~~U.S.~~ UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, ~~D.C.~~DC 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, ~~2017~~2022

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

1934

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

______________

Commission file ~~number~~ number: 001-31972

TELKONET, INC.

(~~Exact name~~Name of ~~Registrant~~registrant as specified in its charter)

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


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

(414)302-2299

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

None

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx ☒ No¨ ☐

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

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

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

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

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

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of October ~~31, 2017 is 133,440,111.~~28, 2022, was 299,212,282.

TELKONET, INC.

FORM 10-Q ~~for the Nine Months Ended~~

September 30, ~~2017~~2022

Index

	Page

PART I. FINANCIAL INFORMATION	3

Item 1. Financial Statements	3

Condensed Consolidated Balance Sheets (Unaudited): September 30, ~~2017~~2022 and December 31, ~~2016~~2021	3

Condensed Consolidated ~~Statements~~Statement of Operations (Unaudited): Three and Nine Months Ended September 30, ~~2017~~2022 and ~~2016~~2021	4

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited): January 1 ~~2017~~ through September 30, ~~2017~~2022 and 2021	5

Condensed Consolidated Statements of Cash Flows (Unaudited): Nine Months Ended September 30, ~~2017~~2022 and ~~2016~~2021	6 7

Notes to Condensed Consolidated Financial Statements (Unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2325

Item ~~4. Controls~~3. Quantitative and ~~Procedures~~qualitative disclosures about market risk	3231

~~PART II. OTHER INFORMATION~~Item 4. Controls and Procedures	3331

~~Item 1. Legal Proceedings~~
PART II. OTHER INFORMATION	33

Item ~~1A. Risk Factors~~1. Legal Proceedings	33

Item 1A. Risk Factors	33

Item 2. Unrestricted sales of equity securities and use of proceeds	33

Item 3. Defaults upon senior securities	33

Item 4. Mine safety disclosures	33

Item 5. Other information	33

Item 6. Exhibits	33

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TELKONET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	September 30, 2017			December 31, 2016			September 30, 2022			December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	8,959,229		$	791,858		$	3,721,024		$	2,361,059
Restricted cash on deposit		800,000			–
Accounts receivable, net		1,769,221			1,403,772			1,939,676			1,010,554
Inventories		1,082,289			777,202
Prepaid expenses and other current assets		260,269			205,328
Current assets of discontinued operations		–			7,149,971
Inventories, net								1,408,442			825,559
Contract assets								27,579			266,014
Prepaid expenses								316,754			735,092
Total current assets		12,871,008			10,328,131			7,413,475			5,198,278

Property and equipment, net		318,767			143,907			137,879			84,201

Other assets:
Deposits		17,130			–			4,595			7,595
Operating lease right of use assets								474,831			570,512
Total other assets		17,130			–			479,426			578,107

Total Assets	$	13,206,905		$	10,472,038		$	8,030,780		$	5,860,586

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,137,632		$	765,617		$	628,604		$	1,865,535
Accrued liabilities and expenses		1,094,054			925,581
Related party payable		–			97,127
Accrued liabilities								898,538			718,721
Line of credit		79,953			1,062,129			–			403,089
Deferred revenues - current		444,110			184,793
Deferred lease liability – current		–			3,942
Customer deposits		215,576			165,830
Contract liabilities - current								940,056			800,965
Lease Liabilities - current								153,276			195,176
Income taxes payable		85,884			–			3,599			5,431
Deferred income taxes		–			933,433
Current liabilities of discontinued operations		–			869,604
Total current liabilities		3,057,209			5,008,056			2,624,073			3,988,917

Long-term liabilities:
Deferred revenue - long term		190,896			120,421
Deferred lease liability - long term		40,508			23,761
Lease liabilities								391,680			459,668
Contract liabilities - long term								79,301			140,265
Accrued royalties - long-term								255,000			360,000
Total long-term liabilities		231,404			144,182			725,981			959,933

Commitments and contingencies
Total liabilities								3,350,054			4,948,850

Stockholders’ Equity
Series A, par value $.001 per share; 215 shares issued, 185 shares outstanding at September 30, 2017 and December 31, 2016, preference in liquidation of $1,507,481 and $1,452,114 as of September 30, 2017 and December 31, 2016, respectively		1,340,566			1,340,566
Series B, par value $.001 per share; 538 shares issued, 52 shares outstanding at September 30, 2017 and December 31, 2016, preference in liquidation of $409,009 and $393,435 as of September 30, 2017 and December 31, 2016, respectively		362,059			362,059
Common stock, par value $.001 per share; 190,000,000 shares authorized; 133,440,111 and 132,774,475 shares issued and outstanding at September 30, 2017 and December 31, 2016 , respectively		133,440			132,774
Preferred Stock Series A, par value $.001 per share; 215 shares designated, 181 shares outstanding at September 30, 2022 and 185 outstanding at December 31, 2021, preference in liquidation of $1,837,198 and $1,822,450 as of September 30, 2022 and December 31, 2021, respectively.								1,310,765			1,340,566
Preferred Stock Series B, par value $.001 per share; 567 shares designated, 52 shares outstanding at September 30, 2022 and December 31, 2021, preference in liquidation of $513,179 and $497,605 as of September 30, 2022 and December 31, 2021 respectively.								362,059			362,059
Common Stock, par value $.001 per share; 475,000,000 shares authorized; 299,212,282 and 136,311,335 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively.								299,212			136,311
Additional paid-in-capital		127,383,314			126,955,435			132,583,520			127,740,976
Accumulated deficit		(119,301,087	)		(123,471,034	)		(129,874,830	)		(128,668,176	)
Total stockholders’ equity		9,918,292			5,319,800			4,680,726			911,736

Total Liabilities and Stockholders’ Equity	$	13,206,905		$	10,472,038		$	8,030,780		$	5,860,586

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


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2022			2021			2022			2021
Revenues, net:
Product Revenue	$	1,828,954		$	1,290,389		$	5,570,775		$	4,071,159
Recurring Revenue		188,380			163,679			535,634			532,607
Total Net Revenues		2,017,334			1,454,068			6,106,409			4,603,766

Cost of Sales:
Product COGS		1,371,312			851,873			3,049,048			2,164,586
Recurring COGS		32,952			13,646			94,027			36,868
Total Cost of Sales		1,404,264			865,519			3,143,075			2,201,454

Gross Profit		613,070			588,549			2,963,334			2,402,312

Operating Expenses:
Research and development		272,144			268,917			798,913			876,778
Selling, general and administrative		1,026,023			1,200,569			3,310,127			3,362,761
Depreciation and amortization		8,702			10,346			31,129			33,935
Total Operating Expenses		1,306,869			1,479,832			4,140,169			4,273,474

Operating Profit / (Loss)		(693,799	)		(891,283	)		(1,176,835	)		(1,871,162	)

Other Income / (Expenses):
Gain / (Loss) on Debt Extinguishment		–			916,107			–			1,836,780
Gain / (Loss) on Fixed Assets Disposal		(70	)		–			(526	)		–
Interest expense, net		(2,735	)		(7,584	)		(21,940	)		(19,286	)
Total Other Income / (Expenses):		(2,805	)		908,523			(22,466	)		1,817,494

Income (Loss) before Provision for Income Taxes		(696,604	)		17,240			(1,199,301	)		(53,668	)

Income Tax Provision /(Benefit)		968			–			7,353			1,948
Net Income (Loss)	$	(697,572	)	$	17,240		$	(1,206,654	)	$	(55,616	)

Net Income (Loss) per Common Share:
Basic – net income (loss) attributable to common stockholders	$	0.00			0.00			0.00			0.00
Diluted – net income (loss) attributable to common stockholders	$	0.00			0.00			0.00			0.00

Weighted Average Common Shares Outstanding – basic		299,212,282			136,311,335			295,592,261			136,311,335
Weighted Average Common Shares Outstanding – diluted		299,212,282			136,311,335			295,592,261			136,311,335

See accompanying notes to the unaudited condensed consolidated financial statements

TELKONET, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

~~NINE MONTHS FROM~~ JANUARY 1, ~~2017~~2021 THROUGH SEPTEMBER 30, ~~2017~~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 Stock		Common Stock		Additional Paid In Capital		Accumulated Deficit			Total Stockholders' 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

Stock-based compensation expense related to employee stock options		–		–		–		–		–		–		1,815		–			1,815

Net loss attributable to common stockholders		–		–		–		–		–		–		–		82,739			82,739

Balance at Mar 31, 2021		185		1,340,566		52		362,059		136,311,335		136,311		127,735,529		(128,172,652	)		1,401,813

Stock-based compensation expense related to employee stock options		–		–		–		–		–		–		1,816		–			1,816

Net loss attributable to common stockholders		–		–		–		–		–		–		–		(155,595	)		(155,595	)

Balance at June 30, 2021		185		1,340,566		52		362,059		136,311,335		136,311		127,737,345		(128,328,247	)		1,248,034

Stock-based compensation expense related to employee stock options		–		–		–		–		–		–		1,815		–			1,815

Net loss attributable to common stockholders		–		–		–		–		–		–		–		17,240			17,240

Balance at September 30, 2021		185	$	1,340,566		52	$	362,059		136,311,335	$	136,311	$	127,739,160	$	(128,311,007	)	$	1,267,089

TELKONET, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

JANUARY 1, 2022 THROUGH SEPTEMBER 30, 2022

	Series A Preferred Stock			Series A Preferred Stock			Series B Preferred Stock		Series B Preferred Stock		Common Stock		Common Stock		Additional Paid In Capital		Accumulated Deficit			Total Stockholders' 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

Shares cancelled per severance agreement		(4	)		(29,801	)		–		–		–		–		–		–			(29,801	)

Stock-based compensation expense related to employee stock options		–			–			–		–		–		–		1,815		–			1,815

Net 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

Stock-based compensation expense related to employee stock options		–			–			–		–		–		–		1,815		–			1,815

Net profit attributable to common stockholders		–			–			–		–		–		–		–		8,746			8,746

Balance at June 30, 2022		181			1,310,765			52		362,059		299,212,282		299,212		132,581,705		(129,177,258	)		5,376,483

