U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2022
OR
o☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________ to __________.
Commission file number 001-31972
TELKONET, INC.
(Exact name of Registrant as specified in its charter)
| Utah | 87-0627421 |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| 20800 Swenson Drive, Suite 175, Waukesha, WI | 53186 |
| (Address of Principal Executive Offices) | (Zip Code) |
(414)302-2299
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| None | None | None |
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 Exchange Act 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. 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer |
| Non-accelerated filer | Smaller reporting company |
| Emerging growth company |
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 defined in Rule 12b-2 of the Exchange 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, 2017April 30, 2022 is 133,440,111.
.
TELKONET, INC.
FORM 10-Q for the Nine Months Ended September 30, 2017
March 31, 2022
| 2 |
TELKONET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2017 | December 31, 2016 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 8,959,229 | $ | 791,858 | ||||
| Restricted cash on deposit | 800,000 | – | ||||||
| Accounts receivable, net | 1,769,221 | 1,403,772 | ||||||
| Inventories | 1,082,289 | 777,202 | ||||||
| Prepaid expenses and other current assets | 260,269 | 205,328 | ||||||
| Current assets of discontinued operations | – | 7,149,971 | ||||||
| Total current assets | 12,871,008 | 10,328,131 | ||||||
| Property and equipment, net | 318,767 | 143,907 | ||||||
| Other assets: | ||||||||
| Deposits | 17,130 | – | ||||||
| Total other assets | 17,130 | – | ||||||
| Total Assets | $ | 13,206,905 | $ | 10,472,038 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,137,632 | $ | 765,617 | ||||
| Accrued liabilities and expenses | 1,094,054 | 925,581 | ||||||
| Related party payable | – | 97,127 | ||||||
| Line of credit | 79,953 | 1,062,129 | ||||||
| Deferred revenues - current | 444,110 | 184,793 | ||||||
| Deferred lease liability – current | – | 3,942 | ||||||
| Customer deposits | 215,576 | 165,830 | ||||||
| Income taxes payable | 85,884 | – | ||||||
| Deferred income taxes | – | 933,433 | ||||||
| Current liabilities of discontinued operations | – | 869,604 | ||||||
| Total current liabilities | 3,057,209 | 5,008,056 | ||||||
| Long-term liabilities: | ||||||||
| Deferred revenue - long term | 190,896 | 120,421 | ||||||
| Deferred lease liability - long term | 40,508 | 23,761 | ||||||
| Total long-term liabilities | 231,404 | 144,182 | ||||||
| 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 | ||||||
| Additional paid-in-capital | 127,383,314 | 126,955,435 | ||||||
| Accumulated deficit | (119,301,087 | ) | (123,471,034 | ) | ||||
| Total stockholders’ equity | 9,918,292 | 5,319,800 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 13,206,905 | $ | 10,472,038 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues, net: | ||||||||||||||||
| Product | $ | 1,904,571 | $ | 1,360,887 | $ | 5,728,878 | $ | 6,356,437 | ||||||||
| Recurring | 131,665 | 143,028 | 344,708 | 340,412 | ||||||||||||
| Total Net Revenue | 2,036,236 | 1,503,915 | 6,073,586 | 6,696,849 | ||||||||||||
| Cost of Sales: | ||||||||||||||||
| Product | 1,160,019 | 770,830 | 3,233,978 | 3,194,094 | ||||||||||||
| Recurring | 55,702 | 36,618 | 118,347 | 92,324 | ||||||||||||
| Total Cost of Sales | 1,215,721 | 807,448 | 3,352,325 | 3,286,418 | ||||||||||||
| Gross Profit | 820,515 | 696,467 | 2,721,261 | 3,410,431 | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development | 500,656 | 429,622 | 1,323,669 | 1,321,007 | ||||||||||||
| Selling, general and administrative | 1,188,905 | 1,432,489 | 4,396,667 | 5,012,249 | ||||||||||||
| Depreciation and amortization | 14,616 | 8,382 | 34,405 | 24,366 | ||||||||||||
| Total Operating Expenses | 1,704,177 | 1,870,493 | 5,754,741 | 6,357,622 | ||||||||||||
| Operating Loss | (883,662 | ) | (1,174,026 | ) | (3,033,480 | ) | (2,947,191 | ) | ||||||||
| Other Income (Expenses): | ||||||||||||||||
| Interest income (expense), net | 8,722 | (15,482 | ) | 2,797 | (45,308 | ) | ||||||||||
| Total Other Income (Expense) | 8,722 | (15,482 | ) | 2,797 | (45,308 | ) | ||||||||||
| Loss from Continuing Operations before Provision (Benefit) for Income Taxes | (874,940 | ) | (1,189,508 | ) | (3,030,683 | ) | (2,992,499 | ) | ||||||||
| Provision (Benefit) for Income Taxes | (3,600 | ) | 2,575 | 4,301 | 3,200 | |||||||||||
| Net loss from continuing operations | (871,340 | ) | (1,192,083 | ) | (3,034,984 | ) | (2,995,699 | ) | ||||||||
| Discontinued Operations: | ||||||||||||||||
| Gain from sale of discontinued operations (net of tax) | 218,000 | – | 6,602,871 | – | ||||||||||||
| Income from discontinued operations (net of tax) | 11,403 | 798,887 | 602,060 | 2,050,998 | ||||||||||||
| Net income (loss) attributable to common stockholders | $ | (641,937 | ) | $ | (393,196 | ) | $ | 4,169,947 | $ | (944,701 | ) | |||||
| Net income (loss) per common share: | ||||||||||||||||
| Basic - continuing operations | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | ||||
| Basic - discontinued operations | $ | 0.00 | $ | 0.01 | $ | 0.05 | $ | 0.02 | ||||||||
| Basic – net income (loss) attributable to common stockholders | $ | (0.01 | ) | $ | (0.00 | ) | $ | 0.03 | $ | (0.00 | ) | |||||
| Diluted - continuing operations | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | ||||
| Diluted - discontinued operations | $ | 0.00 | $ | 0.01 | $ | 0.05 | $ | 0.02 | ||||||||
| Diluted – net income (loss) attributable to common stockholders | $ | (0.01 | ) | $ | (0.00 | ) | $ | 0.03 | $ | (0.00 | ) | |||||
| Weighted Average Common Shares Outstanding – basic | 133,231,367 | 132,314,049 | 133,007,830 | 130,399,390 | ||||||||||||
| Weighted Average Common Shares Outstanding –diluted | 133,231,367 | 132,314,049 | 133,405,096 | 130,399,390 | ||||||||||||
March 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,878,897 | $ | 2,361,059 | ||||
| Accounts receivable, net | 1,965,244 | 1,010,554 | ||||||
| Inventories, net | 1,074,952 | 825,559 | ||||||
| Contract assets | 128,872 | 266,014 | ||||||
| Prepaid expenses | 464,165 | 735,092 | ||||||
| Total current assets | 9,512,130 | 5,198,278 | ||||||
| Property and equipment, net | 74,749 | 84,201 | ||||||
| Other assets: | ||||||||
| Deposits | 7,595 | 7,595 | ||||||
| Operating lease right of use assets | 536,114 | 570,512 | ||||||
| Total other assets | 543,709 | 578,107 | ||||||
| Total Assets | $ | 10,130,588 | $ | 5,860,586 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,623,486 | $ | 1,865,535 | ||||
| Accrued liabilities | 817,511 | 718,721 | ||||||
| Line of credit | 436,136 | 403,089 | ||||||
| Contract liabilities – current | 815,478 | 800,965 | ||||||
| Operating lease liabilities – current | 145,409 | 195,176 | ||||||
| Income taxes payable | 5,431 | 5,431 | ||||||
| Total current liabilities | 3,843,451 | 3,988,917 | ||||||
| Long-term liabilities: | ||||||||
| Contract liabilities – long-term | 125,624 | 140,265 | ||||||
| Operating lease liabilities – long-term | 470,591 | 459,668 | ||||||
| Accrued royalties – long-term | 325,000 | 360,000 | ||||||
| Total long-term liabilities | 921,215 | 959,933 | ||||||
| Total liabilities | $ | 4,764,666 | $ | 4,948,850 | ||||
| Commitments and contingencies | – | – | ||||||
| Stockholders’ Equity | ||||||||
| Preferred Stock Series A, par value $ per share; shares designated, shares outstanding at March 31, 2022 and outstanding at December 31, 2021, preference in liquidation of $1,800,887 and $1,822,450 as of March 31, 2022 and December 31, 2021, respectively. | 1,310,765 | 1,340,566 | ||||||
| Preferred Stock Series B, par value $ per share; shares designated, shares outstanding at March 31, 2022 and December 31, 2021, preference in liquidation of $502,740 and $497,605 as of March 31, 2022 and December 31, 2021 respectively. | 362,059 | 362,059 | ||||||
| Common Stock, par value $ per share; shares authorized; and shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively. | 299,212 | 136,311 | ||||||
| Additional paid-in-capital | 132,579,890 | 127,740,976 | ||||||
| Accumulated deficit | (129,186,004 | ) | (128,668,176 | ) | ||||
| Total stockholders’ equity | 5,365,922 | 911,736 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 10,130,588 | $ | 5,860,586 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 3 |
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues, net: | ||||||||
| Product | $ | 1,954,430 | $ | 1,107,864 | ||||
| Recurring | 196,275 | 186,345 | ||||||
| Total Net Revenue | 2,150,705 | 1,294,209 | ||||||
| Cost of Sales: | ||||||||
| Product | 1,132,900 | 577,814 | ||||||
| Recurring | 31,770 | 10,900 | ||||||
| Total Cost of Sales | 1,164,670 | 588,714 | ||||||
| Gross Profit | 986,035 | 705,495 | ||||||
| Operating Expenses: | ||||||||
| Research and development | 269,240 | 311,448 | ||||||
| Selling, general and administrative | 1,212,813 | 1,211,103 | ||||||
