U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 2019
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________ to __________.
Commission file number 001-31972
TELKONET, INC.
(Exact name of Registrant as specified in its charter)
| Utah | 87-0627421 |
| (State or Other Jurisdiction of Incorporation or Organization) | |
| 20800 Swenson Drive, Suite 175, Waukesha, WI | 53186 |
| (Address of Principal Executive Offices) | (Zip Code) |
(414) 302-2299
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| None | None | None |
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filero | Accelerated filero |
| Non-accelerated filerx | Smaller reporting companyx |
| Emerging growth companyo |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yeso Nox
The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of JulyOctober 31, 2019 is 135,331,951.135,633,350.
TELKONET, INC.
FORM 10-Q for the SixNine Months Ended JuneSeptember 30, 2019
| 2 |
TELKONET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,380,382 | $ | 4,678,891 | ||||
| Accounts receivable, net | 2,455,255 | 1,081,291 | ||||||
| Inventories | 1,754,676 | 1,790,919 | ||||||
| Contract assets | 515,080 | 314,749 | ||||||
| Prepaid expenses | 441,667 | 577,386 | ||||||
| Income taxes receivable | 25,336 | 19,695 | ||||||
| Total current assets | 8,572,396 | 8,462,931 | ||||||
| Property and equipment, net | 218,632 | 247,289 | ||||||
| Other assets: | ||||||||
| Deposits | 17,130 | 17,130 | ||||||
| Operating lease right of use assets | 968,485 | – | ||||||
| Total other assets | 985,615 | 17,130 | ||||||
| Total Assets | $ | 9,776,643 | $ | 8,727,350 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,055,301 | $ | 408,045 | ||||
| Accrued liabilities | 895,608 | 656,611 | ||||||
| Line of credit | 864,125 | 121,474 | ||||||
| Contract liabilities – current | 821,213 | 1,070,502 | ||||||
| Operating lease liabilities – current | 218,614 | – | ||||||
| Total current liabilities | 3,854,861 | 2,256,632 | ||||||
| Long-term liabilities: | ||||||||
| Contract liabilities – long term | 142,703 | 162,121 | ||||||
| Operating lease liabilities – long term | 830,907 | – | ||||||
| Deferred lease liability – long term | – | 71,877 | ||||||
| Total long-term liabilities | 973,610 | 233,998 | ||||||
| Total liabilities | $ | 4,828,471 | $ | 2,490,630 | ||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Series A, par value $.001 per share; 215 shares issued, 185 shares outstanding at June 30, 2019 and December 31, 2018, preference in liquidation of $1,636,875 and $1,600,168 as of June 30, 2019 and December 31, 2018, respectively | 1,340,566 | 1,340,566 | ||||||
| Series B, par value $.001 per share; 538 shares issued, 52 shares outstanding at June 30, 2019 and December 31, 2018, preference in liquidation of $445,406 and $435,081 as of June 30, 2019 and December 31, 2018, respectively | 362,059 | 362,059 | ||||||
| Common stock, par value $.001 per share; 190,000,000 shares authorized; 135,331,951 and 134,793,211 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively | 135,331 | 134,792 | ||||||
| Additional paid-in-capital | 127,645,801 | 127,570,709 | ||||||
| Accumulated deficit | (124,535,585 | ) | (123,171,406 | ) | ||||
| Total stockholders’ equity | 4,948,172 | 6,236,720 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 9,776,643 | $ | 8,727,350 | ||||
September 30, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,484,114 | $ | 4,678,891 | ||||
| Accounts receivable, net | 2,079,998 | 1,081,291 | ||||||
| Inventories | 1,367,580 | 1,790,919 | ||||||
| Contract assets | 423,303 | 314,749 | ||||||
| Prepaid expenses | 373,043 | 577,386 | ||||||
| Income taxes receivable | 25,336 | 19,695 | ||||||
| Total current assets | 7,753,374 | 8,462,931 | ||||||
| Property and equipment, net | 201,857 | 247,289 | ||||||
| Other assets: | ||||||||
| Deposits | 17,130 | 17,130 | ||||||
| Operating lease right of use assets | 930,684 | – | ||||||
| Total other assets | 947,814 | 17,130 | ||||||
| Total Assets | $ | 8,903,045 | $ | 8,727,350 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,004,599 | $ | 408,045 | ||||
| Accrued liabilities | 622,737 | 656,611 | ||||||
| Line of credit | 909,423 | 121,474 | ||||||
| Contract liabilities – current | 998,458 | 1,070,502 | ||||||
| Operating lease liabilities – current | 221,920 | – | ||||||
| Total current liabilities | 3,757,137 | 2,256,632 | ||||||
| Long-term liabilities: | ||||||||