Stock-based compensation expense related to employee stock options		–			–			–		–		–		–		1,815		–			1,815

Net profit attributable to common stockholders		–			–			–		–		–		–		–		(697,572	)		(697,572	)

Balance at September 30, 2022		181		$	1,310,765			52	$	362,059		299,212,282	$	299,212	$	132,583,520	$	(129,874,830	)	$	4,680,726

See accompanying notes to the unaudited condensed consolidated financial statements

TELKONET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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


	Nine Months Ended
	September 30
	2022			2021
Cash Flows from Operating Activities:
Net loss	$	(1,206,654	)	$	(55,616	)

Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation expense related to employee stock options		5,445			5,446
Depreciation and amortization		31,129			33,935
Loss / (gain) on fixed asset disposal		526			–
Noncash operating lease expense (ROU)		95,681			172,161
Gain on debt extinguishment		–			(1,836,780	)

Changes in operating assets and liabilities:
Accounts receivable, net		(929,122	)		6,758
Inventories, net		(582,883	)		533,648
Prepaid expenses		418,338			(474,370	)
Deposits		3,000			–
Accounts payable		(1,236,931	)		84,733
Accrued royalties - long-term		(105,000	)		(105,000	)
Accrued liabilities		179,817			235,124
Contract liabilities		78,127			232,825
Contract assets		238,435			(76,772	)
Operating lease liabilities		(109,888	)		(180,134	)
Accrued income tax payable		(1,832	)		7,509
Income taxes receivable		–			105,745
Net Cash Used In Operating Activities		(3,121,812	)		(1,310,788	)

Cash Flows From Investing Activities:
Payments for Property & Equipment		(86,633	)		–
Proceeds from sale of fixed assets		1,300			–
Net Cash Used in Investing Activities		(85,333	)		–

Cash Flows From Financing Activities:
Proceeds from Note Payable		–			913,063
Proceeds from stock and warrants issued in VDA Transaction		5,000,000			–
Repurchase of employee-owned Class A shares		(29,801	)		–
Proceeds from line of credit		4,434,152			5,357,000
Payments on line of credit		(4,837,241	)		(5,357,996	)
Net Cash Provided By Financing Activities		4,567,110			912,067

Net increase/(decrease) in cash and cash equivalents		1,359,965			(398,721	)
Cash and cash equivalents at the beginning of the period		2,361,059			3,011,811
Cash and cash equivalents at the end of the period	$	3,721,024		$	2,613,090

	Nine Months Ended
	September 30
Supplemental Disclosures of Cash Flow Information:	2022		2021
Cash transactions:
Cash paid during the period for interest	$	21,940	$	18,643

See accompanying notes to the unaudited condensed consolidated financial statements

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 –

~~See accompanying notes to the unaudited condensed consolidated financial statements~~

~~TELKONET, INC.~~

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2017~~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 unaudited condensed consolidated financial statements follows.

~~General~~Basis 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 ~~nine months ended September 30, 2017,~~interim periods presented 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, ~~2016~~2021 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC.

~~Business~~The condensed consolidated financial statements include the accounts of the Company and ~~Basis of Presentation~~its 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 ~~Platform~~and the Rhapsody Platforms of intelligent automation solutions designed to optimize energy efficiency, comfort and analytics in support of the emerging Internet of Things (“IoT”). 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 provides~~Platform. In 2020, the Company launched the Rhapsody Platform, which simplifies the installation and setup of the Company’s newest products and integrations. Both platforms provide comprehensive savings, management reporting, analytics and virtual engineering of a customer’s portfolio and/or property’s room-by-room energy consumption. Telkonet has deployed more than a half million intelligent devices worldwide in properties within the hospitality, ~~military,~~ educational, ~~healthcare~~governmental and other commercial markets. The ~~EcoSmart platform is rapidly being~~platforms are recognized as ~~a leading solution~~solutions for reducing energy consumption, operational costs and carbon footprints, and eliminating the need for new energy generation in these marketplaces – all ~~while~~whilst improving occupant comfort and convenience.

On ~~March 28, 2017,~~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 Agreement~~a stock purchase agreement (the “Purchase Agreement”) with ~~DCI-Design Communications LLC~~VDA Group S.p.A., an Italian joint stock company (“~~DCI”~~VDA”), ~~a Delaware limited liability company, whereby DCI~~pursuant to which VDA would, ~~acquire all of~~at 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, pursuant~~Agreement), contribute $5 million to Telkonet (the “Financing”) and, in exchange, Telkonet would issue to VDA (the “Issuance”): (i) 162,900,947 shares of the ~~terms~~Company’s common stock; and (ii) a warrant to purchase 105,380,666 additional shares of the Company’s common stock (the “Warrant”) (the Issuance and the ~~conditions of~~Financing referred to collectively herein as the ~~Purchase Agreement, the Company closed~~“VDA Transaction”). The Closing occurred on ~~the sale. The income from discontinued operations (net of tax) represents the activity of EthoStream from~~ January 1, 2017 through the date of the sale on March 28, 2017. The gain from sale of discontinued operations (net of tax) represents the gain recognized from the EthoStream selling price that was in excess of the assets sold to DCI and liabilities assumed by DCI on March 28, 2017. On September 27, 2017, the Company reached a final settlement with DCI on net working capital as set forth in the Purchase Agreement. On September 29, 2017, the Company received $100,000 from the escrow account for the portion of the escrow account set aside for net working capital adjustments and cash proceeds of $311,000 from DCI in the settlement of net working capital adjustments. The net working capital receivable of $93,000 in other current assets was applied against the cash proceeds of $311,000 received on September 29, 2017 resulting in a gain from sale of discontinued operations of $218,000 recognized during the three months ended September 30, 2017.7, 2022.

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~)Following the issuance of 162,900,947 shares of the Company’s common stock to VDA upon the Closing, VDA owns 53% of the issued and outstanding common stock on a fully diluted as exercised/converted basis, resulting in a change of control of the 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 ~~condensed consolidated~~Company has elected not to apply pushdown accounting adjustments to the Company’s financial statements ~~include~~related to the ~~accounts~~change in control as allowed by Accounting Standards Update No. 2014-17.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and ~~its wholly-owned subsidiaries, Telkonet Communications, Inc., and EthoStream. The current and prior period accounts of Ethostream have been classified as discontinued operations on~~assumptions 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 information~~amounts reported in the consolidated financial ~~statement footnotes reflect~~statements and accompanying notes. On an ongoing basis, the ~~Company’s~~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 ~~continuing operations.~~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 Form 10-K filed with the SEC for a more in-depth analysis of such policies.

~~Liquidity~~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, as follows:

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 ~~Financial Condition~~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 contracts do not contain such mutual termination rights for convenience. All contracts are in written form.

ii)

Identify the performance obligations

The Company will enter into product only contracts that contain a single performance obligation related to the transfer of products to a customer.

The Company ~~reported~~will 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 for~~solution 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 terms~~functionality 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 for~~has determined that the ~~quarters ended September 30, 2017 or December 31, 2017, the Company will be deemed to be~~product 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.

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

~~On March 28, 2017, the Company and EthoStream, entered into the Purchase Agreement with DCI whereby DCI acquired all of the assets and certain liabilities of EthoStream for~~also offers post-installation support services to customers. Support services are considered a base purchase price of $12,750,000, subject to an adjustment based on the net working capital of EthoStream on the closing date of the sale transaction. The Company’s liquidity for the remainder of 2017 remains strong due to the net proceeds received from 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 with the sale of the Company’s wholly-owned subsidiary, EthoStream. The escrow amount, net of potential claims, would be fully released after an escrow period not to exceed 12 months from the transaction closing on March 29, 2017. On September 29, 2017, the Company received $100,000 from the escrow account for the portion of the escrow account set aside for net working capital adjustments.separate performance obligation.

iii)

Determine the transaction price

~~TELKONET, INC.~~The Company generally enters into contracts containing fixed prices. It is not customary for the Company to include contract terms that would result in variable consideration. In the rare situation that a contract does include this type of provision, it is not expected to result in a material adjustment to the transaction price. The Company regularly extends pricing discounts; however, they are negotiated up front and adjust the fixed transaction price set out in the contract.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~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.

~~(UNAUDITED~~

iv)

Allocate the transaction price to the performance obligations

Revenues from customer contracts are allocated to the separate performance obligations based on their relative stand-alone selling price (“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 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.

All 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.

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.

~~Income (Loss) per Common Share~~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 Condensed Consolidated Balance Sheet.

Advertising

The Company atfollows the ~~average market price~~policy of charging the ~~common shares for~~costs of advertising to expenses as incurred. The Company incurred $0 and $2,751 in advertising costs during the ~~year. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company's outstanding stock options~~three months ended September 30, 2022 and ~~warrants. For~~2021, respectively. During the nine months ended September 30, ~~2017~~2022 and ~~2016, there were 5,621,800~~2021, the Company incurred $3,402 and ~~2,240,225 shares of common stock underlying options and warrants excluded due to these instruments being anti-dilutive,~~$5,725 in advertising costs, respectively.

~~Use of Estimates~~

Research and Development

The ~~preparation~~Company accounts for research and development costs in accordance with the ASC 730-10, “Research and Development”. Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. Total expenditures on research and product development for the three months ended September 30, 2022 and 2021 were $272,144 and $268,917, respectively. Total expenditures on research and product development for the nine months ended September 30, 2022 and 2021 were $798,913 and $876,778, respectively.

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 States~~past 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 ~~accepted~~greater than 30 days past due date. The delinquent account designation does not trigger an accounting ~~principles (“GAAP”) requires management to make certain estimates, judgments~~transaction until such time the account is deemed uncollectible. The allowance for doubtful accounts is determined by examining the reserve history and ~~assumptions~~any outstanding invoices that ~~affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date~~are over 30 days past due as of the ~~financial statements, and the reported amounts~~end of ~~revenues and expenses during~~ the reporting period. ~~Estimates~~Accounts are ~~used when accounting for items~~deemed 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 uncollectible~~payment 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 available~~only 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.