| Depreciation and amortization | 9,453 | 13,240 | ||||||
| Total Operating Expenses | 1,491,506 | 1,535,791 | ||||||
| Operating Loss | (505,471 | ) | (830,296 | ) | ||||
| Other Income (Expenses): | ||||||||
| Gain / (Loss) on debt extinguishment | 0 | 920,673 | ||||||
| Interest expense, net | (12,357 | ) | (7,873 | ) | ||||
| Total Other Income (Expenses) | (12,357 | ) | 912,800 | |||||
| Income (Loss) before Provision for Income Taxes | (517,828 | ) | 82,504 | |||||
| Income Taxes Provision (Benefit) | 0 | (235 | ) | |||||
| Net Income (Loss) | $ | (517,828 | ) | $ | 82,739 | |||
| Net Income (Loss) per Common Share: | ||||||||
| Basic – Net Income (Loss) Attributable to Common Stockholders | $ | (0.00 | ) | $ | 0.00 | |||
| Diluted – Net Income (Loss) Attributable to Common Stockholders | $ | (0.00 | ) | $ | 0.00 | |||
| Weighted Average Common Shares Outstanding used in Computing Basic Net Income/Loss Per Share | 286,542,208 | 136,311,335 | ||||||
| Weighted Average Common Shares Outstanding used in Computing Diluted Net Income/Loss Per Share | 286,542,208 | 136,311,335 | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 4 |
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
NINE MONTHS FROM JANUARY 1, 20172021 THROUGH SEPTEMBER 30, 2017MARCH 31, 2021
| 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 | ||||||||||||||||||||
| 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, 2021 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 136,311,335 | $ | 136,311 | $ | 127,733,714 | $ | (128,255,391 | ) | $ | 1,317,259 | ||||||||||||||||||||
| Shares issued to directors | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
| Stock-based compensation expense related to employee stock options | – | – | – | – | – | – | 1,815 | – | 1,815 | |||||||||||||||||||||||||||
| Net profit / (loss) attributable to common stockholders | – | – | – | – | – | – | – | 82,739 | 82,739 | |||||||||||||||||||||||||||
| Balance at March 31, 2021 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 136,311,335 | $ | 136,311 | $ | 127,735,529 | (128,172,652 | ) | $ | 1,401,813 | |||||||||||||||||||||
See accompanying notes to the unaudited, condensed, consolidated financial statements
| 5 |
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWSSTOCKHOLDERS’ EQUITY (UNAUDITED)
(UNAUDITED)JANUARY 1, 2022 THROUGH MARCH 31, 2022
| 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 | ||||
| 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, 2022 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 136,311,335 | $ | 136,311 | $ | 127,740,976 | $ | (128,668,176 | ) | $ | 911,736 | ||||||||||||||||||||
| Stock and warrants issued in VDA Transaction | – | – | – | – | 162,900,947 | 162,901 | 4,837,099 | – | 5,000,000 | |||||||||||||||||||||||||||
| Repurchase of Series A Preferred Stock Shares | (4 | ) | (29,801 | ) | – | – | – | – | – | – | (29,801 | ) | ||||||||||||||||||||||||
| Stock-based compensation expense related to employee stock options | – | – | – | – | – | – | 1,815 | – | 1,815 | |||||||||||||||||||||||||||
| Net profit / (loss) attributable to common stockholders | – | – | – | – | – | – | – | (517,828 | ) | (517,828 | ) | |||||||||||||||||||||||||
| Balance at March 31, 2022 | 181 | $ | 1,310,765 | 52 | $ | 362,059 | 299,212,282 | $ | 299,212 | $ | 132,579,890 | (129,186,004 | ) | $ | 5,365,922 | |||||||||||||||||||||
See accompanying notes to the unaudited, condensed, consolidated financial statements
| 6 |
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash transactions: | ||||||||
| Cash paid during the period for interest | $ | 11,485 | $ | 30,980 | ||||
| Cash paid during the period for income taxes, net of refunds | 58,551 | – | ||||||
| Schedule of Non-Cash Investing Activities: | ||||||||
| Unpaid purchases of property and equipment included in accounts payable | $ | 66,693 | – | |||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss) | $ | (517,828 | ) | $ | 82,739 | |||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Stock-based compensation expense related to employee stock options | 1,815 | 1,815 | ||||||
| Depreciation and amortization | 9,453 | 13,240 | ||||||
| Noncash operating lease expense | 34,398 | 57,387 | ||||||
| Gain on debt extinguishment | 0 | (920,673 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | (954,690 | ) | (142,384 | ) | ||||
| Inventories, net | (249,394 | ) | 223,479 | |||||
| Prepaid expenses | 397,860 | (40,951 | ) | |||||
| Accounts payable | (271,851 | ) | (268,338 | ) | ||||
| Accrued royalties – long-term | (35,000 | ) | (35,000 | ) | ||||
| Accrued liabilities | 98,790 | 234,291 | ||||||
| Contract liabilities | (128 | ) | 108,580 | |||||
| Contract assets | 10,210 | 89,520 | ||||||
| Operating lease liabilities | (38,844 | ) | (57,658 | ) | ||||
| Net Cash Used In Operating Activities | (1,515,209 | ) | (653,953 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from stock and warrants issued in VDA Transaction | 5,000,000 | 0 | ||||||
| Proceeds from line of credit | 1,360,000 | 1,680,000 | ||||||
| Payments on line of credit | (1,326,953 | ) | (1,359,475 | ) | ||||
| Net Cash Provided By (Used In) Financing Activities | 5,033,047 | 320,525 | ||||||
| Net increase (decrease) in cash and cash equivalents | 3,517,838 | (333,428 | ) | |||||
| Cash, cash equivalents at the beginning of the period | 2,361,059 | 3,011,811 | ||||||
| Cash and cash equivalents at the end of the period | $ | 5,878,897 | $ | 2,678,383 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash transactions: | ||||||||
| Cash paid during the period for interest | $ | 5,019 | $ | 5,875 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 7 |
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 31, 2022
(UNAUDITED)
NOTE A – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial statements follows.
GeneralBasis of Presentation
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 ninethree months ended September 30, 2017,March 31, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2022. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 20162021 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC.
BusinessThe condensed consolidated financial statements include the accounts of the Company and Basis of Presentationits wholly-owned subsidiary, Telkonet Communications, Inc., operating as a single reportable business segment.
Business
Telkonet, Inc. (“we,” “us,” “our,” the “Company,” or “Telkonet”), formed in 1999 and incorporated under the laws of the state of Utah, is the creator of the EcoSmart Platformand the Rhapsody Platforms of intelligent automation solutions designed to optimize energy efficiency, comfort and analytics in support of the emerging Internet of Things (“IoT”). The platforms are deployed primarily in the hospitality, educational, governmental and other commercial markets, and is specified by engineers, HVAC professionals, building owners, and building operators. We currently operate in a single reportable business segment.
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 providesPlatform. 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, healthcaregovernmental and other commercial markets. The EcoSmart platform is rapidly beingplatforms are recognized as a leading solutionsolutions for reducing energy consumption, operational costs and carbon footprints, and eliminating the need for new energy generation in these marketplaces – all whilewhilst improving occupant comfort and convenience.
On March 28, 2017,August 6, 2021, the Company and the Company’s wholly-owned subsidiary, EthoStream LLC, a Wisconsin limited liability company (“EthoStream”), entered into an Asset Purchase Agreementa stock purchase agreement (the “Purchase Agreement”) with DCI-Design Communications LLCVDA Group S.p.A., an Italian joint stock company (“DCI”VDA”), a Delaware limited liability company, whereby DCIpursuant to which VDA would, acquire all ofat 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 forClosing (as defined in the Purchase Agreement. On March 29, 2017, pursuantAgreement), contribute $5 million to the termsTelkonet (the “Financing”) and, in exchange, Telkonet would issue to VDA (The “Issuance”): (i) shares of Company Common Stock (the “Common Stock”); and (ii) a warrant to purchase 105,380,666 additional shares of Common Stock (the “Warrant”) (the Issuance and the conditionsFinancing referred to collectively herein as the “VDA Transaction”). The Closing occurred on January 7, 2022.
Following the issuance of 162,900,947 shares of Common Stock to VDA upon the Closing, VDA owns 53% of the Purchase Agreement, the Company closedissued and outstanding Common Stock 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 capitalfully diluted 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, 2017exercised/converted basis, resulting in a gain from salechange of discontinued operationscontrol of $218,000 recognized during the three months ended September 30, 2017.Company. VDA could eventually own as much as 65% of the issued and outstanding Common Stock on a fully diluted as exercised/converted basis if it fully exercises the Warrant.