| Contract liabilities – long-term | 122,517 | 162,121 | ||||||
| Operating lease liabilities – long-term | 794,273 | – | ||||||
| Deferred lease liability – long-term | – | 71,877 | ||||||
| Total long-term liabilities | 916,790 | 233,998 | ||||||
| Total liabilities | $ | 4,673,927 | $ | 2,490,630 | ||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Series A, par value $.001 per share; 215 shares issued, 185 shares outstanding at September 30, 2019 and December 31, 2018, preference in liquidation of $1,655,535 and $1,600,168 as of September 30, 2019 and December 31, 2018, respectively | 1,340,566 | 1,340,566 | ||||||
| Series B, par value $.001 per share; 538 shares issued, 52 shares outstanding at September 30, 2019 and December 31, 2018, preference in liquidation of $450,655 and $435,081 as of September 30, 2019 and December 31, 2018, respectively | 362,059 | 362,059 | ||||||
| Common stock, par value $.001 per share; 190,000,000 shares authorized; 135,633,350 and 134,793,211 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 135,632 | 134,792 | ||||||
| Additional paid-in-capital | 127,680,315 | 127,570,709 | ||||||
| Accumulated deficit | (125,289,454 | ) | (123,171,406 | ) | ||||
| Total stockholders’ equity | 4,229,118 | 6,236,720 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 8,903,045 | $ | 8,727,350 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 3 |
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
| Revenues, net: | ||||||||||||||||||||||||||||||||
| Product | $ | 3,380,892 | $ | 2,820,805 | $ | 5,967,561 | $ | 4,324,463 | $ | 1,995,788 | $ | 1,319,046 | $ | 7,963,349 | $ | 5,643,509 | ||||||||||||||||
| Recurring | 189,143 | 153,357 | 365,676 | 254,895 | 202,855 | 144,970 | 568,531 | 399,865 | ||||||||||||||||||||||||
| Total Net Revenue | 3,570,035 | 2,974,162 | 6,333,237 | 4,579,358 | 2,198,643 | 1,464,016 | 8,531,880 | 6,043,374 | ||||||||||||||||||||||||
| Cost of Sales: | ||||||||||||||||||||||||||||||||
| Product | 2,077,066 | 1,376,729 | 3,767,664 | 2,370,966 | 1,259,151 | 881,444 | 5,026,815 | 3,252,409 | ||||||||||||||||||||||||
| Recurring | 77,072 | 66,482 | 163,114 | 126,479 | 74,437 | 68,467 | 237,551 | 194,947 | ||||||||||||||||||||||||
| Total Cost of Sales | 2,154,138 | 1,443,211 | 3,930,778 | 2,497,445 | 1,333,588 | 949,911 | 5,264,366 | 3,447,356 | ||||||||||||||||||||||||
| Gross Profit | 1,415,897 | 1,530,951 | 2,402,459 | 2,081,913 | 865,055 | 514,105 | 3,267,514 | 2,596,018 | ||||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||||||||
| Research and development | 425,670 | 431,856 | 912,296 | 870,636 | 448,690 | 539,652 | 1,360,986 | 1,410,287 | ||||||||||||||||||||||||
| Selling, general and administrative | 1,476,719 | 1,291,103 | 2,799,767 | 2,568,006 | 1,137,084 | 1,248,204 | 3,936,851 | 3,816,210 | ||||||||||||||||||||||||
| Depreciation and amortization | 17,043 | 16,628 | 33,975 | 33,543 | 16,775 | 16,797 | 50,750 | 50,340 | ||||||||||||||||||||||||
| Total Operating Expenses | 1,919,432 | 1,739,587 | 3,746,038 | 3,472,185 | 1,602,549 | 1,804,653 | 5,348,587 | 5,276,837 | ||||||||||||||||||||||||
| Operating Loss | (503,535 | ) | (208,636 | ) | (1,343,579 | ) | (1,390,272 | ) | (737,494 | ) | (1,290,548 | ) | (2,081,073 | ) | (2,680,819 | ) | ||||||||||||||||
| Other Income (Expenses): | ||||||||||||||||||||||||||||||||
| Gain on fixed assets | 150 | – | 150 | – | ||||||||||||||||||||||||||||
| Interest income (expense), net | (15,040 | ) | 4,054 | (20,600 | ) | 1,524 | (16,525 | ) | 9,540 | (37,125 | ) | 11,063 | ||||||||||||||||||||
| Total Other Income (Expense) | (15,040 | ) | 4,054 | (20,600 | ) | 1,524 | (16,375 | ) | 9,540 | (36,975 | ) | 11,063 | ||||||||||||||||||||
| Loss before Provision for Income Taxes | (518,575 | ) | (204,582 | ) | (1,364,179 | ) | (1,388,748 | ) | (753,869 | ) | (1,281,008 | ) | (2,118,048 | ) | (2,669,756 | ) | ||||||||||||||||
| Provision for Income Taxes | 0 | 2,000 | 0 | 2,000 | – | – | – | 2,000 | ||||||||||||||||||||||||
| Net loss attributable to common stockholders | $ | (518,575 | ) | $ | (206,582 | ) | $ | (1,364,179 | ) | $ | (1,390,748 | ) | ||||||||||||||||||||
| Net Loss Attributable to Common Stockholders | $ | (753,869 | ) | $ | (1,281,008 | ) | $ | (2,118,048 | ) | $ | (2,671,756 | ) | ||||||||||||||||||||
| Net income (loss) per common share: | ||||||||||||||||||||||||||||||||
| Basic – net (loss) attributable to common stockholders | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||||||||||||||||||