Product warranties for the nine months ended September 30, 2022 and the year ended December 31, 2021 are as follows:

Schedule of product warranty accrual
	September 30, 2022			December 31, 2021
Beginning balance	$	46,650		$	45,328
Warranty claims incurred		(5,296	)		(16,075	)
Provision charged (credited) to expense		(770	)		17,397
Ending balance	$	40,584		$	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 ~~adopted~~follows ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10-25 also provides guidance on ~~derecognition,~~de-recognition, classification, treatment of interest and penalties, and disclosure of such positions.

~~Revenue Recognition~~Stock Based Compensation

~~For revenue from product sales, the Company recognizes revenue~~We account for our stock based awards in accordance with ASC ~~605-10, “Revenue Recognition”~~718, which requires a fair value measurement and ~~ASC 605-10-S99 guidelines that require that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence~~recognition of ~~an arrangement exists; (2) delivery has occurred; (3)~~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 ~~selling price is fixed~~fair value of stock options granted using the Black-Scholes valuation model. This model requires us to make estimates and ~~determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments~~assumptions including, among other things, estimates regarding the ~~fixed nature~~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 ~~selling prices~~awards, which is generally the vesting period. Changes in these estimates and assumptions can materially affect the determination of the ~~products delivered~~fair value of stock-based compensation 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 periodconsequently, the related ~~sales are recorded. The guidelines also address the accounting for arrangements that may involve the delivery or performance~~amount recognized in our consolidated statements of ~~multiple products, services and/or rights to use assets.~~operations.

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~Income (Loss) per Common Share)

~~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.

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

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

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

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~~computes earnings per share under ASC 260-10, “Earnings per Share.” Basic net income (loss) per common share is computed using the weighted average shares outstanding. Diluted net income (loss) per common share is computed using the treasury stock method, which assumes that the proceeds to ~~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~~be received on exercise of outstanding stock options and warrants are used to repurchase shares of the ~~contract. The prices for these services are fixed and determinable prior to delivery~~Company at the average market price 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 deferralscommon shares 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 asyear. Dilutive common stock equivalents consist of shares issuable upon the exercise of the ~~end of the period. As of September 30, 2017~~Company's outstanding stock options and ~~December 31, 2016, there was $68,855 and $193,400 recorded within accounts receivable, respectively, related to revenue recognized that has not yet been billed.~~

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~)

~~Guarantees and Product Warranties~~

The Company records a liability for potential warranty claims in cost of sales at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. The products sold are generally covered by a warranty for a period of one year. In the event the Company determines that its current or future product repair and replacement costs exceed its estimates, an adjustment to these reserves would be charged to earnings in the period such determination is made.warrants. For the ~~nine~~three months ended September 30, ~~2017~~2022, there were 105,380,666 and ~~the year ended December 31, 2016, the Company experienced returns of approximately 1.0% to 2.5% of materials~~2,626,847 warrants and options outstanding, respectively. Comparable amounts for September 30, 2021 were 250,000 and 3,349,793 warrants and options outstanding, respectively. These amounts are not included in dilutive income (loss) per share as 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.~~impact would be anti-dilutive.

~~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~~Net income / (loss) attributable 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.common shareholders:

~~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 obligation 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.

Schedule of earnings per share
	Three Months Ended						Nine Months Ended
	September 30						September 30
	2022			2021			2022			2021
Net Income / (Loss)	$	(697,572	)	$	17,240		$	(1,206,654	)	$	(55,616	)
Less cumulative dividends earned on Preferred stock		(23,505	)		(23,505	)		(69,743	)		(69,743	)
Net loss attributable to common shareholders	$	(721,077	)	$	(6,265	)	$	(1,276,397	)	$	(125,359	)

Shares used in the calculation of diluted EPS are summarized below:

Schedule of weighted average diluted shares
	Three Months Ended				Nine Months Ended
	September 30				September 30
	2022		2021		2022		2021
Weighted average common shares outstanding - basic	$	299,212,282	$	136,311,335	$	295,592,261	$	136,311,335
Dilutive effect of stock options		–		–		–		–
Weighted average common shares outstanding - diluted	$	299,212,282	$	136,311,335	$	295,592,261	$	136,311,335

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~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 assets exceeds its fair value.

~~In February 2016,~~Sales Tax

Unless provided with a resale or tax exemption certificate, the ~~FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”).~~Company assesses and collects sales tax on sales transactions and records the amount as a liability. It is recognized as a liability until remitted to the applicable state. Total revenues do not include sales tax as the Company is considered a pass through conduit for collecting and remitting sales taxes.

Concentrations of Credit Risk

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The ~~new standard establishes~~Company 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) model~~consequence, 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 ~~requires~~would be received upon sale of an asset or paid upon transfer of a ~~lessee~~liability 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 ~~record a ROU asset~~the level of pricing observability. Financial assets and ~~a lease liability~~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 balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern 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 beginningprice transparency of the ~~earliest comparative period presented in~~asset, liability or market and the ~~financial statements, with certain practical expedients available.~~nature of the asset or liability. The Company ~~is currently evaluating~~categorizes financial assets and liabilities that are recurring, at fair value into a three-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 ~~impact~~short maturity of ~~its pending adoption~~these instruments (Level 1 instruments), except for the line of ~~ASU 2016-02 on its consolidated financial statements. Upon adoption,~~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 ~~expects that the ROU asset and 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

similar obligations (Level 2 instruments).

Leases

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

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

~~NOTE E~~Operating leases are included in our Condensed Consolidated Balance Sheets as operating lease right-of-use assets, lease liabilities – ~~DEBT~~current and 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.

~~Kross Promissory Note~~Impact of COVID-19 Pandemic

The Company’s operations and financial results continue to be negatively impacted by the COVID-19 pandemic and its successive variants. 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 workforce’s ability to deliver our products and services could well be impacted. Management continues to monitor the impact of the global situation on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce. We expect this disruption to continue to have a material adverse impact on our results of operations, financial condition, cash flows, and liquidity.

Capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that the COVID-19 pandemic could cause a local, national and/or global economic recession. Policymakers around the globe have responded with fiscal policy actions to support the economy as a whole, but it is presently unknown whether and to what extent further fiscal actions will continue. The magnitude and overall effectiveness of these actions remain uncertain.

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, 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. Despite STR and Tourism Economics’ upgraded recovery timeline for domestic hospitality’s revenue per available room (RevPAR), when adjusted for inflation, RevPAR will still likely remain below 2019 levels until at least 2024. Though topline continues to improve, labor will be the biggest challenge for hoteliers’ profitability moving forward ².

________________________

¹O’Conner, Stefani C. “Industry’s recovery heats up-slowly.” Hotelbusiness.com January 2022:8A

² Fox, Jena Tesse “STR, TE expect full U.S. RevPAR recovery to occur in 2022.” Hotelbusiness.com July 2022:11

NOTE B – NEW ACCOUNTING PRONOUNCEMENTS

~~On August 4,~~In June 2016, the ~~Board~~FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of ~~Directors authorized~~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 September 30, 2022.

Disaggregation of revenues
	Hospitality		Education		Multiple Dwelling Units		Government		Healthcare		Total
Product Revenue	$	1,441,286	$	319,115	$	98	$	68,455	$	0	$	1,828,954
Recurring Revenue		165,540		22,840		0		0		0		188,380
	$	1,606,826	$	341,955	$	98	$	68,455	$	0	$	2,017,334
% of Total		80%		17%		0%		3%		0%		100%

The following table presents the Company’s product and recurring revenues disaggregated by industry for the nine months ended September 30, 2022.

	Hospitality		Education		Multiple Dwelling Units		Government		Healthcare		Total
Product Revenue	$	3,921,615	$	1,233,998	$	73,552	$	341,247	$	363	$	5,570,775
Recurring Revenue		460,037		75,597		0		0		0		535,634
	$	4,381,652	$	1,309,595	$	73,552	$	341,247	$	363	$	6,106,409
% of Total		72%		21%		1%		6%		0%		100%

The following table presents the Company’s product and recurring revenues disaggregated by industry for the three months ended September 30, 2021.

	Hospitality		Education		Multiple Dwelling Units		Government		Healthcare		Total
Product Revenue	$	1,195,394	$	39,577	$	33,728	$	21,690	$	0	$	1,290,389
Recurring Revenue		96,211		67,468		–		–		–		163,679
	$	1,291,605	$	107,045	$	33,728	$	21,690	$	0	$	1,454,068
% of Total		89%		8%		2%		1%		0%		100%

The following table presents the Company’s product and recurring revenues disaggregated by industry for the nine months ended September 30, 2021.

	Hospitality		Education		Multiple Dwelling Units		Government		Healthcare		Total
Product Revenue	$	3,463,056	$	123,975	$	290,936	$	144,997	$	48,195	$	4,071,159
Recurring Revenue		408,604		97,542		26,461		0		0		532,607
	$	3,871,660	$	221,517	$	317,397	$	144,997	$	48,195	$	4,603,766
% of Total		84%		5%		7%		3%		1%		100%

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

Remaining performance obligations

As of September 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $0.7 million. Except for support services, the Company expects to ~~reimburse Peter T. Kross (“Mr. Kross”) $161,075 for expenses incurred~~recognize 100% of the remaining performance obligations over the next six months.

Contract assets and liabilities

Contract Assets and Liabilities
	September 30, 2022		December 31, 2021
Contract assets	$	27,579	$	266,014
Contract liabilities - current		940,056		800,965

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 September 30, 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 Sheets.