The Company has elected not to apply pushdown accounting adjustments to the Company’s financial statements related to the change in control as allowed by Accounting Standards Update No. 2014-17.
| 8 |
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(UNAUDITEDCritical Accounting Policies and Estimates)
The condensed consolidatedpreparation of financial statements includein conformity with accounting principles generally accepted in the accountsUnited States of America requires the Company to make estimates and its wholly-owned subsidiaries, Telkonet Communications, Inc., and EthoStream. The current and prior period accounts of Ethostream have been classified as discontinued operations onassumptions that affect 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 informationamounts reported in the consolidated financial statement footnotes reflectstatements and accompanying notes. On an ongoing basis, the Company evaluates significant estimates used in preparing its consolidated financial statements including those related to revenue recognition and allowances for uncollectible accounts receivable, inventory obsolescence, recovery of long-lived assets, income tax provisions and related valuation allowance, 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 critical judgments, assumptions, and estimates used in the preparation of the consolidated financial statements are summarized below. Please refer to our most recent 10-K filing for a more in-depth analysis of such policies.
Revenue from Contracts with Customers
Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606, the Standard”) supersedes nearly all legacy revenue 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.
| i) | Identify the customer contracts |
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 and the customer and both parties are committed to perform their respective obligations, (2) the Company can identify each party’s rights regarding goods or services transferred, (3) the 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 entitled in exchange for the goods or services transferred is probable.
A contract does not exist if each party to the contract has the unilateral right to terminate a wholly unperformed contract without compensating the other party (or parties). Nearly all of the Company’s results from continuing operations.contracts do not contain such mutual termination rights for convenience. All contracts are in written form.
| ii) | Identify the performance obligations |
Liquidity and Financial ConditionThe Company will enter into product only contracts that contain a single performance obligation related to the transfer of products to a customer.
The Company reportedwill also enter into certain customer contracts that encompass product and installation services, referred to as “turnkey” solutions. These contracts ultimately provide the customer with a net loss of $3,034,984 from continuing operations forsolution that enhances the nine months ended September 30, 2017, had cash used in operating activities from continuing operations of $2,459,746 and had an accumulated deficit of $119,301,087. Since inception, 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 revolving credit facility with Heritage Bank of Commerce, a California state chartered bank (“Heritage Bank”), was executed to amend certain termsfunctionality of the Loan and Security Agreement (the “Heritage Bank Loan Agreement”) following the sale of certain assets of the Company’s 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 of the Heritage Bank Loan Agreement. Among the terms of the amendment was that ifcustomer’s existing equipment. For this reason, the Company deviates from its projected EBITDA forhas determined that the quarters ended September 30, 2017 or December 31, 2017, the Company will be deemed to beproduct and installation services are not separately identifiable performance obligations, but 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 byessence represent one, year to September 30, 2019.combined performance obligation (“turnkey”).
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,Company also offers post-installation support services to customers. Support services are considered a separate performance obligation.
| iii) | Determine the transaction price |
The Company generally enters into contracts containing fixed prices. It is not customary for the Company wasto include contract terms that would result in compliance with all financial covenants.
On March 28, 2017,variable consideration. In the Company and EthoStream, entered into the Purchase Agreement with DCI whereby DCI acquired allrare situation that a contract does include this type of the assets and certain liabilities of EthoStream forprovision, it is not expected to result in a base purchase price of $12,750,000, subject to anmaterial adjustment based on the net working capital of EthoStream on the closing date of the sale transaction. The Company’s liquidity for the remainder of 2017 remains strong due to the net proceeds received fromtransaction price. The Company regularly extends pricing discounts; however, they are negotiated up front and adjust the sale of EthoStream.
Restricted Cash on Deposit
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 withfixed transaction price set out in 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.
contract.
| 9 |
TELKONET, INC.Customer contracts will typically contain upfront deposits that will be applied against future invoices, as well as customer retainage. The intent of any required deposit or retainage is to ensure that the obligations of either party are honored and follow customary industry practices. In addition, the Company 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 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 support revenue and recognized on a straight-line basis over the support revenue term.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| iv) | Allocate the transaction price to the performance obligations |
SEPTEMBER 30, 2017
(UNAUDITEDRevenues from customer contracts are allocated to the separate performance obligations based on their relative stand-alone selling price (“SSP”) at contract inception. The SSP is the price at which the Company would sell a promised good or service 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 for a broad range of amounts resulting from, but not limited to, tiered discounting for value added resellers (“VAR”) based upon committed volumes and other economic factors. Due to the high variability of our pricing, the Company 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.
Income (Loss) per Common ShareAll support service agreements, whether single or multi-year terms, automatically renew for one-year terms at a suggested retail price (“SRP”), unless terminated by either party. Support service renewals are consistently priced and therefore would support the use of SRP as the best estimate of an SSP for such performance obligations.
| v) | Revenue Recognition |
The Company 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.
Contract Fulfillment Cost
The Company computes earnings per share under ASC 260-10, “Earnings Per Share”. Basic 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 sharesrecognizes related costs of the 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 Consolidated Balance Sheet.
Advertising
The Company atfollows the average market pricepolicy of charging the common shares forcosts of advertising to expenses as incurred. The Company incurred $1,508 and $1,493 in advertising costs during the year. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company's outstanding stock options and warrants. For the ninethree months ended September 30, 2017March 31, 2022 and 2016, there were 5,621,800 and 2,240,225 shares of common stock underlying options and warrants excluded due to these instruments being anti-dilutive,2021, respectively.
Use of EstimatesResearch and Development
The preparationCompany 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 March 31, 2022 and 2021 were $269,240 and $311,448, respectively.
| 10 |
Accounts Receivable
Accounts receivable are uncollateralized customer obligations due under normal trade terms. The Company records allowances for doubtful accounts based on customer-specific analysis and general matters such as current assessment of financial statements in conformity with United Statespast due balances and economic conditions. The Company writes off accounts receivable when they become uncollectible. Management identifies a delinquent customer based upon the delinquent payment status of America (U.S.)an outstanding invoice, generally acceptedgreater than 30 days past due date. The delinquent account designation does not trigger an accounting principles (“GAAP”) requires management to make certain estimates, judgmentstransaction until such time the account is deemed uncollectible. The allowance for doubtful accounts is determined by examining the reserve history and assumptionsany outstanding invoices that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dateare over 30 days past due as of the financial statements, and the reported amountsend of revenues and expenses during the reporting period. EstimatesAccounts are used when accounting for itemsdeemed uncollectible on a case-by-case basis, at management’s discretion based upon an examination of the communication with the delinquent customer and matters such as revenue recognition and allowances for uncollectiblepayment history. Typically, 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 availableonly escalated to “uncollectible” status after multiple attempts at the time they are made. Actual results may differ from those estimates.collection have proven unsuccessful.
Inventory Obsolescence
Inventories consist of thermostats, sensors and controllers for Telkonet’s product platforms. These inventories are purchased for resale and do not include manufacturing labor and overhead. Inventories are stated at the lower of cost or net realizable value determined by the first in, first out (FIFO) method. The Company’s inventories are subject to technological obsolescence. Management evaluates the net realizable value of its inventories on a quarterly basis and when it is determined that the Company’s carrying cost of such excess and obsolete inventories cannot be recovered in full, a charge is taken against income for the difference between the carrying cost and the estimated realizable amount.
Guarantees and Product Warranties
The Company records a liability for potential warranty claims. The amount of the liability is based on the trend in the historical ratio of claims to sales. 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.
| Schedule of product warranty accrual | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Beginning balance | $ | 46,650 | $ | 17,551 | ||||
| Warranty claims incurred | (700 | ) | (1,527 | ) | ||||
| Provision charged (credited) to expense | 5,468 | 30,626 | ||||||
| Ending balance | $ | 51,418 | $ | 46,650 | ||||
Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10 “Income Taxes.”740-10. 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 net operating losses at the statutory rates enacted for 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 adoptedfollows 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.
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.
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(UNAUDITED)
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 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.
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.
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.
| 11 |
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(UNAUDITED)Stock Based Compensation
GuaranteesWe account for our stock based awards in accordance with ASC 718, which requires a fair value measurement and Product Warrantiesrecognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options and restricted stock awards.
We estimate the fair value of stock options granted using the Black-Scholes valuation model. This model requires us to make estimates and assumptions including, among other things, estimates regarding the length of time an employee will retain vested stock options before exercising them and the estimated volatility of our common stock price. 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 our consolidated statements of operations.
The Company records a liability for potential warranty claims in costcomputes 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 salesoutstanding stock options and warrants are used to repurchase shares of the Company at the timeaverage market price of sale. Thethe 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 the three months ended March 31, 2022 and 2021, there were and shares of common stock respectively underlying options and warrants excluded due to these instruments being anti-dilutive.
Shares used in the calculation of diluted EPS for the first three months of 2022 are summarized below:
| Schedule of earnings per share | ||||||||
| 2022 | 2021 | |||||||
| Net loss | $ | (517,828 | ) | $ | 82,739 | |||
| Less: cumulative dividends earned on Series A and Series B preferred stock | (23,388 | ) | (23,502 | ) | ||||
| Net loss attributable to common shareholders | $ | (541,216 | ) | $ | 59,237 | |||
Shares used in the calculation of diluted EPS for the quarters ended March 31, 2022 and 2021 are summarized below:
| Schedule of weighted average diluted shares | ||||||||
| 2022 | 2021 | |||||||
| Weighted average common shares outstanding - basic | 286,542,208 | 136,311,335 | ||||||
| Dilutive effect of stock options | 0 | 0 | ||||||
| Dilutive effect of stock warrants | – | – | ||||||
| Weighted average common shares outstanding - diluted | 286,542,208 | 136,311,335 | ||||||
Recovery of Long -Lived Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10. Recoverability is measured by comparison of the carrying amount to the future net undiscounted cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying 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 byassets exceeds its fair value.