| Net Loss per Common Share: | ||||||||||||||||||||||||||||||||
| Basic – net loss attributable to common stockholders | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | ||||||||||||||||||||
| Diluted – net (loss) attributable to common stockholders | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||||||||||||||||||
| Diluted – net loss attributable to common stockholders | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | ||||||||||||||||||||
| Weighted Average Common Shares Outstanding – basic | 135,085,519 | 133,989,919 | 134,477,460 | 133,843,329 | 135,331,951 | 133,989,919 | 134,937,277 | 133,892,730 | ||||||||||||||||||||||||
| Weighted Average Common Shares Outstanding –diluted | 135,085,519 | 133,989,919 | 134,497,822 | 133,843,329 | ||||||||||||||||||||||||||||
| Weighted Average Common Shares Outstanding – diluted | 135,331,951 | 134,238,181 | 134,937,277 | 133,892,730 | ||||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 4 |
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2018
| 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 December 31, 2017 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 133,695,111 | $ | 133,695 | $ | 127,421,402 | $ | (119,724,656 | ) | $ | 9,533,066 | |||||||||||
| January 1, 2018, Cumulative effect of a change in accounting principle related to ASC 606, net of tax | – | – | – | – | – | – | – | (430,000 | ) | (430,000 | ) | ||||||||||||||||
| Shares issued to directors | – | – | – | – | 294,808 | 294 | 35,706 | – | 36,000 | ||||||||||||||||||
| Stock-based compensation expense related to employee stock options | – | – | – | – | – | – | 3,061 | – | 3,061 | ||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | (1,390,748 | ) | (1,390,748 | ) | ||||||||||||||||
| Balance at June 30, 2018 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 133,989,919 | $ | 133,989 | $ | 127,460,169 | $ | (121,545,404 | ) | $ | 7,751,379 | |||||||||||
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2019
| 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 December 31, 2018 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 134,793,211 | $ | 134,792 | $ | 127,570,709 | $ | (123,171,406 | ) | $ | 6,236,720 | |||||||||||
| Shares issued to directors | – | – | – | – | 538,740 | 539 | 71,461 | – | 72,000 | ||||||||||||||||||
| Stock-based compensation expense related to employee stock options | – | – | – | – | – | – | 3,631 | – | 3,631 | ||||||||||||||||||
| Net loss attributable to common stockholders | – | – | – | – | – | – | – | (1,364,179 | ) | (1,364,179 | ) | ||||||||||||||||
| Balance at June 30, 2019 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 135,331,951 | $ | 135,331 | $ | 127,645,801 | $ | (124,535,585 | ) | $ | 4,948,172 | |||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Six Months Ended | ||||||
| June 30, | ||||||
| 2019 | 2018 | |||||
| Cash Flows from Operating Activities: | ||||||
| Net loss | $ | (1,364,179 | ) | $ | (1,390,748 | ) |
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||
| Stock-based compensation expense related to employee stock options | 3,631 | 3,061 | ||||
| Stock issued to directors as compensation | 72,000 | 36,000 | ||||
| Depreciation and amortization | 33,975 | 33,543 | ||||
| Provision for doubtful accounts, net of recoveries | 19,174 | (75 | ) | |||
| Reserve for inventory obsolescence | 197,440 | (5,900 | ) | |||
| Noncash operating lease expense | 118,950 | – | ||||
| Changes in operating assets and liabilities: | ||||||
| Accounts receivable | (1,393,138 | ) | (373,066 | ) | ||
| Inventories | (161,194 | ) | 282,868 | |||
| Prepaid expenses and other current assets | 135,721 | (452,538 | ) | |||
| Accounts payable | 647,256 | (17,997 | ) | |||
| Accrued liabilities and expenses | 238,997 | 65,966 | ||||
| Contract liability | (268,707 | ) | (368,436 | ) | ||
| Contract assets | (200,331 | ) | (4,684 | ) | ||
| Operating lease liability | (109,791 | ) | – | |||
| Income tax receivable | (5,646 | ) | – | |||
| Deferred lease liability | – | 13,002 | ||||
| Net Cash Used In Operating Activities | (2,035,842 | ) | (2,179,004 | ) | ||
| Cash Flows From Investing Activities: | ||||||
| Purchase of property and equipment | (5,318 | ) | (7,493 | ) | ||
| Net Cash Used In Investing Activities | (5,318 | ) | (7,493 | ) | ||
| Cash Flows From Financing Activities: | ||||||
| Proceeds from line of credit | 5,604,000 | 200,000 | ||||
| Payments on line of credit | (4,861,349 | ) | (882,211 | ) | ||
