudited): Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020	6 7

Notes to Condensed Consolidated Financial Statements (Unaudited)	89

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2324

Item 4. Controls and Procedures	3234

PART II. OTHER INFORMATION	3336

Item 1. Legal Proceedings	3336

Item 1A. Risk Factors	3336

Item 6. Exhibits	3336

	Series A Preferred Stock		Series A Preferred Stock		Series B Preferred Stock		Series B Preferred Stock		Common		Common Stock		Additional Paid-in		Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			Equity
Balance at January 1, 2017		185	$	1,340,566		52	$	362,059		132,774,475	$	132,774	$	126,955,435	$	(123,471,034	)	$	5,319,800

Shares issued to directors		–		–		–		–		665,636		666		107,334		–			108,000

Stock-based compensation expense related to employee stock options		–		–		–		–		–		–		320,545		–			320,545

Net income		–		–		–		–		–		–		–		4,169,947			4,169,947

Balance at September 30, 2017		185	$	1,340,566		52	$	362,059		133,440,111	$	133,440	$	127,383,314	$	(119,301,087	)	$	9,918,292


	For the Nine Months Ended September 30,
	2021			2020
Cash Flows from Operating Activities:
Net loss	$	(55,616	)	$	(2,279,353	)

Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation expense related to employee stock options		5,446			5,446
Stock issued to directors as compensation		0			18,000
Depreciation and amortization		33,935			44,196
Noncash operating lease expense		172,161			173,556
Gain on debt extinguishment		(1,836,780	)		0

Changes in operating assets and liabilities:
Accounts receivable, net		6,758			700,666
Inventories, net		533,648			(95,154	)
Prepaid expenses		(474,370	)		3,883
Deposits		0			10,130
Accounts payable		84,733			(71,060	)
Accrued royalties – long-term		(105,000	)		500,000
Accrued liabilities		235,124			275,350
Contract liabilities		232,825			(56,430	)
Contract assets		(76,772	)		142,241
Operating lease liabilities		(180,134	)		(166,918	)
Accrued income tax payable		7,509			0
Income taxes receivable		105,745			(307	)
Net Cash Used In Operating Activities		(1,310,788	)		(795,754	)

Cash Flows From Financing Activities:
Proceeds from note payable		913,063			913,063
Proceeds from line of credit		5,357,000			5,425,000
Payments on line of credit		(5,357,996	)		(5,984,030	)
Net Cash Provided By Financing Activities		912,067			354,033

Net decrease in cash and cash equivalents		(398,721	)		(441,721	)
Cash, cash equivalents at the beginning of the period		3,011,811			3,300,600
Cash and cash equivalents at the end of the period	$	2,613,090		$	2,858,879

Schedule of diluted EPS
	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Weighted average common shares outstanding - basic		136,311,335		136,311,335		136,311,335		136,061,140
Dilutive effect of stock options		0		0		0		0
Weighted average common shares outstanding - diluted		136,311,335		136,311,335		136,311,335		136,061,140

Options Outstanding								Options Exercisable
Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	0.01 - $0.15		3,075,000		6.19	$	0.14		3,075,000	$	0.14
$	0.16 - $0.99		2,476,800		3.44		0.18		2,246,800		0.18
			5,551,800		4.97	$	0.16		5,321,800	$	0.16

	Number of Shares			Weighted Average Price Per Share
Outstanding at January 1, 2016		1,825,225		$	0.28
Granted		1,300,000			0.17
Exercised		–			–
Cancelled or expired		(292,500	)		0.69
Outstanding at December 31, 2016		2,832,725		$	0.18
Granted		3,000,000			0.14
Exercised		–			–
Cancelled or expired		(280,925	)		0.17
Outstanding at September 30, 2017		5,551,800		$	0.16

		Warrants Outstanding						Warrants Exercisable
Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	0.18		50,000		0.16	$	0.18		50,000	$	0.18
	0.20		250,000		4.02		0.20		250,000		0.20
			300,000		3.38	$	0.20		300,000	$	0.20

2017 (remainder of)	$	43,738
2018		153,063
2019		154,496
2020		164,903
2021		182,512
2022 and thereafter		764,024
Total	$	1,462,736

	September 30,		December 31,
	2017		2016

Accounts receivable, net	$	–	$	456,478
Inventories		–		350,506
Other current assets		–		12,980
Other asset – goodwill		–		5,796,430
Other asset – intangible asset, net		–		533,577
Current assets of discontinued operations		–		7,149,971


Accounts payable		–		465,346
Accrued liabilities and expenses		–		90,187
Deferred revenues		–		37,509
Customer deposits		–		200,466
Deferred lease liability		–		76,096
Current liabilities of discontinued operations		–		869,604

Net assets of discontinued operations	$	–	$	6,280,367

	Three Months Ended
	September 30, 2017			September 30, 2016			Variance

Product	$	1,904,571	94%	$	1,360,887	90%	$	543,684		40%
Recurring		131,665	6%		143,028	10%		(11,363	)	-8%
Total	$	2,036,326	100%	$	1,503,915	100%	$	532,321		35%

	Three Months Ended September 30
	2017		2016		Variance

Total	$	500,656	$	429,622	$	71,034	17%