Sales Tax
Unless provided with a warranty for a period of one year. In the eventresale or tax exemption certificate, the Company determines that its current or future product repairassesses and replacement costs exceed its estimates, an adjustmentcollects sales tax on sales transactions and records the amount as a liability. It is recognized as a liability until remitted to these reserves would be charged to earnings in the period such determination is made. For the nine months ended September 30, 2017 and the year ended December 31, 2016,applicable state. Total revenues do not include sales tax as the Company experienced returns of approximately 1.0% to 2.5% of materials included in the cost of sales. As of September 30, 2017 and December 31, 2016, the Company recorded warranty liabilities in the amount of $77,810 and $95,540, respectively, using this experience factor range.
Product warranties for the nine months ended September 30, 2017 and the year ended December 31, 2016 are as follows:
| 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
Certain amounts on the condensed consolidated balance sheets as 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.
NOTE B – NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts 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. 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) a modified retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). 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 obligationpass through conduit for collecting and could accelerate or defer the timing of recognizing revenue. The Company also continues to evaluate the presentation of 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.
remitting sales taxes.
| 12 |
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(UNAUDITED)Concentrations of Credit Risk
In February 2016,Financial instruments and related items, which potentially subject the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”).Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The new standard establishesCompany places its cash and temporary cash investments with quality credit institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company has never experienced any losses related to these balances. With respect to trade receivables, the Company performs ongoing credit evaluations of its customers’ financial conditions and limits the amount of credit extended when deemed necessary. The Company provides credit to its customers primarily in the United States in the normal course of business. The Company routinely assesses the financial strength of its customers and, as a right-of-use (ROU) modelconsequence, believes its trade receivables credit risk exposure is limited.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity date of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The Company accounts for the fair value of financial instruments in accordance with ASC 820, which defines fair value for accounting purposes, established a framework for measuring fair value and expanded disclosure requirements regarding fair value measurements. Fair value is defined as an exit price, which is the price that requireswould be received upon sale of an asset or paid upon transfer of a lesseeliability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to recordthe level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. The Company categorizes financial assets and liabilities that are recurring, at fair value into a ROUthree-level hierarchy in accordance with these provisions:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and are unobservable.
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, and certain accrued liabilities. The carrying amounts of these assets and liabilities approximate fair value due to the short maturity of these instruments (Level 1 instruments), except for the line of credit. The carrying amount of the line of credit approximates fair value due to the interest rate and terms approximating those available to the Company for similar obligations (Level 2 instruments).
Leases
The Company determines if an arrangement is a lease liabilityat inception. This determination generally depends on whether the balance sheetarrangement conveys to the Company the right to control the use of an explicitly or implicitly identified fixed asset for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affectinga period of time in exchange for consideration. Control of an underlying asset is conveyed to the patternCompany if the Company obtains the rights to direct the use of expense recognition in 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 beginningto obtain substantially all of the earliest comparative period presented ineconomic benefits from using the financial statements, with certain practical expedients available.underlying asset. The Company is currently evaluatingdoes not separate non-lease components from lease components to which they relate and accounts for the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements. Upon adoption, the Company expects that the ROU assetcombined lease and non-lease components as a single lease liability will be recognized in the balance sheets in amounts that will be material.
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– ACCOUNTS RECEIVABLE
Components of accounts receivable as of September 30, 2017 and December 31, 2016 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 | ||||
component.
| 13 |
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(UNAUDITED)Operating leases are included in our 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 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. 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.
Impact of COVID-19 Pandemic
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, social distancing edicts and overall fear, the hospitality industry, our largest market that generally accounts for a majority of our revenue, has suffered as much as any since the onset of the pandemic. While the industry is trending toward recovery, the situation remains fragile. The effects of supply-chain issues, inflation and labor shortages, and subsequent rising wages, all present some level of pandemic uncertainty for the foreseeable future. STR and Tourism Economics expect leisure travel to pace the recovery while commercial demand, the dominant segment, will remain significantly below pre-pandemic levels until there is a significant increase in the quantity of large group events, as well as the return of business travel [1] When adjusted for inflation, revenue per available room (RevPAR) will likely remain below 2019 levels until at least 2025[2].
_________________________
[1] O’Conner, Stefani C. “Industry’s recovery heats up-slowly.” Hotelbusiness.com January 2022:8A
[2] O’Conner, Stefani C. “Industry’s recovery heats up-slowly.” Hotelbusiness.com January 2022:14A
| 14 |
NOTE B – NEW ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU No. 2016-13, Financial 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 credit deterioration. The guidance requires a modified retrospective 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 adoption of ASU 2016-13 for smaller reporting companies until January 1, 2023. The Company will continue to evaluate the impact of ASU 2016-13 on its 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.
NOTE C – REVENUE
The following table presents the Company’s product and recurring revenues disaggregated by industry for the three months ended March 31, 2022.
| Disaggregation of revenues | ||||||||||||||||||||||||
| Hospitality | Education | Multiple Dwelling Units | Government | Healthcare | Total | |||||||||||||||||||
| Product | $ | 1,058,627 | $ | 551,381 | $ | 69,297 | $ | 275,125 | $ | 0 | $ | 1,954,430 | ||||||||||||
| Recurring | 164,434 | 31,841 | 0 | 0 | 0 | 196,275 | ||||||||||||||||||
| $ | 1,223,061 | $ | 583,222 | $ | 69,297 | $ | 275,125 | $ | 0 | $ | 2,150,705 | |||||||||||||
| 57% | 27% | 3% | 13% | 0% | 100% | |||||||||||||||||||
The following table presents the Company’s product and recurring revenues disaggregated by industry for the three months ended March 31, 2021.
| Hospitality | Education | Multiple Dwelling Units | Government | Healthcare | Total | |||||||||||||||||||
| Product | $ | 712,907 | $ | 74,103 | $ | 172,735 | $ | 118,335 | $ | 29,784 | $ | 1,107,864 | ||||||||||||
| Recurring | 162,794 | 16,426 | 7,125 | 0 | 0 | 186,345 | ||||||||||||||||||
| $ | 875,701 | $ | 90,529 | $ | 179,860 | $ | 118,335 | $ | 29,784 | $ | 1,294,209 | |||||||||||||
| 68% | 7% | 14% | 9% | 2% | 100% | |||||||||||||||||||
Sales taxes and other usage-based taxes are excluded from revenues.
Remaining performance obligations
As of March 31, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $0.6 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 | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Contract assets | $ | 128,872 | $ | 266,014 | ||||
| Contract liabilities | 941,102 | 941,230 | ||||||
| 15 |
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 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 March 31, 2022 is the result of cash payments received and 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 approximately 60 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 12 months or not, are immaterial and will continue to be recognized in the period incurred within selling, general and administrative expenses.
NOTE D – ACCOUNTS RECEIVABLE
Components of accounts receivable as of March 31, 2022 and December 31, 2021 are as follows:
| Schedule of accounts receivable | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Accounts receivable | $ | 1,977,914 | $ | 1,016,117 | ||||
| Allowance for doubtful accounts | (12,670 | ) | (5,563 | ) | ||||
| Accounts receivable, net | $ | 1,965,244 | $ | 1,010,554 | ||||
NOTE E – DEBTINVENTORIES
Components of inventories as of March 31, 2022 and December 31, 2021 are as follows:
| Schedule of components of inventories | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Product purchased for resale | $ | 1,392,173 | $ | 1,269,056 | ||||
| Reserve for obsolescence | (317,221 | ) | (443,497 | ) | ||||
| Inventory, net | $ | 1,074,952 | $ | 825,559 | ||||
| 16 |
Kross Promissory NoteNOTE F – CURRENT ACCRUED LIABILITIES
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 interestCurrent accrued liabilities 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, 2017March 31, 2022 and December 31, 2016 was zero and $97,127, respectively.2021 are as follows:
| Schedule of accrued liabilities and expenses | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Accrued payroll and payroll taxes | $ | 427,240 | $ | 242,131 | ||||
| Accrued professional | 65,222 | 136,584 | ||||||
| Accrued sales taxes, penalties, and interest | 20,166 | 16,634 | ||||||
| Product warranties | 51,418 | 46,650 | ||||||
| Other accrued liabilities | 253,465 | 276,722 | ||||||
| Total current accrued liabilities | $ | 817,511 | $ | 718,721 | ||||
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 (subsequently reduced to $1,000,000 on December 13, 2021), (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% at September 30, 20176.50% on March 31, 2022 and 6.75% at6.25% on December 31, 2016.2021. 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 hashad an exercise price of $0.20$0.20 and expires expired October 9, 2021.2021. On February 17, 2016, an amendmentNovember 6, 2019, the Eleventh Amendment to the Credit Facility was executed extendingto 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 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 Twelfth Amendment, Heritage Bank consented to the VDA Transaction (as described above in Note A – Basis of Presentation and Significant Accounting Policies - Business) between the Company and VDA, and acknowledged and agreed that certain events occurring in connection with the VDA Transaction, including the change of control of the Company resulting from the VDA Transaction, do not constitute Events of Default as defined in the Heritage Bank Loan Agreement.
On December 13, 2021, the Company entered into a thirteenth amendment to the Heritage Bank Loan Amendment to extend the revolving maturity date to March 31, 2022, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement. In addition, the Heritage Bank Loan Amendment reduced the credit extension amount to $1,000,000 and reduced unrestricted cash maintained in the Company’s accounts at Bank to be at least $1,000,000.