The Company incurs incremental costs to obtain a contract in the form of sales commissions. These costs, whether related to ~~his successful contested proxy. Effective June 27, 2016, Mr. Kross became a director~~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 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 Noteaccounts receivable as of September 30, ~~2017~~2022 and December 31, ~~2016 was zero and $97,127, respectively.~~2021 are as follows:

Schedule of accounts receivable
	September 30, 2022			December 31, 2021
Accounts receivable	$	2,001,844		$	1,016,117
Allowance for doubtful account		(62,168	)		(5,563	)
Accounts receivable, net	$	1,939,676		$	1,010,554

NOTE E – INVENTORIES

Components of inventories as of September 30, 2022 and December 31, 2021 are as follows:

Schedule of components of inventories
	September 30, 2022			December 31, 2021
Product purchased for resale	$	1,551,676		$	1,269,056
Inventory - In Transit		235,000			–
Inventory - Obsolescence Reserve		(378,234	)		(443,497	)
Inventory, net	$	1,408,442		$	825,559

NOTE F – CURRENT ACCRUED LIABILITIES

Current accrued liabilities at September 30, 2022 and December 31, 2021 are as follows:

Schedule of accrued liabilities and expenses
	September 30, 2022		December 31, 2021
Accrued payroll and payroll taxes	$	244,255	$	242,131
Accrued inventory in transit		157,263		–
Accrued professional fees		118,453		136,584
Accrued sales taxes, penalties and interest		35,087		16,634
Product warranties		40,584		46,650
Other accrued liabilities		302,896		276,722
Total current accrued liabilities	$	898,538	$	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 ~~Heritage Bank Loan Agreement~~Credit Facility is secured by all of the Company’s assets. The Credit Facility 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~~9.25% on September 30, ~~2017~~2022 and ~~6.75% at~~6.25% 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 ~~has~~had an exercise price of ~~$0.20~~$0.20 and ~~expires~~ expired October 9, ~~2021.~~2021. On ~~February 17, 2016,~~November 6, 2019, the Company entered into an eleventh amendment to the ~~Credit Facility was executed extending~~Heritage Bank Loan Agreement to extend the revolving maturity date to September 30, ~~2018,~~2021, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement, and eliminate the maximum EBITDA loss covenant. The Eleventh Amendment was effective as of September 30, 2019.

On September 30, 2021, the Company entered into a twelfth amendment to the Heritage Bank Loan Agreement (the “Twelfth Amendment”) to extend the revolving maturity date to December 31, 2021, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement. In addition, subject to certain conditions as specified in the 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 Agreement (the “Thirteenth 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 Thirteenth Amendment reduced the credit extension amount to $1,000,000 and reduced unrestricted cash maintained in the Company’s accounts at Heritage Bank to be at least $1,000,000, rather than $2,000,000.

On March 10, 2022, the Company entered into a fourteenth amendment to the Heritage Bank Loan Agreement 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 ~~contain~~contains financial covenants. As discussed above, the EBITDA loss covenant was eliminated in the Eleventh Amendment. 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 ~~any~~either of these covenants could result in an event of default under the Heritage Bank Loan Agreement. Upon the occurrence of such an event of default or certain other customary events of defaults, payment of any outstanding amounts under the Credit Facility may be accelerated and Heritage Bank’s commitment to extend credit under the Heritage Bank Loan Agreement may be terminated. The Heritage Bank Loan Agreement contains other representations and warranties, covenants, and other provisions customary to transactions of this nature.

The outstanding balance on the Credit Facility was $0 and $403,089 at September 30, 2022 and December 31, 2021 respectively, and the remaining available borrowing capacity was approximately $1,000,000 and $460,000, respectively. As of September 30, ~~2017,~~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.

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 would acquire all of the assets and certain liabilities of EthoStream. Heritage Bank had 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, 2017~~an amendment to the Credit Facility was executedamending the quarterly and year to date EBITDA compliance measurements for 2017.~~

1418

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~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 ~~August 29, 2017,~~April 17, 2020, the Company entered into an ~~amendment~~unsecured promissory note for $913,063 (“the First PPP Loan”). In January 2021, the Company applied for forgiveness of the amount due on the First PPP Loan. On February 16, 2021, Heritage Bank confirmed that the First PPP Loan granted to the ~~Credit Facility~~Company, in the original principal amount of $913,063 plus accrued interest of $7,610 thereon, was forgiven in full.

On April 27, 2021, the Company entered into an unsecured promissory note, dated as of April 26, 2021, for a second PPP loan (“the Second PPP Loan” and together with the First PPP Loan, the “PPP Loans”), with Heritage Bank ~~was executed to amend certain terms~~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 ~~Agreement allowing for~~granted 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 forth~~Company, 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 to~~The total amount forgiven in 2021 for principal and accrued interest under the ~~revolving credit facility with Heritage Bank~~PPP 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$1,836,780 and is shown 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~~a gain on debt extinguishment.

NOTE H – CAPITAL STOCK

Series A

The Company has designated 215 shares of preferred stock as Series A Preferred Stock (“Series A”). Each share of Series A is convertible, at the option of the holder thereof, at any time, into shares of the Company’s common stock at a conversion price of ~~$0.363~~$0.363 per share. On November 16, 2009, the Company sold 215 shares of Series A with attached warrants to purchase an aggregate of 1,628,800 shares of the Company’s common stock at ~~$0.33~~$0.33 per share. The Series A shares were sold at a price per share of $5,000 and each Series A share is convertible into approximately 13,774 shares of common stock at a conversion price of $0.363 per share. The Company received ~~$1,075,000~~$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 A shares were repurchased per the terms of a separation agreement with Jason L. Tienor, former President and Chief Executive Officer.

Series B

The Company has designated ~~538~~567 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 267 shares of Series B with attached warrants to purchase an aggregate of 5,134,626 shares of the Company’s common stock at ~~$0.13~~$0.13 per share. The Series B shares were sold at a price per share of $5,000 and each Series B share was convertible into approximately 38,461 shares of common stock at a conversion price of ~~$0.13~~$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 38,461 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, 486 of the preferred shares issued on August 4, 2010 and April 8, 2011 were converted to shares of the Company’s common stock. In a prior year, the redemption feature available to the Series B holders expired.

Preferred stock carries certain preference rights as detailed in the Company’s Amended Articles of Incorporation related to both the payment of dividends and as to payments upon liquidation in preference to any other class or series of capital stock of the Company. As of September 30, ~~2017,~~2022, the liquidation preference of the preferred stock is based on the following order: first, Series B with a preference value of ~~$409,009,~~$513,179, which includes cumulative accrued unpaid dividends of ~~$149,009,~~$253,179, and second, Series A with a preference value of ~~$1,507,481,~~$1,837,198, 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.$932,198.

1519

~~TELKONET, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~)

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 ~~2010~~2020 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 10,000,000 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 September 30, 2022, there were approximately 10,000,000 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.~~2022. No options have been issued under the 2020 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 Life		Weighted Average Exercise Price	Number Exercisable		Weighted Average Exercise Price
$.01-$0.15	2,000,000	2.38	$	0.14	2,000,000	$	0.14
$.16-$0.20	626,847	0.98	$	0.18	626,847	$	0.18
	2,626,847	2.05	$	0.16	2,626,847	$	0.16

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

Schedule of option activity
	2022								2021
	Number of Shares			Weighted Average Exercise Price		Value			Number of Shares		Weighted Average Exercise Price		Value
Balance Jan 1		3,349,793		$	0.16	$	535,967			3,349,793	$	0.16	$	535,967
Granted		–			–		–			–		–		–
Cancelled, Expired		(26,241	)		0.17		(4,461	)		–		–		–
Exercised		–			–		–			–		–		–
Balance March 31		3,323,552			0.16		531,506			3,349,793		0.16		535,967
Granted		–			–		–			–		–		–
Cancelled, Expired		(541,149	)		0.16		(86,584	)		–		–		–
Exercised		–			–		–			–		–		–
Balance June 30		2,782,403			0.16		444,922			3,349,793		0.16		535,967
Granted		–			–		–			–		–		–
Cancelled, Expired		(155,556	)		0.18		(28,000	)		–		–		–
Exercised		–			–		–			–		–		–
Balance Sep 30		2,626,847		$	0.16	$	416,922			3,349,793	$	0.16	$	535,967

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

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

~~There~~During the quarter and nine months ended September 30, 2022 no options were ~~3,000,000~~granted or exercised and ~~zero~~during the quarter and nine months ended September 30, 2021, no options were granted, exercised, cancelled or expired.

Total stock-based compensation expense for the quarter ended September 30, 2022 and ~~zero options exercised during~~2021 was $1,815 and $1,815 respectively. Total stock-based compensation expense for the nine months ended September 30, ~~2017~~2022 and ~~2016, respectively. Total stock-based compensation expense in connection with options granted to employees recognized in the condensed consolidated statements of operations for the three~~2021 was $5,445 and ~~nine months ended September 30, 2017 and 2016 was $2,343 and $2,703, respectively, and $320,545 and $10,204,~~$5,446 respectively.

Warrants

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

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

Schedule of warrants outstanding and exercisable
	Number of Shares			Weighted Average Price / Share
Outstanding at January 1, 2021		250,000		$	0.16
Granted		–			–
Exercised		–			–
Cancelled or Expired		(250,000	)		0.16
Outstanding at December 31, 2021		–		$	–
Granted		105,380,666			0.06
Exercised		–			–
Cancelled or Expired		–			–
Outstanding at March 31, 2022		105,380,666		$	0.06
Granted		–			–
Exercised		–			–
Cancelled or Expired		–			–
Outstanding at June 30, 2022		105,380,666		$	0.06
Granted		–			–
Exercised		–			–
Cancelled or Expired		–			–
Outstanding at September 30, 2022		105,380,666		$	0.06

1721

~~TELKONET, INC.~~

~~NOTES~~NOTE J – STOCK ISSUANCE TO ~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2017~~

~~(UNAUDITED~~NON-EMPLOYEE DIRECTORS)

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

Number of
Shares Weighted Average
Price Per Share
Outstanding at January 1, 2016 5,638,410 $ 0.20
Issued – –
Exercised (5,211,542 ) 0.13
Cancelled or expired (126,868 ) 3.00
Outstanding at December 31, 2016 300,000 0.20
Issued – –
Exercised – –
Cancelled or expired – –
Outstanding at September 30, 2017 300,000 $ 0.20
~~There were no warrants granted, exercised, cancelled or forfeited during~~During the ~~nine months~~quarters ended September 30, ~~2017~~2022 and ~~no warrants granted, 5,211,542 warrants exercised and 126,868 cancelled or forfeited during the nine months ended September 30, 2016, respectively.~~
~~NOTE I – RELATED PARTY TRANSACTIONS~~
~~On August 4, 2016, the Board of Directors authorized~~2021, the Company issued no common stock 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.
its non-employee directors. During the nine months ended September 30, ~~2017,~~2022 and 2021, the Company issued common stock ~~in the amount of $108,000~~valued at $0 and $18,000 to ~~the Company’s~~its non-employee ~~directors as compensation for their attendance and participation in the Company’s Board of Director and committee meetings.~~
On July 1, 2016, each newly elected Board of Director member, Mr. Kross, Mr. Blatt and Mr. Byrnes were granted 100,000 stock options pursuant to the Company’s Board of Director compensation plan. These options have an expiration period of ten years, vest quarterly over five years and have an exercise price of $0.19.
Upon execution of their employment agreements during the nine months ended September 30, 2017, each of Messrs. Tienor, Sobieski and Koch, were granted 1,000,000 stock options at fair market value and all were scheduled to vest over a three year period. However, pursuant to the terms of the employment agreements, the stock options vested immediately upon the sale of the Company’s subsidiary, EthoStream, in March 2017.
~~During the nine months ended September 30, 2017, Messrs. Tienor, Sobieski and Koch, earned a bonus of $29,250 contingent on the sale and sale price amount of Ethostream.~~
From time to time the Company may receive advances from certain of its officers in the form of salary deferment or cash advances to meet short term working capital needs. These advances may not have formal repayment terms or arrangements. As of September 30, 2017 and December 31, 2016, there were no such arrangements.
18
~~TELKONET, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~SEPTEMBER 30, 2017~~
~~(UNAUDITED~~)
~~NOTE J – COMMITMENTS AND CONTINGENCIES~~directors.