| Net Cash Provided (Used) In Financing Activities | 742,651 | (682,211 | ) | |||
| Net decrease in cash and cash equivalents | (1,298,509 | ) | (2,868,708 | ) | ||
| Cash and cash equivalents at the beginning of the period | 4,678,891 | 9,195,595 | ||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | 3,380,382 | $ | 6,326,887 | ||
| Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets: | ||||||
| Cash and cash equivalents | $ | 3,380,382 | $ | 6,316,887 | ||
| Restricted cash | – | 10,000 | ||||
| Total cash, cash equivalents, and restricted cash | $ | 3,380,382 | $ | 6,326,887 | ||
| 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, 2018 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 133,695,111 | $ | 133,695 | $ | 127,421,402 | $ | (119,724,656 | ) | $ | 9,533,066 | |||||||||||
| January 1, 2018, Cumulative effect of a change in accounting principle related to ASC 606, net of tax | – | – | – | – | – | – | – | (430,000 | ) | (430,000 | ) | ||||||||||||||||
| Shares issued to directors | – | – | – | – | 294,808 | 294 | 35,706 | – | 36,000 | ||||||||||||||||||
| Stock-based compensation expense related to employee stock options | – | – | – | – | – | – | 1,531 | – | 1,531 | ||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | (1,184,166 | ) | (1,184,166 | ) | ||||||||||||||||
| Balance at March 31, 2018 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 133,989,919 | $ | 133,989 | $ | 127,458,639 | $ | (121,338,822 | ) | $ | 7,956,431 | |||||||||||
| Stock-based compensation expense related to employee stock options | – | – | – | – | – | – | 1,530 | – | 1,530 | ||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | (206,582 | ) | (206,582 | ) | ||||||||||||||||
| Balance at June 30, 2018 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 133,989,919 | $ | 133,989 | $ | 127,460,169 | $ | (121,545,404 | ) | $ | 7,751,379 | |||||||||||
| Shares issued to directors | – | – | – | – | 546,988 | 547 | 71,453 | – | 72,000 | ||||||||||||||||||
| Stock-based compensation expense related to employee stock options | – | – | – | – | – | – | 1,529 | – | 1,529 | ||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | (1,281,008 | ) | (1,281,008 | ) | ||||||||||||||||
| Balance at September 30, 2018 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 134,536,907 | $ | 134,536 | $ | 127,533,151 | $ | (122,826,412 | ) | $ | 6,543,900 | |||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2019
| 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, 2019 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 134,793,211 | $ | 134,792 | $ | 127,570,709 | $ | (123,171,406 | ) | $ | 6,236,720 | |||||||||||
| Shares issued to directors | – | – | – | – | 292,308 | 294 | 35,708 | – | 36,002 | ||||||||||||||||||
| Stock-based compensation expense related to employee stock options | – | – | – | – | – | – | 1,815 | – | 1,815 | ||||||||||||||||||
| Net loss attributable to common stockholders | – | – | – | – | – | – | – | (845,604 | ) | (845,604 | ) | ||||||||||||||||
| Balance at March 31, 2019 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 135,085,519 | $ | 135,086 | $ | 127,608,232 | $ | (124,017,010 | ) | $ | 5,428,933 | |||||||||||
| Shares issued to directors | – | – | – | – | 246,432 | 245 | 35,753 | – | 35,998 | ||||||||||||||||||
| Stock-based compensation expense related to employee stock options | – | – | – | – | – | – | 1,816 | – | 1,816 | ||||||||||||||||||
| Net loss attributable to common stockholders | – | – | – | – | – | – | – | (518,575 | ) | (518,575 | ) | ||||||||||||||||
| Balance at June 30, 2019 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 135,331,951 | $ | 135,331 | $ | 127,645,801 | $ | (124,535,585 | ) | $ | 4,948,172 | |||||||||||
| Shares issued to directors | – | – | – | – | 301,399 | 301 | 32,699 | – | 33,000 | ||||||||||||||||||
| Stock-based compensation expense related to employee stock options | – | – | – | – | – | – | 1,815 | – | 1,815 | ||||||||||||||||||
| Net loss attributable to common stockholders | – | – | – | – | – | – | – | (753,869 | ) | (753,869 | ) | ||||||||||||||||
| Balance at September 30, 2019 | 185 | $ | 1,340,566 | 52 | $ | 362,059 | 135,633,350 | $ | 135,632 | $ | 127,680,315 | $ | (125,289,454 | ) | $ | 4,229,118 | |||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 6 |
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (2,118,048 | ) | $ | (2,671,756 | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Stock-based compensation expense related to employee stock options | 5,446 | 4,590 | ||||||