On March 10, 2022, the Company entered into a fourteenth amendment to the Heritage Bank Loan Amendment to extend the revolving maturity date to June 30, 2023, unless earlier accelerated under the terms of the Heritage Bank 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 containcontains 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 $1 million, both of which are measured monthly and minimum cash account balances.at the end of each month. A violation of anyeither 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.
| 17 |
The outstanding balance on the Credit Facility was $436,135 and $403,089 at March 31, 2022 and December 31, 2021 respectively, and the remaining available borrowing capacity was approximately $514,000 and $311,000, respectively. As of September 30, 2017,March 31, 2022, the Company was in compliance with all financial covenants. The outstanding balance on 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.
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 LLCunsecured 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 providedconfirmed that the First PPP Loan granted to the Company, with its consent toin the sale transaction. Upon closingoriginal principal amount of the sale transaction on March 29, 2017, the entire balance outstanding on the Credit Facility$913,063 plus accrued interest of $7,610 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.
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(UNAUDITED)
On August 29, 2017,April 27, 2021, the Company entered into an amendment to unsecured promissory note, dated as of April 26, 2021, for a second PPP loan (“the Credit FacilitySecond PPP Loan” and together with the First PPP Loan, the “PPP Loans”), with Heritage Bank was executed to amend certain termsunder a second draw of the PPP administered by the SBA and authorized by the Keeping American Workers Employed and Paid Act. 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 Agreement allowing forgranted to 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 forthCompany, in the amendment.original principal amount of $913,063 plus accrued interest of $3,044 thereon, was forgiven in full.
On October 23, 2017, an amendment toThe total amount forgiven in 2021 for principal and accrued interest under the revolving credit facility with Heritage BankPPP Loans 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 F – PREFERRED STOCK$1,836,780.
NOTE H – PREFERRED STOCK
Series A
The Company has designated 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 $0.363 per share. On November 16, 2009, the Company sold 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 shares of common stock at a conversion price of $0.363$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. On March 31, 2022, four Series A4 shares were repurchased per the terms of a separation agreement with Jason L. Tienor, former President and Chief Executive Officer, who will receive reimbursement for the shares.
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$0.13 per share. On August 4, 2010, the Company sold 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$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 shares of common stock at a conversion price of $0.13$0.13 per share. The Company received $1,335,000$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$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 shares of common stock at a conversion price of $0.13$0.13 per share. The Company received $1,355,000$1,355,000 from the sale of the Series B shares on April 8, 2011. In prior years, 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,March 31, 2022, the liquidation preference of the preferred stock is based on the following order: first, Series B with a preference value of $409,009,$502,740, which includes cumulative accrued unpaid dividends of $149,009,$242,740, and second, Series A with a preference value of $1,507,481,$1,800,887, 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.
$895,887.
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
NOTE GI – CAPITAL STOCK
The Company has authorized 15,000,000 shares of preferred stock (designated and undesignated), with a par value of $.001 per share. The Company has designated 215 shares as Series A preferred stock and 538 shares as Series B preferred stock. As of September 30, 2017 and December 31, 2016, there were 185 shares of Series A and 52 shares of Series B outstanding.
The Company has authorized 190,000,000 shares of common stock with a par value of $.001 per share. As of September 30, 2017 and December 31, 2016 the Company had 133,440,111 and 132,774,475 common shares issued and outstanding.
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.
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”“2020 Plan”). The 2020 Plan was established in 20102020 as an incentive plan for officers, employees, non-employee directors, prospective employees and other key persons. The 2020 Plan replaced the 2010 Amended and Restated Stock Option and Incentive Plan, as amended (the “2010 Plan”), which expired on November 17, 2020. The 2020 Plan is administered by the Board of Directors or the compensation committee, which is comprised of not less than two non-employee directors who are independent. A total of shares of stock were reserved and available for issuance under the 2020 Plan. The exercise price per share for the stock covered by a stock option granted shall be determined by the administrator at the time of grant but shall not be less than 100 percent of the fair market value on the date of grant. The term of each stock option shall be fixed by the administrator, but no stock option shall be exercisable more than ten years after the date the stock option is granted. As of March 31, 2022, there were approximately shares remaining for issuance under the 2020 Plan.
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 2010 Plan as of September 30, 2017.March 31, 2022. No options have been issued under the 2021 Plan.
| 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)
| Schedule of options by exercise price | ||||||||||||||||||||
| 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 | 2,000,000 | $ | 0.14 | 2,000,000 | $ | 0.14 | ||||||||||||||
| $0.16 - $0.30 | 1,323,552 | 0.18 | 1,310,573 | 0.18 | ||||||||||||||||
| 3,323,552 | $ | 0.16 | 3,310,573 | $ | 0.16 | |||||||||||||||
Transactions involving stock options issued to employees are summarized as follows:
| Schedule of option activity | ||||||||
| Number of Shares | Weighted Average Exercise Price Per Share | |||||||
| Outstanding at January 1, 2021 | 3,349,793 | $ | 0.16 | |||||
| Granted | 0 | 0 | ||||||
| Exercised | 0 | 0 | ||||||
| Cancelled or expired | 0 | 0 | ||||||
| Outstanding at December 31, 2021 | 3,349,793 | $ | 0.16 | |||||
| Granted | 0 | 0 | ||||||
| Exercised | 0 | 0 | ||||||
| Cancelled or expired | (26,241 | ) | 0.17 | |||||
| Outstanding at March 31, 2022 | 3,323,552 | $ | 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 | |||||
| 20 |
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 for the trailing period equal to the expected term prior to the date of the award. The Company bases the risk-free interest rate used in the Black-ScholesBlack 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 recordrecords share-based compensation for those awards that are expected to vest. In accordance with ASC 718-10, the Company adjustscalculates share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience.
There were 3,000,000 and zeroThe total estimated fair value of the options granted during both the quarters ended March 31, 2022 and zero2021 was $. The total fair value of underlying shares related to options exercisedthat vested during the nine monthsquarters ended September 30, 2017March 31, 2022 and 2016,2021 was $and $, respectively. The aggregate intrinsic value of the vested options was as of March 31, 2022 and 2021. During the quarters ended March 31, 2022 and 2021, options were granted, exercised, cancelled or expired. Total stock-based compensation expense in connection with options granted to employees recognized in the condensed consolidated statements of operations for both the threequarters ended March 31, 2022 and nine months ended September 30, 2017 and 20162021 was $2,343 and $2,703, respectively, and $320,545 and $10,204, respectively.$.
Warrants
The following table summarizes the changes in warrants outstanding and the related pricesexercise price for the shares of the Company’s common stock250,000 warrants issued to non-employees ofHeritage Bank in connection with 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)Credit Facility (see Note G) and the 105,380,666 warrants issued to VDA in connection with the VDA Transaction (see Note A).
Transactions involving warrants are summarized as follows:
| Schedule of warrants outstanding and exercisable | ||||||||||||||||
| Number of Shares | Weighted Average Price Per Share | Number of Shares | Weighted Average Exercise Price Per Share | |||||||||||||
| Outstanding at January 1, 2016 | 5,638,410 | $ | 0.20 | |||||||||||||
| Outstanding at January 1, 2021 | 250,000 | $ | 0.16 | |||||||||||||
| Issued | – | – | 0 | 0 | ||||||||||||
| Exercised | (5,211,542 | ) | 0.13 | 0 | 0 | |||||||||||
| Cancelled or expired | (126,868 | ) | 3.00 | (250,000 | ) | (0.16 | ) | |||||||||
| Outstanding at December 31, 2016 | 300,000 | 0.20 | ||||||||||||||
| Outstanding at December 31, 2021 | 0 | 0 | ||||||||||||||
| Issued | – | – | 105,380,666 | 0.06 | ||||||||||||
| Exercised | – | – | 0 | 0 | ||||||||||||
| Cancelled or expired | – | – | 0 | 0 | ||||||||||||
| Outstanding at September 30, 2017 | 300,000 | $ | 0.20 | |||||||||||||
| Outstanding at March 31, 2022 | 105,380,666 | $ | 0.06 | |||||||||||||
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 IJ – 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.STOCK ISSUANCE TO NON-EMPLOYEE DIRECTORS
During the nine monthsquarters ended September 30, 2017,March 31, 2022 and 2021, the Company issued common stock in the amountvalued at $ and $, and paid cash consideration of $108,000$236,333 and $15,000, respectively 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 The amount payable to directors at March 31, 2022 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 years2021 was $6,667 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.
$127,000, respectively.
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(UNAUDITED)
NOTE JK – COMMITMENTS AND CONTINGENCIES
Office LeaseLeases 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 was set to expire at the end of January 2017. In December 2016, the Company entered into a first amendment to the lease agreement extending the lease through the end of January 2018.
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 WaukeshaThis lease expires in May 2027.2024.
CommitmentsIn November 2021, the Company entered into a lease agreement for minimum rentals under non-cancelable425 square feet of commercial office space in Gaithersburg, Maryland. This lease expires on November 30, 2022.