~~Office Lease Obligations~~NOTE K – COMMITMENTS AND CONTINGENCIES

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.~~30, 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. 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 Waukesha~~This lease expires inon May ~~2027.~~31, 2024.

~~Commitments~~In November 2021, the Company entered into a lease agreement for ~~minimum rentals under non-cancelable leases as~~425 square feet of ~~September~~commercial office space in Gaithersburg, Maryland. This lease expires on November 30, ~~2017 are as follows:~~2022.

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
~~Rental expenses charged to continuing operations~~The components of lease expense for the three and nine months ended September 30 ~~2017~~are as follows:
Components of lease expense
Three Months Ended Nine Months Ended
September 30 September 30
2022 2021 2022 2021
Operating lease cost - fixed $ 49,947 $ 57,387 $ 146,236 $ 172,161
Variable lease cost 25,933 30,213 88,952 91,688
Total operating lease cost $ 75,880 $ 87,600 $ 235,188 $ 263,849
Other information related to leases as of September 30 is as follows:
Other information related to leases

September 30,
2022

December 31,
2021

Operating lease liability - current $ 153,276 $ 195,176
Operating lease liability - long term 391,680 459,668
Operating cash flows from operating leases 109,888 242,305

Weighted-average remaining lease term of operating leases 3.2 years 4.1 years
Weighted-average discount rate of operating leases 8.5% 8.5%
22
Future annual minimum operating lease payments as of September 30, 2022 were as follows:
Future annual minimum operating lease payments
2022 (excluding the months already reported upon) $ 47,771
2023 193,169
2024 172,424
2025 158,510
2026 53,185
2027 and thereafter –
Total minimum lease payments 625,059
Less imputed interest (80,103 )
Total $ 544,956
Rental expenses charged to operations for the 3 months ended September 30, 2022 and ~~2016 was $86,649~~2021 were $75,880 and ~~$42,271~~$87,600, respectively. Rental expenses charged to operations for the 9 months ended September 30, 2022 and ~~$200,816~~2021 were $235,188, and ~~$127,537,~~$263,849, respectively.

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 dated January 7, 2022, 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.
John M. Srouji, Chief Sales & Operations Officer, is employed pursuant to an employment agreement with us effective August 16, 2022 and expiring on May 31, 2026. The term of the employment agreement will automatically renew for an additional twelve months. Mr. Srouji will receive a base salary of $300,000 per year and bonuses and benefits based on the Company's internal policies and on participation in the Company's incentive and benefit plans. Mr. Srouji will have a guaranteed 2022 bonus of $25,000 with the potential of an additional $20,000 should the Company achieve specified targets.
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.
In addition to the foregoing, stock options may be 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.
23
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 litigation discussed below, which has been dismissed, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.

~~Sales Tax~~Sipco Litigation and License Agreement

~~During~~The Company continues to fulfill its obligations under the Wireless Network Patent License Agreement (the “License Agreement”) between SIPCO, LLC (“Sipco”) and IPCO, LLC dba IntusIQ (collectively, the “Licensors”) and the Company, dated November 30, 2020. The parties entered into the License Agreement in connection with the settlement of a lawsuit filed by Sipco as disclosed in more detail in the Company’s previously filed reports.
The minimum payments required under the License Agreement have been accrued for on the Company’s Condensed Consolidated Balance Sheets 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 September 2022, the Company had a current liability of approximately $196,724, which $56,724 is included in accounts payable and $140,000 in other accrued liabilities (See Note F – Current Accrued Liabilities for further breakdown of accrued liabilities), along with a non-current liability of $255,000 included in accrued royalties – long-term recorded on its Condensed Consolidated Balance Sheets.
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 from~~entered 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 associated~~entered into an Indemnification Agreement with ~~the sales and use tax audit~~.Chief Financial Officer Richard E. Mushrush.

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.

19
~~TELKONET, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~SEPTEMBER 30, 2017~~
~~(UNAUDITED~~Sales Tax)
~~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.~~

The following table sets forth the change in the sales tax accrual as of September 30, ~~2017~~2022 and December 31, ~~2016:~~2021:
Schedule of sales tax accrual

September 30,
2022

December 31,
2021

Beginning balance $ 16,634 $ 31,396
Sales tax collected 122,460 85,589
Provisions (reversals) 8,231 (7,685 )
Payments (112,238 ) (92,666 )
Ending balance $ 35,087 $ 16,634

September 30,
2017
December 31, 2016
Balance, beginning of year $ 274,869 $ 229,768
Sales tax collected 235,091 452,016
Provisions (reversals) (52,000 ) 151,000
Interest and penalties - (3,017 )
Payments (385,629 ) (554,898 )
Balance, end of period $ 72,331 $ 274,869
24

NOTE KL – BUSINESS CONCENTRATION

For the nine months ended September 30, ~~2017 and 2016, no single customer represented 10% or more~~2022, two customers, each representing over 15% of total net revenues, accounted for approximately 36% of total net revenues. ~~As of~~For the nine months ended September 30, ~~2017,~~2021, one customer accounted for approximately ~~10%~~21% of total net revenues.
As of September 30, 2022, one customer accounted for approximately 30% of the Company’s net accounts receivable. As of December 31, ~~2016, two~~2021, there were five customers, ~~accounted~~each representing over 10% of the Company’s net accounts receivable, accounting for ~~approximately 24%~~64% of the Company’s net accounts receivable.

~~Purchases from one supplier approximated $2,122,000, or 86%, of purchases for~~For the nine months ended September 30, ~~2017 and $1,907,000, or 77%,~~2022, purchases from two suppliers, accounted for approximately 95% of ~~purchases for the nine months ended September 30, 2016. Total~~total purchases.
The amount due to ~~this~~one supplier, net of deposits paid, was approximately ~~$525,858~~$46,000 and $134,000 as of September 30, ~~2017,~~2022 and ~~$45,037 as of~~ December 31, ~~2016.~~2021, respectively.

~~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.
20
~~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
21
~~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.



2225

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 unaudited condensed consolidated financial statements and related notes thereto for the three ~~and~~or nine months ended September 30, ~~2017,~~2022, as applicable, 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 the Company is focusing its sales efforts in areas with available public funding and incentives, such as rebate programs offered by utilities for efficiency upgrades. Through the Company’s proprietary platform, 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~~this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may contain certain forward-looking statements regarding strategic growth initiatives, growth opportunities and management’s expectations regarding orders and financial results for the remainder of ~~2017~~2022 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.

Business
The Company, formed in 1999 and incorporated under the laws of the state of Utah, is the creator of the EcoSmart and the Rhapsody Platforms of intelligent automation solutions designed to optimize energy efficiency, comfort and analytics in support of the emerging Internet of Things (“IoT”). 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.
The Company’s direct sales effort targets the hospitality, education, commercial, utility and government/military markets. The Company is focusing its sales efforts in areas with available public funding and incentives, such as rebate programs offered by utilities for efficiency upgrades. Through the Company’s proprietary 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.
Critical Accounting Policies and Estimates and New Accounting Pronouncements

~~The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company~~Please refer 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.Notes A & B under Item 1 – Financial Statements.

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~~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.
VSOE – In most instances, products are sold separately in stand-alone arrangements. Services are also sold separately through renewals of contracts with varying periods. The Company determines VSOE based on pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or stand-alone prices for the service element(s).
TPE – If the Company cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, the Company uses third-party evidence of selling price. The Company determines TPE based on sales of a comparable amount of similar product or service offered by multiple third parties considering the degree of customization and similarity of product or service sold.
ESP – The estimated selling price represents the price at which the Company would sell a product or service if it were sold on a stand-alone basis. When neither VSOE nor TPE exists for all elements, the Company determines ESP for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on the Company’s pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining ESP.
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.
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The Company provides call center support services to properties installed by the Company. The Company receives monthly service fees from such properties for its services. The Company recognizes the service fee ratably over the term of the contract. The prices for these services are fixed and determinable prior to delivery of the service. The fair value of these services is known due to objective and reliable evidence from standalone executed contracts.  The Company reports such revenues as recurring revenues. Deferred revenue includes deferrals for the monthly support service fees. Long-term deferred revenue represents support service fees to be earned or provided beginning after September 30, 2018. Revenue recognized that has not yet been billed to a customer results in an asset as of the end of the period. As of September 30, 2017 and December 31, 2016, there was $68,855 and $193,400 recorded within accounts receivable, respectively, related to revenue recognized that has not yet been billed.
~~New Accounting Pronouncements~~
For information regarding recent accounting pronouncements and their effect on the Company, see “New Accounting Pronouncements” in Note B of the Notes to Unaudited Condensed Consolidated Financial Statements contained herein.
Revenues

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

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

Product $ 1,904,571 94% $ 1,360,887 90% $ 543,684 40%
Recurring 131,665 6% 143,028 10% (11,363 ) -8%
Total $ 2,036,326 100% $ 1,503,915 100% $ 532,321 35%
Three Months Ended
September 30, 2022 September 30, 2021 Variance

Product $ 1,828,954 91% $ 1,290,389 89% $ 538,565 42%
Recurring 188,380 9% 163,679 11% 24,701 15%
Total $ 2,017,334 100% $ 1,454,068 100% $ 563,265 39%

Nine Months Ended

September 30, 2017 September 30, 2016 Variance

Product $ 5,728,878 94% $ 6,356,437 95% $ (627,559 ) -10%
Recurring 344,708 6% 340,412 5% 4,296 1%
Total $ 6,073,586 100% $ 6,696,849 100% $ (623,263 ) -9%
Nine Months Ended
September 30, 2022 September 30, 2021 Variance

Product $ 5,570,775 91% $ 4,071,159 88% $ 1,499,616 37%
Recurring 535,634 9% 532,607 12% 3,027 1%
Total $ 6,106,409 100% $ 4,603,766 100% 4 1,502,643 33%
Product Revenue
Product revenue principally arises from the sale and installation of ~~the EcoSmart~~ energy management ~~platform.~~platforms. The ~~EcoSmart Suite~~suite of products consists of thermostats, sensors, controllers, wireless networking products, switches, outlets and a control platform.