| Stock issued to directors as compensation | 105,000 | 108,000 | ||||||
| Depreciation and amortization | 50,750 | 50,339 | ||||||
| Provision for doubtful accounts, net of recoveries | (7,241 | ) | 101,917 | |||||
| Reserve for inventory obsolescence | 189,539 | (15,394 | ) | |||||
| Noncash operating lease expense | 178,426 | – | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (991,466 | ) | 285,330 | |||||
| Inventories | 233,800 | (615,055 | ) | |||||
| Prepaid expenses and other current assets | 204,343 | (515,403 | ) | |||||
| Accounts payable | 596,554 | (335,056 | ) | |||||
| Accrued liabilities and expenses | (33,874 | ) | 297,803 | |||||
| Contract liability | (111,648 | ) | (370,209 | ) | ||||
| Contract assets | (108,554 | ) | (7,292 | ) | ||||
| Operating lease liability | (164,794 | ) | – | |||||
| Income tax receivable | (5,641 | ) | (10,018 | ) | ||||
| Deferred lease liability | – | 17,893 | ||||||
| Net Cash Used In Operating Activities | (1,977,408 | ) | (3,674,311 | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Purchase of property and equipment | (5,318 | ) | (7,492 | ) | ||||
| Net Cash Used In Investing Activities | (5,318 | ) | (7,492 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from line of credit | 9,079,000 | 1,100,000 | ||||||
| Payments on line of credit | (8,291,051 | ) | (1,526,481 | ) | ||||
| Net Cash Provided (Used) In Financing Activities | 787,949 | (426,481 | ) | |||||
| Net decrease in cash and cash equivalents | (1,194,777 | ) | (4,108,284 | ) | ||||
| Cash and cash equivalents at the beginning of the period | 4,678,891 | 9,195,595 | ||||||
| Cash and cash equivalents at the end of the period | $ | 3,484,114 | $ | 5,087,311 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 7 |
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
Six Months Ended June 30, | Nine Months Ended September 30, | |||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||||||||
| Cash transactions: | ||||||||||||||
| Cash paid during the period for interest | $ | 35,650 | $ | 17,554 | $ | 60,580 | $ | 21,430 | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNESEPTEMBER 30, 2019
(UNAUDITED)
NOTE A – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial statements follows.
General
The accompanying unaudited condensed consolidated financial statements of Telkonet, Inc. (the “Company”, “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 sixnine months ended JuneSeptember 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2018 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC.
Business and Basis of Presentation
Telkonet, Inc. (the “Company”, “Telkonet”), 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 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 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 and other commercial markets. The EcoSmart platform is recognized as a solution for reducing energy consumption, operational costs and carbon footprints, and eliminating the need for new energy generation in these marketplaces – all whilst improving occupant comfort and convenience.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Telkonet Communications, Inc. We currently operate in a single reportable business segment.
Going Concern and Management’s Plan
The accompanying financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future and, thus, do not include any adjustments relating to the recoverability and classification of assets and liabilities that may be necessary if the Company is unable to continue as a going concern.
| 9 |
Since inception through JuneSeptember 30, 2019, we have incurred cumulative losses of $124,535,585$125,289,454 and have never generated enough funds through operations to support our business. For the six-monthnine-month period ended JuneSeptember 30, 2019, we had an operating cash flow deficit of $2,035,842$1,977,408 from operations. The Company’s ability to continue as a going concern is dependent upon generating profitable operations in the future and obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. There can be no assurance that the Company will be able to secure such financing at commercially reasonable terms, if at all. If cash resources become insufficient to meet the Company’s ongoing obligations, the Company will be required to scale back or discontinue portions of its operations or discontinue operations entirely, whereby, the Company’s shareholders may lose some or all of their investment.