The components of lease expense for the 3 months ended March 31 are as follows:
| Components of lease expense | ||||||||
| Operating lease expense: | 2022 | 2021 | ||||||
| Operating lease cost - fixed | $ | 49,024 | $ | 57,387 | ||||
| Variable lease cost | 31,912 | 30,137 | ||||||
| Total operating lease cost | $ | 80,936 | $ | 87,524 | ||||
Other information related to leases as of September 30, 2017 areMarch 31 is as follows:
| Other information related to leases | ||||||||
| 2022 | 2021 | |||||||
| Operating lease liability - current | $ | 145,409 | $ | 242,299 | ||||
| Operating lease liability - long-term | $ | 470,591 | $ | 592,341 | ||||
| Operating cash outflows from operating leases | $ | 38,843 | $ | 57,658 | ||||
| Weighted-average remaining lease term of operating leases | 3.9 years | 4.8 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 March 31, 2022 were as follows:
| Future annual minimum operating lease payments | ||||
| 2022 | $ | 143,077 | ||
| 2023 | 193,169 | |||
| 2024 | 172,425 | |||
| 2025 | 158,510 | |||
| 2026 and thereafter | 53,183 | |||
| Total minimum lease payments | 720,364 | |||
| Less imputed interest | (104,364 | ) | ||
| Total | $ | 616,000 |
Rental expenses charged to continuing operations for the three and nine3 months ended September 30, 2017March 31, 2022 and 2016 was $86,6492021 were $80,936 and $42,271 and $200,816 and $127,537,$87,524, respectively.
| 22 |
Employment and Consulting Agreements
The Company has employment agreements with certain of its key employees which include non-disclosure and confidentiality provisions for protection of the Company’s proprietary information.
Under the terms of a Consulting Agreement, Piercarlo Gramaglia will serve as Chief Executive Officer of the Company for a term of eighteen (18) months, unless earlier terminated pursuant to the terms of the Consulting Agreement. In exchange for his service as Chief Executive Officer, the Company will pay Mr. Gramaglia an annual fee of $30,000 and will pay his reasonable expenses associated with the performance of his duties as Chief Executive Officer.
Jeffrey J. Sobieski, Chief Technology Officer, is employed pursuant to an employment agreement with us effective January 7, 2022. Mr. Sobieski’s employment agreement has an initial term of one (1) year, which will automatically renew for a period of an additional twelve (12) months, and provides for a base salary of $211,625 per year and bonuses and benefits based upon the Company’s internal policies and participation in the Company’s incentive and benefit plans. Per the agreement, Mr. Sobieski is eligible to receive a bonus, not to exceed 15% of his base salary, should predetermined objectives be met.
Richard E. Mushrush, Chief Financial Officer, is employed pursuant to an employment agreement with us effective January 7, 2022. Mr. Mushrush’s employment agreement has an initial term of one (1) year, which will automatically renew for a period of an additional twelve (12) months, and provides for a base salary of $122,000 per year and bonuses and benefits based upon the Company’s internal policies and participation in the Company’s incentive and benefit plans. Per the agreement, Mr. Mushrush is eligible to receive a bonus, not to exceed 20% of his base salary, should predetermined objectives be met.
Under the terms of the severance agreement with Mr. Jason L. Tienor signed March 10, 2022 and filed with Form 8-K of that date, severance costs associated with this agreement of $222,800 have been accrued in the quarter ending March 31, 2022.
In addition to the foregoing, stock options are periodically granted to employees under the Company’s 2020 equity incentive plan at the discretion of the Compensation Committee of the Board of Directors. Executives of the Company are eligible to receive stock option grants, based upon individual performance and the performance of the Company as a whole.
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 TaxSipco Litigation and License Agreement
DuringThe company continues to fulfill its obligations of the 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 costly litigation.
The minimum payments required under the License Agreement have been accrued for on the Company’s 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 began on January 1, 2022 and continue until December 31, 2024, thus satisfying both criteria of probable and reasonably estimable. Accordingly, a long-term liability was recorded representing the sum of those contractual minimums. As of March 31, 2022, the Company had a current liability of approximately $140,000, which $41,940 is included in accounts payable and $133,060 in other accrued liabilities (See Note F – Current Accrued Liabilities for further breakdown of accrued liabilities), along with a non-current liability of $325,000 included in accrued royalties – long-term recorded on its Consolidated Balance Sheet.
Indemnification Agreements
On March 31, 2010, the Company entered into Indemnification Agreements with executives Jason L. Tienor, then President and Chief Executive Officer, and Jeffrey J. Sobieski, then Chief Operating Officer. On April 24, 2012, the Company engaged a sales tax consultant to assist in determining the extent of its potential sales tax exposure. Based upon this analysis, management determined the Company had probable exposure for certain unpaid obligations, including interest and penalty, of approximately $1,100,000 including and prior to the year ended December 31, 2011. The Company has approximately $72,000 and $275,000 accrued as of September 30, 2017 and December 31, 2016, respectively.
During the year ended December 31, 2016, the State of Wisconsin performed a sales and use tax audit covering the period fromentered into an Indemnification Agreement with director Tim S. Ledwick. On January 1, 2012 through December 31, 2015. The audit resulted in approximately $120,000 in additional use tax and interest. As of September 30, 2017, the Company paid in full the additional use tax liability and interest associatedentered into an Indemnification Agreement with the sales and use tax audit.
Chief Financial Officer Richard E. Mushrush.
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(UNAUDITED)The Indemnification Agreements provide that the Company will indemnify the Company's officers and directors, to the fullest extent permitted by law, relating to, resulting from or arising out of any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation by reason of the fact that such officer or director (i) is or was a director, officer, employee or agent of the Company or (ii) is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. In addition, the Indemnification Agreements provide that the Company will make an advance payment of expenses to any officer or director who has entered into an Indemnification Agreement, in order to cover a claim relating to any fact or occurrence arising from or relating to events or occurrences specified in this paragraph, subject to receipt of an undertaking by or on behalf of such officer or director to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company as authorized under the Indemnification Agreement.
Prior to 2017, the Company successfully executed and paid in full VDAs in thirty six states totaling approximately $765,000 and is current with the subsequent filing requirements.Sales Tax
The following table sets forth the change in the sales tax accrual as of September 30, 2017March 31, 2022 and December 31, 2016:2021:
| Schedule of sales tax accrual | |||||||||||||||||
September 30, 2017 | December 31, 2016 | March 31, 2022 | December 31, 2021 | ||||||||||||||
| Balance, beginning of year | $ | 274,869 | $ | 229,768 | $ | 16,634 | $ | 31,396 | |||||||||
| Sales tax collected | 235,091 | 452,016 | 39,513 | 85,589 | |||||||||||||
| Provisions (reversals) | (52,000 | ) | 151,000 | 2,646 | (7,685 | ) | |||||||||||
| Interest and penalties | - | (3,017 | ) | ||||||||||||||
| Payments | (385,629 | ) | (554,898 | ) | (38,627 | ) | (92,666 | ) | |||||||||
| Balance, end of period | $ | 72,331 | $ | 274,869 | $ | 20,166 | $ | 16,634 | |||||||||
NOTE KL – BUSINESS CONCENTRATION
For the ninethree months ended September 30, 2017 and 2016, no single customer representedMarch 31, 2022, three customers, each representing over 10% or moreof total net revenues, accounted for approximately 50% of total net revenues. As of September 30, 2017, one customerFor the three months ended March 31, 2021, two customers, accounted for approximately 25% of total net revenues.
As of March 31, 2022, there were three customers, each representing over 10% of the Company’s net accounts receivable, accounting for 52% of the Company’s net accounts receivable. As of December 31, 2016, two2021, there were five customers, accountedeach representing over 10% of the Company’s net accounts receivable, accounting for approximately 24%64% of the Company’s net accounts receivable.
PurchasesFor the three months ended March 31, 2022, purchases from one supplier approximated $2,122,000,two suppliers, accounted for approximately $892,000, or 86%95%, of total purchases and approximately $62,000, or 63%, of total purchases for the ninethree months ended September 30, 2017 and $1,907,000, or 77%, of purchases for the nine months ended September 30, 2016. TotalMarch 31, 2021. The amount due to thisone supplier, net of deposits paid, was approximately $525,858 $694,000 and $651,000 as of September 30, 2017,March 31, 2022 and $45,037 as of December 31, 2016.
NOTE L – DISCONTINUED OPERATIONS
In October of 2016, the Company, under the direction and authority of the Board of Directors, committed to a plan to offer for sale EthoStream, the Company’s wholly–owned High-Speed Internet Access (“HSIA”) subsidiary. As a result of this decision to sell EthoStream, the operating results of EthoStream as of and for 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 all 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, 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 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.
2021, respectively.
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,March 31, 2022, 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, 2016,2021, filed with the U.S.US. Securities and Exchange Commission (the “SEC”) on April 3, 2017.March 31, 2022.
Business
Telkonet, Inc. (the “Company”, “Telkonet”, “we”, “our”), formed in 1999 and incorporated under the laws of the state of Utah, is the creator of the EcoSmart Platform 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 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.
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 theThe 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 20172022 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 statementsPlease refer to Notes A & B contained 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 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.
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.
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.Part I.
New Accounting Pronouncements
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 | ||||||||||||||||||||||||
| March 31, 2022 | March 31, 2021 | Variance | ||||||||||||||||||||||
| Product | $ | 1,954,430 | 91% | $ | 1,107,864 | 86% | $ | 846,566 | 76% | |||||||||||||||
| Recurring | 196,275 | 9% | 186,345 | 14% | 9,930 | 5% | ||||||||||||||||||
| Total | $ | 2,150,705 | 100% | $ | 1,294,209 | 100% | $ | 856,496 | 66% | |||||||||||||||
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% | ||||||||||||||||
| 25 |
Product Revenue
Product revenue principally arises from the sale and installation of the EcoSmart energy management platform.platforms. The EcoSmart Suitesuite of products consists of thermostats, sensors, controllers, wireless networking products, switches, outlets and a control platform.