For the three months ended September 30, ~~2017,~~2022, product ~~revenue~~revenues increased ~~by 40%~~42% or ~~$0.5~~$0.54 million when compared to the prior year. Hospitality revenues increased 21% to $1.44 million, educational revenues increased 706% to $0.32 million and ~~for~~governmental revenues increased 216% to $0.07 million, while MDU revenues decreased 100% to $0.00 million and healthcare revenues were unchanged at $0.00 million. Product revenues derived from channel partners increased 55% to $1.43 million compared to the prior year period. The increase was primarily driven by increased volumes from three existing customers in the hospitality market, partially offset by a decrease in volume from one existing customer. International revenues increased 228% to $0.22 million. The increase in international revenues was primarily driven by increased volumes from one existing customer in the hospitality market.
For the nine months ended September 30, ~~2017,~~2022, product ~~revenue~~revenues increased 37% or $1.50 million when compared to the prior year.
Hospitality revenues increased 13% to $3.92 million, governmental revenues increased 135% to $0.34 million and educational revenues increased 895% to $1.23 million, while MDU revenues decreased ~~10% or $0.6~~75% to $0.07 million and healthcare revenues decreased 100% to $0.00 million. ~~For the three months ended September 30, 2017, the hospitality market comprised $1.3~~Product revenues derived from channel partners increased 32% to $4.26 million ~~of product sales for the three months ended September 30, 2017, a $0.1 million decrease from~~compared to the prior year period. The ~~education market sales for~~increase was primarily driven by increased volumes from two existing customers in the ~~three months ended September 30, 2017~~hospitality and educational markets, partially offset by volume decreases from one existing customer. International revenues increased ~~$0.3~~6% to $0.49 million when compared to ~~$0.4 million from $0.1 million for~~ the prior year period. The ~~Multiple Dwelling Unit (“MDU”) market increased $0.2~~increase in international revenues was not primarily driven by any specific customer.
Backlogs were approximately $3.3 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~~ million at September 30, ~~2017.~~2022 and 2021, respectively.
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Recurring Revenue
Recurring revenue ~~is attributed to our call center~~consists of Telkonet’s service and support ~~services.~~programs for its energy management platforms. The Company recognizes revenue ratably over the service ~~month~~period for monthly support revenues and defers revenue for annual support services over the term of the service period. ~~Recurring revenue consists of Telkonet’s EcoCare service and support program.~~

For the three and nine months ended September 30, ~~2017,~~2022, recurring revenue ~~decreased~~increased by 8%15% and ~~increased by~~ 1%, respectively, when compared to the prior year ~~period.~~periods. The increase was related to increased unit sales of call center support services.

Cost of Sales

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

Product $ 1,160,019 61% $ 770,830 57% $ 389,189 50%
Recurring 55,702 42% 36,618 26% 19,084 52%
Total $ 1,215,721 60% $ 807,448 54% $ 408,273 51%
The table below outlines product versus recurring cost of sales, along with respective amounts of those costs as a percentage of revenue for the comparable periods:

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

Product $ 3,233,978 56% $ 3,194,094 50% $ 39,884 1%
Recurring 118,347 34% 92,324 27% 26,023 28%
Total $ 3,352,325 55% $ 3,286,418 49% $ 65,907 2%
Three Months Ended
September 30, 2022 September 30, 2021 Variance

Product $ 1,371,312 75% $ 851,873 66% $ 519,439 61%
Recurring 32,952 17% 13,646 8% 19,306 141%
Total $ 1,404,264 70% $ 865,519 60% $ 538,745 62%
Nine Months Ended
September 30, 2022 September 30, 2021 Variance

Product $ 3,049,048 55% $ 2,164,586 53% $ 884,462 41%
Recurring 94,027 18% 36,868 7% 57,159 155%
Total $ 3,143,075 51% $ 2,201,454 48% $ 941,621 43%

Costs of Product Revenue

Costs of product revenue include ~~equipment~~materials and installation labor related to ~~EcoSmart technology.~~Telkonet’s platform technologies. For the three and nine months ended September 30, ~~2017,~~2022, product costs increased ~~by 50%~~61% and 1%41%, respectively, compared to the prior year ~~periods. For the three month comparison, the materials~~period.
The quarterly variance was primarily attributable to increases in material costs of $0.31 million resulting from increased product revenues, logistical expenses of $0.04 million, inclusive of import tariffs and a purchase price variance of $0.19 million, resulting from global chip shortages, supply chain challenges and inflationary pressures. Material costs as a percentage of product ~~sales~~revenues were 75%, an increase of 9%, compared to the prior year period.
The quarterly variance was primarily attributable to increases in material costs of $0.31 million resulting from increased ~~2% to 45% for the three month ended September 30, 2017 from 43% for the three months ended September 30, 2016. The cost~~product revenues, logistical expenses of ~~materials increased $0.15 million, freight and warranty expense increased~~ $0.04 million, inclusive of import tariffs and ~~inventory adjustments increased $0.08 million. For the three months ended September 30, 2017, the Company’s increased use~~a purchase price variance of ~~outside contractors for installations resulted in a~~ $0.19 million, ~~variance in contractor services~~resulting from global chip shortages, supply chain challenges and inflationary pressures. Material costs ~~consequently, salary, benefits and travel costs related~~as a percentage of product revenues were 75%, an increase of 9%, compared to ~~installations decreased by $0.07 million.~~the prior year period.

For the nine month comparison, the variance was primarily attributable to increases in material costs of $0.54 million resulting from increased product revenues, logistical expenses of $0.13 million, a purchase price variance of $0.23 million, resulting from global chip shortages, supply chain challenges and inflationary pressures, and the use of ~~outside contractors for installations resulted in a $0.20~~installation subcontractors of $0.19 million, partially offset by decrease in ~~salary, wages and travel expense. These decreases~~inventory adjustments of $0.26 million. Material costs as a percentage of product revenues were ~~offset by a $0.16 million adjustment in inventory costs, a $0.03 million~~55%, an 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.~~of 2%, compared to the prior year period.

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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 both the three and nine months ended September 30, ~~2017,~~2022, recurring revenue costs increased by ~~52%~~141% and ~~28%~~155%, respectively, 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 increase~~variance 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.

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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
September 30, 2022 September 30, 2021 Variance

Product $ 457,642 25% $ 438,516 34% $ 19,126 4%
Recurring 155,428 83% 150,033 92% 5,395 4%
Total $ 613,070 30% $ 588,549 40% $ 24,521 4%

Nine Months Ended
September 30, 2022 September 30, 2021 Variance

Product $ 2,521,727 45% $ 1,906,573 47% $ 615,154 32%
Recurring 441,607 82% 495,739 93% (54,132 -11%
Total $ 2,963,334 49% $ 2,402,312 52% $ 561,022 23%
Gross Profit on Product Revenue
Gross profit ~~for~~on product revenue is influenced by pricing, revenue volume and the ~~three and nine months ended September 30, 2017 increased by 26% and decreased by 21%, respectively, when compared to the prior year periods. For~~composition of those revenues.
Gross profit on product revenue for the three months ended September 30, 2017, the actual gross profit percentage declined to 39% from 43%. The majority of the variance was due to an approximate increase of 20% for outside services. For the nine months ended September 30, 2017, the actual gross profit percentage declined to 44% from 50%. Material costs as a percentage of sales2022 increased ~~3% for the nine months ended September 30, 2017~~4% or $0.02 million when compared to the prior year period. The ~~inventory valuation adjustment~~increase in gross profit was primarily attributable to an increase in revenues of $0.54 million and a decrease in the use of installation subcontractors of $0.06 million, partially offset by increases in logistical expenses of $0.04 million, inclusive of import tariffs and a purchase price variance of ~~$0.16~~$0.19 million, ~~during~~resulting from global chip shortages, supply chain challenges and inflationary pressures. For the three months ended September 30, 2022, the actual gross profit percentage decreased by 9 points to 25% compared to the prior year period. Tariffs imposed on Chinese imports resulted in an adverse impact of approximately 5% on the actual gross profit percentage for the three months ended September 30, 2022, compared to approximately 8% for the prior year period. Tariffs will fluctuate based upon volume of goods imported, which is contingent upon expected inventory supply and demand.
Gross profit on product revenue for the nine months ended September 30, ~~2017~~2022 increased 32% or $0.61 million when compared to the prior year ~~period also contributed to~~period. The increase in gross profit ~~decline.~~was primarily attributable to an increase in revenues of $1.50 million and a decrease in inventory adjustments of $0.26 million, partially offset by increases in material costs of $0.54 million resulting from increased product revenues, logistical expenses of $0.13 million, a purchase price variance of $0.23 million, resulting from global chip shortages, supply chain challenges and inflationary pressures and the use of installation subcontractors of $0.19 million. For the nine months ended September 30, 2022, the actual gross profit percentage decreased by 2 points to 45% compared to the prior year period. Tariffs imposed on Chinese imports resulted in an adverse impact of approximately 4% on the actual gross profit percentage for the nine months ended September 30, 2022 and September 30, 2021.
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Gross Profit on Recurring Revenue

~~The gross~~Gross profit ~~associated with~~on recurring revenue ~~decreased by 29% and 9%, respectively,~~ for the three and nine months ended September 30, ~~2017~~2022 increased by 4% and decreased by 11% respectively, when compared to the prior year ~~periods. For the three months ended September 30, 2017, the actual gross profit percentage decreased 16% compared~~period. Variances were primarily due to ~~the prior year period, from 74% to 58%. The primary reason was a manager was added to the Company’s~~fluctuating unit sales of call center support ~~department, increasing wages~~services and ~~benefits. For the nine months ended September 30, 2017, the actual gross profit percentage decreased 7% compared to the prior year period, from 73% to 66%.~~increases in call center staffing.