We have not identified, and cannot be certain we will be able to identify, a course of action that guarantees the achievement of profitable operations in the foreseeable future. In June 2018, the Company’s Board engaged an investment bank to identify strategic alternatives to maximize shareholder value, including but not limited to, a sale of the Company, an investment in the Company, a merger or other business combination, a sale of all or substantially all assets or a strategic joint venture. At August 13,November 14, 2019, no definitive alternatives had been identified.
During the quarter ended September 30, 2019, the Company began initiating a number of cost elimination and liquidity management actions, including, reviewing opportunities to decrease spend with third party consultants and providers, strategically reviewing whether or not to fill employee positions in the event of vacancies, and implementing sales campaigns to sell slow-moving inventory and reducing existing inventory volumes. Management expects these actions will continue to reduce operating losses. The full impact of these actions is not expected to be reflected in the Company’s financial statements in the next twelve months. There is no guarantee these actions, nor any other actions identified, will yield profitable operations in the foreseeable future.
At JuneSeptember 30, 2019, the Company had $3,380,382$3,484,114 of cash and approximately $1,056,000$742,000 of availability on its credit facility. The Company currently expects to draw on these cash reserves and utilize the credit facility to finance its near term working capital needs. It expects to continue to incur operating losses and negative operating cash flows for one year beyond the date of these financial statements. Accordingly, and in light of the Company’s historic and continuing losses, there is substantial doubt about the Company’s ability to continue as a going concern.
Income (Loss) per Common Share
The Company computes earnings per share under ASC 260-10, “Earnings Per Share”. Basic net income (loss) per common share is computed using the weighted average shares outstanding. Diluted net income (loss) per common share is computed using the treasury stock method, which assumes that the proceeds to be received on exercise of outstanding stock options and warrants are used to repurchase shares of the Company at the average market price of the common shares for the year. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company's outstanding stock options and warrants. For the sixnine months ended JuneSeptember 30, 2019 and 2018, there were 3,599,793 and 3,557,399 shares of common stock underlying options and warrants excluded due to these instruments being anti-dilutive, respectively.
Use of Estimates
The preparation of financial statements in conformity with United States of America (U.S.(“U.S.”) generally accepted accounting principles (“GAAP”) requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used when accounting for items and matters such as revenue recognition and allowances for uncollectible accounts receivable, inventory obsolescence, depreciation and amortization, long-lived assets, taxes, related valuation allowance and income tax provisions, stock-based compensation, and contingencies. The Company believes that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results may differ from those estimates.
| 10 |
Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10 “Income Taxes.” Under this method, deferred income taxes (when required) are provided based on the difference between the financial reporting and income tax bases of assets and liabilities and 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 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 de-recognition, classification, treatment of interest and penalties, and disclosure of such positions.
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.
Identify the customer contracts
The Company accounts for a customer contract under ASC 606 when the contract is legally enforceable. A contract is legally enforceable when all of the following criteria are met: (1) the contract has been approved by the Company and the customer and both parties are committed to perform their respective obligations, (2) the Company can identify each party’s rights regarding goods or services transferred, (3) the Company can identify payment terms for goods or services transferred, (4) the contract has commercial substance, and (5) collectability of all the consideration to which the Company is entitled in exchange for the goods or services transferred is probable.
A contract does not exist if each party to the contract has the unilateral right to terminate a wholly unperformed contract without compensating the other party (or parties). Nearly all of the Company’s contracts do not contain such mutual termination rights for convenience. All contracts are in written form.
Identify the performance obligations
The Company will enter into product only contracts that contain a single performance obligation related to the transfer of EcoSmart products to a customer.
The Company 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 solution that enhances the functionality of the customer’s existing equipment. For this reason, the Company has determined that the product and installation services are not separately identifiable performance obligations, but in essence represent one, combined performance obligation (“turnkey”).
The Company also offers technical phone support services to customers. This service is considered a separate performance obligation.
Determine the transaction price
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.
| 11 |
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 new standard, extended warranties are accounted for as a service warranty, requiring the revenue to be recognized over the extended service periods. Contracts involving an extended warranty are immaterial and will continue to be combined with technical phone support services revenue and recognized on a straight-line basis over the term of the contract.