For the three months ended September 30, 2017,March 31, 2022, product revenuerevenues increased by 76% or $0.85 million when compared to the prior year. Hospitality revenues increased 40% or $0.5to $1.06 million, government revenues increased 132% to $0.28 million, education revenues increased 644% to $0.55 million while MDU revenues decreased 60% to $0.07 million and healthcare revenues decreased 100% to $0.00 million. Product revenues derived from value-added resellers and distribution partners were $1.42 million for the ninethree months ended September 30, 2017, product revenue decreased 10% or $0.6 million.March 31, 2022, an increase of 55% compared to the prior year period. The increase was primarily driven by three customers, partially offset by non-repeatable revenues in 2022 from four customers. For the three months ended September 30, 2017, the hospitality market comprised $1.3March 31, 2022, international revenues decreased 45% to $0.14 million of product sales for the three months ended September 30, 2017, a $0.1 million decrease fromwhen compared to the prior year period. The education market sales for the three months ended September 30, 2017 increased $0.3decrease in international revenues was primarily driven by non-repeatable revenues in 2022 from two customers.
Backlogs were approximately $3.2 million 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 from $3.1 million for the nine months ended September 30, 2016 to $2.8$2.6 million at September 30, 2017.March 31, 2022 and 2021, respectively. Beginning in the third quarter of 2021, 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 monthperiod 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,March 31, 2022, recurring revenue decreased by 8% and increased by 1%5% when compared to the prior year period. The increase was related to increased unit sales of call center support services.
Cost of Sales
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:
| Three Months Ended | ||||||||||||||||||||||||
| March 31, 2022 | March 31, 2021 | Variance | ||||||||||||||||||||||
| Product | $ | 1,132,900 | 58% | $ | 577,814 | 52% | $ | 555,087 | 96% | |||||||||||||||
| Recurring | 31,770 | 16% | 10,900 | 6% | 20,870 | 191% | ||||||||||||||||||
| Total | $ | 1,164,670 | 54% | $ | 588,714 | 45% | $ | 575,957 | 98% | |||||||||||||||
Costs of Product Revenue
Costs of product revenue include materials and installation labor related to Telkonet’s platform technologies. For the three months ended March 31, 2022, product costs increased $0.56 million compared to the prior year period based upon greater revenues. The variance was primarily attributable to increases in material costs of $0.47 million, inclusive of product surcharges of $0.24 million resulting from global chip shortages, supply chain challenges and inflationary pressures, logistical expenses of $0.08 million, inclusive of import tariffs, warranty expense of $0.02 million and the use of installation subcontractors of $0.13 million, partially offset by a decrease in inventory adjustments of $0.15 million. Material costs as a percentage of product revenues were 40%, respectively, whenan increase of 7%, compared to the prior year period.
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% | |||||||||||||||||
| 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% | |||||||||||||||||
Costs of Product Revenue
Costs of product revenue include equipment and installation labor related to EcoSmart technology. For the three and nine months ended September 30, 2017, product costs increased by 50% and 1%, respectively, compared to the prior year periods. For the three month comparison, the materials costs as a percentage of product sales increased 2% 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.
For the nine month comparison, the use of outside contractors for installations resulted in a $0.20 million decrease in salary, wages and travel expense. These decreases were offset by 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.
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,March 31, 2022, recurring revenue costs increased by 52% and 28%, respectively,191% when compared to the prior year periods.period. The three and nine month variances are the result of a $0.02 million and a $0.03 million increasevariance was primarily due to increases in salary and benefit costs for the period ended September 30, 2017. The Company added a support services supervisor.call center staffing.
| 26 |
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% | |||||||||||||||||
The table below outlines product versus recurring gross profit, along with respective actual gross profit percentages for the comparable periods:
| 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% | ||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||
| March 31, 2022 | March 31, 2021 | Variance | ||||||||||||||||||||||
| Product | $ | 821,530 | 42% | $ | 530,050 | 48% | $ | 291,479 | 55% | |||||||||||||||
| Recurring | 164,505 | 84% | 175,445 | 94% | (10,940 | ) | -6% | |||||||||||||||||
| Total | $ | 986,035 | 46% | $ | 705,495 | 55% | $ | 280,539 | 40% | |||||||||||||||
Gross Profit on Product Revenue
Gross profit on product revenues for the three and nine months ended September 30, 2017March 31, 2022 increased by 26% and decreased by 21%55%, respectively,or $0.29 million, 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%.period. The majority of the variance was dueprimarily attributable to an approximate increase in revenues of 20% for outside services. For$0.56 million and a decrease in inventory adjustments of $0.15 million, partially offset by increases in material costs of $0.47 million, inclusive of product surcharges of $0.24 million resulting from global chip shortages, supply chain challenges and inflationary pressures, logistical expenses of $0.08 million, inclusive of import tariffs, warranty expense of $0.02 million and the nine months ended September 30, 2017, the actual gross profit percentage declined to 44% from 50%.use of installation subcontractors of $0.13 million. Material costs as a percentage of sales increased 3% for the nine months ended September 30, 2017 whenproduct revenues were 40%, an increase of 7%, compared to the prior year period. The inventory valuation adjustment variance of $0.16 million duringFor the ninethree months ended September 30, 2017 whenMarch 31, 2022, the actual gross profit percentage decreased by 9% to 46% compared to the prior year period also contributed toperiod. Tariffs imposed on Chinese imports resulted in an adverse impact of approximately 5% on the actual gross profit decline.percentage for the three months ended March 31, 2022, compared to approximately 3% for the prior year period.
Gross Profit on Recurring Revenue
The grossGross profit associated withon recurring revenue decreased by 29% and 9%, respectively, for the three and nine months ended September 30, 2017March 31, 2022 decreased 6% when compared to the prior year periods. Forperiod.
Operating Expenses
The tables below outline operating expenses for the comparable periods, along with percentage change:
| Three Months Ended March 31, | ||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||
| Total | $ | 1,491,506 | $ | 1,535,791 | $ | (44,285 | ) | -3% | ||||||||
The Company’s operating expenses are comprised of research and development, selling, general and administrative expenses and depreciation and amortization expense. During the three months ended September 30, 2017, the actual gross profit percentageMarch 31, 2022, operating expense decreased 16%by 3% when compared to the prior year period.
Research and Development
| Three Months Ended March 31, | ||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||
| Total | $ | 269,240 | $ | 311,448 | $ | (42,208 | ) | (14 | )% | |||||||
Research and development costs are related to both present and future product development and integration and are expensed in the period from 74% to 58%. The primary reason was a manager was added toincurred. During the Company’s support department, increasing wages and benefits. For the ninethree months ended September 30, 2017, the actual gross profit percentageMarch 31, 2022, research and development costs decreased 7%14% when compared to the prior year period, from 73%period. The variance is primarily attributable to 66%.
Operating Expenses
| Three Months Ended September 30, | ||||||||||||||||||
| 2017 | 2016 | Variance | ||||||||||||||||
| Total | $ | 1,704,177 | $ | 1,870,493 | $ | (166,316 | ) | -9% | ||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||
| 2017 | 2016 | Variance | ||||||||||||||||
| Total | $ | 5,754,741 | $ | 6,357,622 | $ | (602,881 | ) | -9% | ||||||||||
decreases in payroll of $0.04 million and certification expenses of $0.01 million partially offset by an increase in third-party consultant expenses of $0.01 million.
| 27 |
During the three and nine months ended September 30, 2017, operating expenses decreased by 9% when compared to the prior year periods as outlined below.
Research and Development
| Three Months Ended September 30 | ||||||||||||||||||
| 2017 | 2016 | Variance | ||||||||||||||||
| Total | $ | 500,656 | $ | 429,622 | $ | 71,034 | 17% | |||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||
| 2017 | 2016 | Variance | ||||||||||||||||
| Total | $ | 1,323,669 | $ | 1,321,007 | $ | 2,662 | 0% | |||||||||||
Research and development costs are related to both present and future products 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, research and development costs increased by 17% and 0%, respectively, when compared to the prior year periods. For the three month comparison, the variance is due to an approximate $0.04 million increase in expenditures for consulting, a $0.01 increase in personnel recruiting and an increase of $0.02 million for salary and benefits. 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 offset 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.
Selling, General and Administrative Expenses
| Three Months Ended September 30, | ||||||||||||||||
| 2017 | 2016 | Variance | ||||||||||||||
| Total | $ | 1,188,905 | $ | 1,432,489 | $ | (243,584) | -17% | |||||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2017 | 2016 | Variance | ||||||||||||||
| Total | $ | 4,396,667 | $ | 5,012,249 | $ | (615,582) | -12% | |||||||||
| Three Months Ended March 31, | ||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||
| Total | $ | 1,212,813 | $ | 1,211,103 | $ | 1,710 | 0% | |||||||||
During the three and nine months ended September 30, 2017,March 31, 2022, selling, general and administrative expenses decreased overremained unchanged compared to the prior year periods by 17%period.
Operating Loss and 12%, respectively. ForNet Income (Loss)
During the three month comparison,months ended March 31, 2022, the Company had an operating loss of ($0.52) million, compared to an operating loss of ($0.83) million during the prior year period. The improvement was primarily due to incremental gross profit from additional revenue and a (3%) decrease in operating expenses.
During the three months ended March 31, 2022, the Company had net loss of ($0.52) million compared to net income of $0.08 million for the prior year period. The decrease in profitability was primarily due to the sale of EthoStream, the Company was able to decrease executive, accounting and sales salaries, wages and benefits by $0.20 million. A $0.07 million decrease was a resultnon-recurrence of a refund received from a utility. The Company had a $0.09$0.92 million decreasenon-cash gain on debt extinguishment in sales and use tax,connection with the result of a $0.10 million State of Wisconsin audit assessment during 2016 as well as a $0.06 million decrease in bad debt expense, the result 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.