Operating Expenses

Three Months Ended September 30,
2017 2016 Variance

Total $ 1,704,177 $ 1,870,493 $ (166,316 ) -9%
The tables below outline operating expenses for the comparable periods, along with percentage change:

Nine Months Ended September 30,
2017 2016 Variance

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

September 30,
2022

September 30,
2021
Variance
$ 1,306,869 $ 1,479,832 $ (172,963 ) -12%
Nine Months Ended

September 30,
2022

September 30,
2021
Variance
$ 4,140,169 $ 4,273,474 $ (133,305 ) -3%

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The Company’s operating expenses are comprised of research and development, selling, general and administrative expenses and depreciation and amortization expense. During the three and nine months ended September 30, ~~2017,~~2022, operating expenses decreased by 9%12% and 3%, respectively, when compared to the prior year ~~periods as outlined~~period for the reasons discussed below.

Research and Development
Three Months Ended September 30
2017 2016 Variance

Total $ 500,656 $ 429,622 $ 71,034 17%
Three Months Ended

September 30,
2022

September 30,
2021
Variance
$ 272,144 $ 268,917 $ 3,227 1%

Nine Months Ended September 30,
2017 2016 Variance

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

September 30,
2022

September 30,
2021
Variance
$ 798,913 $ 876,778 $ (77,865 ) -9%

Research and development costs are related to both present and future ~~products~~product development and integration and are expensed in the period incurred. ~~Current research and development costs are associated with product development and integration.~~ During the three and nine months ended September 30, ~~2017,~~2022, research and development costs increased ~~by 17%~~1% and 0%decreased 9%, 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.~~not primarily driven by any specific expense. 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~~variance is primarily attributable to decreases in payroll 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.$0.09 million.
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Selling, General and Administrative Expenses

Three Months Ended September 30,
2017 2016 Variance

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

September 30,
2022

September 30,
2021
Variance
$ 1,026,023 $ 1,200,569 (174,546 ) -15%

Nine Months Ended September 30,
2017 2016 Variance

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

September 30,
2022

September 30,
2021
Variance
$ 3,310,127 $ 3,362,761 (52,634 ) -2%

During the three and nine months ended September 30, ~~2017,~~2022, selling, general and administrative expenses decreased 15% and 2%, respectively, over the prior year ~~periods by 17% and 12%, respectively.~~ periods.
For the three month comparison, ~~due~~the variance is primarily attributable to ~~the sale~~decreases in a trade show expenses 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 result of a refund received from a utility. The Company had a $0.09 million ~~decrease~~and legal fees of $0.20 million, partially offset by increases in ~~sales and use~~payroll taxes of $0.10 million. The payroll tax increase was primarily the result of a ~~$0.10 million State of Wisconsin audit assessment~~non-recurring Employee Retention Credit (“ERC”) in 2021, allowed under the CARES Act, which is a refundable payroll tax credit that encouraged businesses to keep employees on the payroll 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.COVID-19 pandemic.

For the nine month comparison, ~~$0.29 million of~~ the variance is ~~attributed~~primarily attributable to decreases in legal fees of $0.48 million, audit fees of $0.10 million and consulting fees of $0.06 million, partially offset by increases in payroll taxes of $0.42 million, recruiting fees of $0.10 million and staffing, payroll of $0.08 million. The payroll tax increase was primarily the result of a non-recurring Employee Retention Credit (“ERC”) in 2021, allowed under the CARES Act, which is a refundable payroll tax credit that encouraged businesses to keep employees on the payroll during the COVID-19 pandemic.
Operating Income (Loss)
During the three and nine months ended September 30, 2022, the Company had operating losses of $0.69 million and $1.18 million, respectively, compared to operating losses of $0.89 million and $1.87 million, respectively, during the prior year periods.
The three month operating loss improvement is primarily due to the ~~costs associated~~increase in gross profit and reduction in SG&A expenses. The nine month operating loss improvement is again primarily due to the increase in gross profit and a reduction in operating expenses as discussed above.
Net Income (Loss)
During the three and nine months ended September 30, 2022, the Company had net losses of $0.70 million and $1.21 million, respectively, compared to net income of $0.02 million and a net loss of $0.06 million, respectively during the prior year periods.
The three month decrease in net income is primarily due to a $0.92 million non-cash gain on debt extinguishment in connection with the ~~contested 2016 proxy contest as discussed in detail~~full forgiveness of the second PPP Loan 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 wereprior year period, partially offset by an increase in ~~stock option expense~~gross profit and reduction in operating expenses.
The nine month increase in net losses is primarily due to a $1.84 million non-cash gain on debt extinguishment in connection with the full forgiveness of ~~$0.31 million, marketing~~the First and ~~trade show expenses of $0.14 million, rent expense of $0.07 million, commissions of $0.02 million~~Second PPP Loans in the prior year period, partially offset by an increase in gross profit and ~~hardware/software costs of $0.05 million.~~reduction in operating expenses.

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~~Income from Discontinued Operations, Net of Tax~~
Three Months Ended September 30,
2017 2016 Variance

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

Nine Months Ended September 30,

2017 2016 Variance

Total $ 602,060 $ 2,050,998 $ (1,448,938) -71%
Income from discontinued operations decreased $0.79 million or 99% and $1.45 million or 71% for the three and nine months ended September 30, 2017 over the prior year periods. On March 29, 2017, pursuant to the terms and the conditions of the Purchase Agreement, the Company closed on the sale of EthoStream. The income from discontinued operations (net of tax) represents the activity of EthoStream from January 1, 2017 through the date of the sale on March 28, 2017. After March 28, 2017, certain liabilities retained by the Company will be adjusted in future periods as these liability balances are paid.
~~EBITDA from Continuing Operations~~Non-GAAP Financial Measures

Management believes that certain non-GAAP financial measures may be useful to investors in certain instances to provide additional meaningful comparisons between current results and results in prior operating periods. Adjusted earnings before interest, taxes, depreciation, amortization and ~~amortization~~stock-based compensation (“Adjusted EBITDA”) is a metric used by management and frequently used by the financial community. Adjusted EBITDA provides insight into an organization’s operating trends and facilitates comparisons between peer companies, since interest, taxes, depreciation, amortization and ~~amortization~~stock-based compensation can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA is one of the measures used for determining our debt covenant compliance. Adjusted EBITDA excludes certain items that are unusual in nature or not comparable from period to period. While management believes that non-GAAP measurements are useful supplemental information, such adjusted results are not intended to replace our GAAP financial results. Adjusted EBITDA is not, and should not be considered, an alternative to net income (loss), operating income (loss) ~~from operations,~~, or any other measure for determining operating performance ofor liquidity, as determined under accounting principles generally accepted in the United States (GAAP). In assessing the overall health of its business for the three ~~and nine~~ months ended September 30, ~~2017~~2022 and ~~2016,~~2021, the Company ~~excluded items~~believes 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.

· Stock-based compensation: The Company believes that because of the variety of equity awards used by companies, varying methodologies for determining stock-based compensation and the assumptions and estimates involved in those determinations, the exclusion of non-cash stock-based compensation enhances the ability of management and investors to understand the impact of non-cash stock-based compensation on our operating results. Further, the Company believes that excluding stock-based compensation expense allows for a more transparent comparison of its financial results to the previous period.
· Bonuses paid to executives upon sale of discontinued operations: The Company does not consider the bonuses of $87,750 associated with the sale of EthoStream to be indicative of current or future operating performance. Therefore, the Company does not consider the inclusion of these costs helpful in assessing its current financial performance compared to the previous year.
RECONCILIATION OF NET LOSS
TO ADJUSTED EBITDA
Three Months Ended Nine Months Ended
September 30 September 30
2022 2021 2022 2021

Net Income (loss) $ (697,572 ) $ 17,240 $ (1,206,654 ) $ (55,616 )
Gain on debt extinguishment – (916,107 ) – (1,836,780 )
Gain / (Loss on sale of asset 70 – 526 –
Interest expense, net 2,735 7,584 21,940 19,286
Income tax provision 968 – 7,353 1,948
Depreciation and amortization 8,702 10,346 31,129 33,935
EBITDA (685,097 ) (880,937 ) (1,145,706 ) (1,837,227 )

Adjustments:
Stock-based compensation 1,815 1,815 5,445 5,446
Adjusted EBITDA $ (683,282 ) $ (879,122 ) $ (1,140,261 ) $ (1,831,781 )

2932

~~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 September 30, 2022, the Company reported a net loss of ($697,572), had cash used in operating activities of ($3,121,812) and ended the period with an accumulated deficit of ($129,874,830) and total current assets in excess of current liabilities of $4,789,402. At September 30, 2022, the Company had $3,721,024 of cash and $1,000,000 of availability on the Credit Facility.
Since inception through September 30, 2022, we have incurred cumulative losses of ($129,874,830) 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 private~~took, and ~~public offerings~~continues to take, a number of actions to preserve cash. These actions included 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 ~~issuance~~company reinstate some of ~~various debt instruments and asset based lending, and~~expense reductions made.
In addition, on January 7, 2022, the ~~sale~~Company closed on the VDA Transaction (see Note A under Item 1 – Financial Statements), resulting in additional working capital of ~~assets.~~$5,000,000.