Allocate the transaction price to the performance obligations
Revenues from customer contracts are allocated to the separate performance obligations based on their relative stand-alone selling price (“SSP”) at contract inception. The SSP is the price at which the Company would sell a promised good or service separately. The best evidence of an SSP is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers. However, turnkey solutions are sold for a broad range of amounts resulting from, but not limited to, tiered discounting for value added resellers (“VAR”) based upon committed volumes and other economic factors. Due to the high variability of our pricing, the Company cannot establish a reliable SSP using observable data. Accordingly, the Company uses the residual approach to allocate the transaction price to performance obligations related to its turnkey solutions. When support services are not included within the turnkey solution, the residual method is not utilized and no allocation of the transaction price to the performance obligation is necessary.
All support service agreements, whether single or multi-year terms, automatically renew for one-year terms at a suggested retail price (“SRP”). Support service renewals are consistently priced and therefore would support the 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.
A typical turnkey project involves the installation and integration of 200-300 rooms in a customer-controlled facility and usually takes sixty days to complete. Since control over goods and services transfers to a customer once a room is installed, the Company recognizes revenue for turnkey solutions over time. The Company uses an outputs measure based on the number of rooms installed to recognize revenues from turnkey solutions.
Revenues from support services are recognized over time, in even daily increments over the term of the contract, and are presented as “Recurring Revenue” in the Statement of Operations.
Contract liabilities include deferrals for the monthly support service fees. Long-term contract liabilities represent support service fees that will be recognized as revenue after JuneSeptember 30, 2020.
Contract Fulfillment Cost
The Company recognizes related costs of the contract over time in relation to the revenue recognized. Costs included within the projects relate to the cost of the material, direct labor and costs of outside services utilized to complete projects. These are represented as “Contract assets” in the condensed consolidated balance sheets.
| 12 |
Guarantees and Product Warranties
The Company records a liability for potential warranty claims in cost of sales at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. The products sold are generally covered by a warranty for a period of one year. In the event the Company determines that its current or future product repair and replacement costs exceed its estimates, an adjustment to these reserves would be charged to earnings in the period such determination is made. For the sixnine months ended JuneSeptember 30, 2019 and the year ended December 31, 2018, the Company experienced returns of approximately 1% to 2% of materials included in the cost of sales. As of JuneSeptember 30, 2019 and December 31, 2018, the Company recorded warranty liabilities in the amount of $32,503$30,314 and $46,103, respectively, using this experience factor range.
Product warranties for the sixnine months ended JuneSeptember 30, 2019 and the year ended December 31, 2018 are as follows:
| June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||
| Beginning balance | $ | 46,103 | $ | 59,892 | $ | 46,103 | $ | 59,892 | ||||||
| Warranty claims incurred | (37,658 | ) | (28,000 | ) | (36,373 | ) | (28,000 | ) | ||||||
| Provision charged to expense | 24,058 | 14,211 | 20,584 | 14,211 | ||||||||||
| Ending balance | $ | 32,503 | $ | 46,103 | $ | 30,314 | $ | 46,103 | ||||||
NOTE B – NEW ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides guidance for estimating credit losses on certain types of financial instruments, including trade receivables, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. ASU 2016-13 also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance requires a modified retrospective transition method and early adoption is permitted. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.
Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures.
Accounting Standards Recently Adopted
Effective January 1, 2019, the Company has adopted ASU 2016-02, Leases (“ASU 2016-02”), subsequently amended in 2018 by ASU 2018-10, ASU 2018-11 and ASU 2018-20 and codified in ASC 842, Leases (“ASC 842”). ASC 842 is effective for annual periods beginning after December 15, 2018 and interim periods thereafter. Earlier application was permitted, however the Company did not elect to do so. ASC 842 supersedes current lease guidance in ASC 840 and requires a lessee to recognize a right-of-use asset and a corresponding lease liability for substantially all leases. The lease liability will be equal to the present value of the remaining lease payments while the right-of-use asset will be similarly calculated and then adjusted for initial direct costs. In addition, ASC 842 expands the disclosure requirements to increase the transparency and comparability of the amount, timing and uncertainty of cash flows arising from leases.
| 13 |
We chose to elect available practical expedients permitted under the guidance, which among other items, allowed the Company to carry forward its historical lease classification to not reassess leases for the definition of lease under the new standard, and to not reassess initial direct costs for existing leases. Refer below for practical expedient package adopted:
| · | Whether expired or existing contracts contain leases under the new definition of the lease; |
| · | Lease classification for expired or existing leases; and |
| · | Whether previously capitalized initial direct costs would qualify for capitalization under ASC 842. |
Upon the adoption of ASC 842, we have elected to not recognize a right-of-use asset and related lease liability for leases with an initial term of 12 months or less as an accounting policy choice and elected to account for lease and non-lease components as a single lease component.