For the nine month comparison, $0.29 millionfull forgiveness of the variance is attributed to the costs associated with the contested 2016 proxy contest as discussedFirst PPP Loan in detail in the June 30, 2017 Form 10-Q as well as an additional $0.10 million in public company fees in 2016. Due to the sale of EthoStream, the Company was able to decrease temporary staffing, executive, accounting and sales salaries, wages and benefits of $0.61 million, $0.11 million for sales and use tax, related to the State of Wisconsin audit discussed above, a utility refund of $0.07 million, $0.03 million for director fees, $0.04 million for insurance expense. These reductions in expense were offset by an increase in stock option expense of $0.31 million, marketing and trade show expenses of $0.14 million, rent expense of $0.07 million, commissions of $0.02 million and hardware/software costs of $0.05 million.
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 retainedperiod. This was partially offset by the Company will be adjustedimpact of increased revenues and a decrease in future periodsexpenses as these liability balances are paid.discussed above.
EBITDA from Continuing OperationsNon-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 amortizationstock-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 amortizationstock-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, 2017March 31, 2022 and 2016,2021, the Company excluded itemsbelieves it appropriate to exclude stock-based compensation given 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 following general category described below: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 year.
RECONCILIATION OF NET INCOME (LOSS)
TO ADJUSTED EBITDA
FOR THE THREE MONTHS ENDED MARCH 31,
| 2022 | 2021 | |||||||
| Net income (loss) | $ | (517,828 | ) | $ | 82,739 | |||
| Gain on debt extinguishment | – | (920,673 | ) | |||||
| Interest expense, net | 12,357 | 7,873 | ||||||
| Income tax (benefit) provision | – | (235 | ) | |||||
| Depreciation and amortization | 9,453 | 13,240 | ||||||
| EBITDA | (496,018 | ) | (817,056 | ) | ||||
| Adjustments: | ||||||||
| Stock-based compensation | 1,815 | 1,815 | ||||||
| Adjusted EBITDA | $ | (494,203 | ) | $ | (815,241 | ) | ||
RECONCILIATION OF NET LOSS FROM
CONTINUING OPERATIONS TO ADJUSTED EBITDA
(Unaudited)
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 | ) | ||||
Liquidity and Capital Resources
For the three-month period ended March 31, 2022, the Company reported a net loss of ($517,828) and had cash used in operating activities of ($1,515,209) and ended the period with an accumulated deficit of ($129,186,004) and total current assets in excess of current liabilities of $5,668,680. At March 31, 2022, the Company had $5,878,897 of cash and approximately $514,000 of availability on its Credit Facility.
Since inception through March 31, 2022, we have incurred cumulative losses of ($129,186,004) and have never generated enough cash through operations to support our business. 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.
The Company has financed its operations since inception primarily through privatetook and public offeringscontinues to take a number of actions to preserve cash. These actions ranged from suspending the use of engineering consultants, cancelling all non-essential travel, not filling certain vacancies and for certain periods, furloughing certain employees and pay cuts for certain other employees and suspension of the Company’s equity securities,401(k) match. Receipt of PPP monies helped the issuancecompany reinstate some of various debt instruments and asset based lending, andcuts made. With the salereceipt of assets.the First PPP Loan on April 17, 2020 (discussed below), the Company was able to lift some of these mandates in order to return necessary personnel for the Company’s ongoing operations.
In addition, on January 12, 2022, the Company closed on the VDA Transaction (see Note A), resulting in additional working capital of $5,000,000.
Loans under PPP
In addition to the actions noted above, on April 21, 2020, the Company entered into an unsecured promissory note, dated April 17, 2020, with Heritage Bank for a $913,063 loan under the PPP (“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, the outstanding principal and interest accrued on the First PPP Loan was fully forgiven.
On April 27, 2021, the Company entered into a second unsecured promissory note, dated as of April 26, 2021, for a second PPP loan (“the Second PPP Loan” and, together with the First PPP Loan, the “PPP Loans”), with Heritage Bank under a second draw of the PPP administered by the SBA and authorized by the Keeping American Workers Employed and Paid Act. 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.
Working Capital
Working capital (current assets in excess of current liabilities) from continuing operations increased by $9,840,658$4,459,318 during the ninethree months ended September 30, 2017March 31, 2022 from working capital deficit of $26,859$1,209,361 at December 31, 20162021 to a working capital of $9,813,799$ 5,668,679 at September 30, 2017.March 31, 2022. The increase in working capital was primarily due to the injection of funds from the $5 million common shares purchase.
Kross Promissory Note
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.
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 “Heritagethe 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 September 30, 2017both March 31, 2022 and 6.75% at December 31, 2016.2021. 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 expiresstock (which expired, on October 9, 2021.2021). On February 17, 2016, anNovember 6, 2019, the eleventh amendment to the Credit Facility was executed extendingto 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.
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On September 30, 2021, the Company entered into a twelfth amendment to the Heritage Bank Loan Agreement 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 Twelfth Amendment, Heritage Bank consented to the VDA Transaction (as described above under the “Business and Basis of Presentation” 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.
On December 13, 2021, the Company entered into a thirteenth amendment to the Heritage Bank Loan Amendment to extend the revolving maturity date to March 31, 2022, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement. In addition, the Heritage Bank Loan Amendment reduced the credit extension amount to $1,000,000 and reduced unrestricted cash maintained in the Company’s accounts at Bank to be at least $1,000,000.
On March 10, 2022, the Company entered into a fourteenth amendment to the Heritage Bank Loan Amendment to extend the revolving maturity date to June 30, 2023, unless earlier accelerated under the terms of the Heritage Bank 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 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, andare a minimum asset coverage ratio and a minimum unrestricted cash balance of $2 million (since reduced to $1 million), both of which are measured monthly.at the end of each month. A violation of anyeither 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 facilityCredit Facility was $79,953 as of September 30, 2017$436,136 and $403,089 at March 31, 2022 and December 31, 2021 and the remaining available borrowing capacity was approximately $1,304,000.$514,000 and $460,000, respectively. As of September 30, 2017,March 31, 2022, the Company was in compliance with all financial covenants.
On March 28, 2017, the Company and 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 consent to the sale transaction. Upon closing of the sale transaction on March 29, 2017, the entire balance outstanding on 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.
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.
Cash Flow Analysis
Cash used in continuing operations was $2,459,746$1,515,209 and $2,768,301$653,953, during the ninethree months ended September 30, 2017March 31, 2022 and 2016,2021, respectively. As of September 30, 2017,March 31, 2022, our primary capital needs included costs incurred to increase energy management sales, inventory procurement and managing current liabilities. The working capital changes during the ninethree months ended September 30, 2017March 31, 2022 were primarily related to an approximate $380,500a result of the $5 million received as a result of the VDA Transaction, a $955,000 increase in accounts receivable, a $305,000$249,000 increase in inventory,inventories, a $305,000 increase$242,000 reduction in accounts payable, partially offset by a $330,000 increase$398,000 decrease in deferred revenue andprepaid items, a $168,000$299,000 increase in accrued liabilities and expenses. The working capital changes during$33,000 from the nine months ended September 30, 2016 were primarily related to an approximately $469,000 decrease in accounts receivable, a $410,000 increase in inventory, a $535,000 decrease in accounts payable and a $300,000 increase in accrued liabilities and expenses.line of credit. Accounts receivable fluctuatesbalances 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 fluctuatesbalances fluctuate with changes in inventory levels, volume of inventory purchases, and negotiated supplier and vendor terms.
Cash provided by investing activities was $11,092,051 during the nine months ended September 30, 2017 and cash used in investing activities was $2,352 during the nine months ended September 30, 2016, respectively. During the nine months ended September 30, 2017, the cash provided by investing activities reflects the proceeds less adjustments associated with the sale 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 and cash provided by financing activities was $707,637 during the nine months ended September 30, 2017 and 2016, respectively. The Heritage Bank Loan Agreement for the Company’s line of credit includedthe 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.
We are working to manage 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.
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
Item 3. Quantitative and expanded Waukesha, Wisconsin lease requires furniture, shelving, computer equipment and peripherals to be used in the Company’s day-to-day operations.qualitative disclosures about market risk
Not applicable
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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 supervisionSecurities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and withreported within the participationtime 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, includingour disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2022. 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 ineffectivenot effective as of the endMarch 31, 2022 as a result of the period covered by this report.material weaknesses discussed below.
DuringManagement’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 monthsExchange 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, 2021 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, 2021 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.
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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 September 30, 2017,December 31, 2021, 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, 2021 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, 2021.
Changes in Internal Controls
Other than the material weaknesses discussed above, during the quarter ended March 31, 2022, there werehave been no changes in the Company’sour internal controlcontrols over financial reporting that have materially affected or are reasonably likely to materially affect the Company’sour internal controlcontrols over financial reporting.
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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 L – 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.
There have beenwere no material changes during the quarter to risk factors previouslythe 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 2021.
Item 1A2. Unrestricted sales of Form 10-K.equity securities and use of proceeds
None
Item 3. Defaults upon senior securities
None
Item 4. Mine safety disclosures
None
Item 5. Other information
None
| Exhibit Number | Description Of Document | |
| 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of | |
| 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Richard E. Mushrush | |
| 32.1 | Certification of | |
| 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 (embedded within the Inline XBRL document) |
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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: | By: | /s/ |
Chief Executive Officer (principal executive officer) | ||
| Date: | By: | /s/ Richard E. Mushrush |
Richard E. Mushrush Chief Financial Officer (principal financial officer) | ||
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