Loans under PPP
For a discussion of the PPP Loans the Company received under the Paycheck Protection Program, see Note G under Item 1 – Financial Statements.
Working Capital
Working capital (current assets in excess of current liabilities) from ~~continuing~~ operations ~~increased~~decreased by ~~$9,840,658~~($757,483) during the ~~nine~~three months ended September 30, ~~2017~~2022 from working capital ~~deficit~~ of ~~$26,859~~$5,546,885 at ~~December 31, 2016~~June 30, 2022 to a working capital of ~~$9,813,799~~$4,789,402 at September 30, ~~2017.~~2022.

~~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~~For a ~~loan and security agreement (the “Heritage Bank Loan Agreement”), with Heritage Bank~~discussion 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”). 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% at September 30, 2017 and 6.75% at December 31, 2016. On October 9, 2014, as part of the Heritage Bank Loan Agreement, Heritage Bank was granted a warrant to purchase 250,000 shares of Telkonet common stock. The warrant has an exercise price of $0.20 and expires October 9, 2021. On February 17, 2016, an amendment to the Credit Facility was executed extending the maturity date to September 30, 2018, unless earlier accelerated under the terms of the Heritage Bank Loan ~~Agreement.~~Agreement and the Credit Facility, see Note G under Item 1 – Financial Statements.
30

The ~~Heritage Bank Loan Agreement also contains financial covenants that place restrictions~~outstanding balance on among other things, the incurrence of debt, granting of liens and sale of assets. The Heritage Bank Loan Agreement also contains financial covenants that require the Borrowers to maintain a minimum EBITDA level, measured quarterly, and a minimum asset coverage ratio, measured monthly. A violation of any 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~~was $0 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 of the revolving credit facility was $79,953 as of$403,089 at September 30, ~~2017~~2022 and December 31, 2021, respectively, and the remaining available borrowing capacity was approximately ~~$1,304,000.~~$1,000,000 and $460,000, respectively. As of September 30, ~~2017,~~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, 2017~~an 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~~($3,121,812) and ~~$2,768,301~~($1,310,788), during the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, respectively. As of September 30, ~~2017,~~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 nine months ended September 30, ~~2017 were primarily related~~2022 compared to an approximate $380,500 increase in accounts receivable, a $305,000 increase in inventory, a $305,000 increase in accounts payable, a $330,000 increase in deferred revenue and a $168,000 increase in accrued liabilities and expenses. The working capital changes during the nine months ended September 30, ~~2016~~2021 were primarily ~~related to an approximately $469,000~~a result of increases in Account Receivable balances of ($929,000), inventory balances of ($583,000), a decrease in ~~accounts receivable,~~Accounts Payable balances of ($1,237,000), partially offset by a ~~$410,000 increase~~reduction in ~~inventory, a $535,000 decrease in accounts payable and a $300,000 increase in accrued liabilities and expenses.~~prepaid balances of $418,000. Accounts receivable ~~fluctuates~~balances fluctuate based on the negotiated billing terms with customers and collections. We purchase inventory based on forecasts and orders, and when those forecasts and orders change, the amount of inventory may also fluctuate. Accounts payable ~~fluctuates~~balances fluctuate with changes in inventory levels, volume of inventory purchases, and negotiated supplier and vendor terms.

Cash 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.

3133

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.

Item 4. Controls and ~~Procedures.~~Procedures

AsEvaluation of ~~September 30, 2017, the Company performed an evaluation,~~Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the ~~supervision~~Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and ~~with~~reported within the ~~participation~~time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. The Company’s Chief Executive Officer and Chief Financial Officer each evaluated the effectiveness of ~~management, including~~our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 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 ~~ineffective~~not effective as of ~~the end~~September 30, 2022 as a result of the ~~period covered by this report.~~material weaknesses discussed below.

~~During~~Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the ~~nine months~~Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of the financial statements of the Company in accordance with U.S. generally accepted accounting principles, or GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
With the participation of our Chief Executive Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 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.
34
Management did not properly design or maintain effective controls over certain aspects of the control environment and monitoring components of COSO. We did not have a sufficient complement of accounting and financial personnel with an appropriate level of knowledge to address technical accounting and financial reporting matters in accordance with GAAP and the Company’s overall financial reporting requirements. We also lack sufficient information technology resources to address our IT general control environment requirements. The failures within the control environment and monitoring components contributed to the following control activity level material weaknesses:
· Revenues – We did not properly design or maintain effective controls over the recording of revenue recognition for contracts whose performance obligations are fulfilled over time.
· Financial Statement Close and Reporting – We did not properly design or maintain effective controls over the period end financial close and reporting process. Specifically, we lacked control over the review of account reconciliations, journal entries, identification of related party transactions, and reporting of our financial results and disclosures.
· Information Technology – We did not properly design or maintain effective controls to prevent unauthorized access to certain systems, programs and data, and provide for periodic review and monitoring of access and changes in programs, including review of security logs and analysis of segregation of duties conflicts.
· Segregation of Duties – We did not maintain adequate segregation of duties within the Company’s business processes, financial applications, and IT systems. Specifically, we did not have appropriate controls in place to adequately assess the segregation of job responsibilities and system user access for initiating, authorizing, and recording transactions.
These control deficiencies could result in a misstatement of account balances resulting in a more than remote likelihood that a material misstatement to our financial statements may not be prevented or detected on a timely basis. Accordingly, we have determined that these control deficiencies as described above constitute material weaknesses.
As we continue to evaluate and work to improve our internal controls over financial reporting, our senior management may determine to take additional measures to address deficiencies or modify the remediation efforts. Until the remediation efforts that our senior management may identify as necessary, are completed, tested and determined effective, the material weaknesses described above will continue to exist. At present, the Company does not expect to hire additional personnel to remediate these control deficiencies in the near future.
In light of these material weaknesses, we performed additional analyses and procedures in order to conclude that our consolidated financial statements as of and for the year ended December 31, 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.
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 September 30, ~~2017,~~2022, there ~~were~~have been no changes in ~~the Company’s~~our internal control over financial reporting that have materially affected or are reasonably likely to materially affect ~~the Company’s~~our internal ~~control~~controls over financial reporting.

3235

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business.  Although occasional adverse decisions or settlements may occur, 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.None.

Item 1A. Risk Factors.

~~There have been no material changes to risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2016 in response to~~ None.
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
Not applicable.
Item 5. Other information
None.

Item 6. ~~Exhibits.~~Exhibits

Exhibit Number Description Of Document
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of ~~Jason L. Tienor~~Piercarlo Gramaglia
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Richard E. Mushrush
32.1 Certification of ~~Jason L. Tienor~~Piercarlo Gramaglia pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Richard E. Mushrush pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101).

3336

SIGNATURES

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

Telkonet, Inc.
Registrant

Date: November 14, ~~2017~~2022 By: /s/ ~~Jason L. Tienor~~  Piercarlo Gramaglia

~~Jason L. Tienor~~Piercarlo Gramaglia
Chief Executive Officer
(principal executive officer)

Date: November 14, ~~2017~~2022 By: /s/ Richard E. Mushrush

Richard E. Mushrush
Chief Financial Officer
(principal financial officer)

3437

	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

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

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

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

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

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

	For the Nine Months Ended
	September 30,
	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

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

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

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

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

Components of lease expense
	Three Months Ended				Nine Months Ended
	September 30				September 30
	2022		2021		2022		2021
Operating lease cost - fixed	$	49,947	$	57,387	$	146,236	$	172,161
Variable lease cost		25,933		30,213		88,952		91,688
Total operating lease cost	$	75,880	$	87,600	$	235,188	$	263,849

Other information related to leases
	September 30, 2022		December 31, 2021
Operating lease liability - current	$	153,276	$	195,176
Operating lease liability - long term		391,680		459,668
Operating cash flows from operating leases		109,888		242,305

Weighted-average remaining lease term of operating leases		3.2 years		4.1 years
Weighted-average discount rate of operating leases		8.5%		8.5%

Future annual minimum operating lease payments
2022 (excluding the months already reported upon)	$	47,771
2023		193,169
2024		172,424
2025		158,510
2026		53,185
2027 and thereafter		–
Total minimum lease payments		625,059
Less imputed interest		(80,103	)
Total	$	544,956

Schedule of sales tax accrual
	September 30, 2022			December 31, 2021
Beginning balance	$	16,634		$	31,396
Sales tax collected		122,460			85,589
Provisions (reversals)		8,231			(7,685	)
Payments		(112,238	)		(92,666	)
Ending balance	$	35,087		$	16,634

	September 30, 2017			December 31, 2016
Balance, beginning of year	$	274,869		$	229,768
Sales tax collected		235,091			452,016
Provisions (reversals)		(52,000	)		151,000
Interest and penalties		-			(3,017	)
Payments		(385,629	)		(554,898	)
Balance, end of period	$	72,331		$	274,869

	September 30,		December 31,
	2017		2016

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


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

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

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

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

	Three Months Ended
	September 30, 2022			September 30, 2021			Variance

Product	$	1,828,954	91%	$	1,290,389	89%	$	538,565	42%
Recurring		188,380	9%		163,679	11%		24,701	15%
Total	$	2,017,334	100%	$	1,454,068	100%	$	563,265	39%

		Nine Months Ended
		September 30, 2022			September 30, 2021			Variance

Product	$	5,570,775	91%	$	4,071,159	88%	$	1,499,616	37%
Recurring		535,634	9%		532,607	12%		3,027	1%
Total	$	6,106,409	100%	$	4,603,766	100%	4	1,502,643	33%

	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%

	Three Months Ended September 30
	2017		2016		Variance

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

	·	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.

Exhibit Number		Description Of Document
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of ~~Jason L. Tienor~~Piercarlo Gramaglia
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Richard E. Mushrush
32.1		Certification of ~~Jason L. Tienor~~Piercarlo Gramaglia pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Richard E. Mushrush pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101).

	Telkonet, Inc. Registrant

Date: November 14, ~~2017~~2022	By:	/s/ ~~Jason L. Tienor~~ Piercarlo Gramaglia
		~~Jason L. Tienor~~Piercarlo Gramaglia Chief Executive Officer (principal executive officer)