The Company elected to utilize the new alternative transition approach introduced by ASU 2018-11, under which the standard is adopted and measured from the first date of the fiscal year under adoption, in this case January 1, 2019. Comparative periods are presented in accordance with Topic 840 and do not include any retrospective adjustments to comparative periods to reflect the adoption of Topic 842.
As of JuneSeptember 30, 2019, $1.0$0.9 million was included in total other assets, $0.2 million in total current liabilities, and $0.8 million in total long-term liabilities. There was no impact on our Condensed Consolidated Statements of Operations. Refer to Note K for further discussion.
| 14 |
NOTE C– REVENUE
The following table presents the Company’s product and recurring revenues disaggregated by industry for the three months ended JuneSeptember 30, 2019.
| Hospitality | Education | Multiple Dwelling Units | Government | Total | Hospitality | Education | Multiple Dwelling Units | Government | Total | ||||||||||||||||||||||||||
| Product | $ | 2,326,641 | $ | 452,417 | $ | 111,624 | $ | 490,210 | $ | 3,380,892 | $ | 1,764,778 | $ | 155,354 | $ | 59,661 | $ | 15,995 | $ | 1,995,788 | |||||||||||||||
| Recurring | 149,224 | 21,604 | 18,315 | – | 189,143 | 149,868 | 51,321 | 1,666 | – | 202,855 | |||||||||||||||||||||||||
| $ | 2,475,865 | $ | 474,021 | $ | 129,939 | $ | 490,210 | $ | 3,570,035 | $ | 1,914,646 | $ | 206,675 | $ | 61,327 | $ | 15,995 | $ | 2,198,643 | ||||||||||||||||
The following table presents the Company’s product and recurring revenues disaggregated by industry for the sixnine months ended JuneSeptember 30, 2019.
| Hospitality | Education | Multiple Dwelling Units | Government | Total | Hospitality | Education | Multiple Dwelling Units | Government | Total | ||||||||||||||||||||||||||
| Product | $ | 4,021,290 | $ | 708,153 | $ | 312,050 | $ | 926,068 | $ | 5,967,561 | $ | 5,786,068 | $ | 863,507 | $ | 371,711 | $ | 942,063 | $ | 7,963,349 | |||||||||||||||
| Recurring | 305,496 | 41,049 | 19,131 | – | 365,676 | 455,364 | 92,370 | 20,797 | – | 568,531 | |||||||||||||||||||||||||
| $ | 4,326,786 | $ | 749,202 | $ | 331,181 | $ | 926,068 | $ | 6,333,237 | $ | 6,241,432 | $ | 955,877 | $ | 392,508 | $ | 942,063 | $ | 8,531,880 | ||||||||||||||||
The following table presents the Company’s product and recurring revenues disaggregated by industry for the three months ended September 30, 2018.
| Hospitality | Education | Multiple Dwelling Units | Government | Total | ||||||||||||||||
| Product | $ | 1,222,543 | $ | (4,159 | ) | $ | 100,604 | $ | 58 | $ | 1,319,046 | |||||||||
| Recurring | 103,157 | 40,344 | 1,469 | – | 144,970 | |||||||||||||||
| $ | 1,325,700 | $ | 36,185 | $ | 102,073 | $ | 58 | $ | 1,464,016 | |||||||||||
The following table presents the Company’s product and recurring revenues disaggregated by industry for the nine months ended September 30, 2018.
| Hospitality | Education | Multiple Dwelling Units | Government | Total | ||||||||||||||||
| Product | $ | 4,755,219 | $ | 647,079 | $ | 166,454 | $ | 74,757 | $ | 5,643,509 | ||||||||||
| Recurring | 330,652 | 58,449 | 10,764 | – | 399,865 | |||||||||||||||
| $ | 5,085,871 | $ | 705,528 | $ | 177,218 | $ | 74,757 | $ | 6,043,374 | |||||||||||
Sales taxes and other usage-based taxes are excluded from revenues.
| 15 |
Remaining performance obligations
As of JuneSeptember 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $0.6$0.8 million. Except for support services, the Company expects to recognize 100% of the remaining performance obligations over the next six months.
Contract assets and liabilities
| June 30, 2019 | December 31, 2018 | Variance | September 30, 2019 | December 31, 2018 | Variance | ||||||||||||||||
| Contract assets | $ | 515,080 | $ | 314,749 | $ | 200,331 | $ | 423,303 | $ | 314,749 | $ | 108,554 | |||||||||
| Contract liabilities | 963,916 | 1,232,623 | (268,707 | ) | 1,120,975 | 1,232,623 | (111,648 | ) | |||||||||||||
| Net contract liabilities | $ | 448,836 | $ | 917,874 | $ | (469,038 | ) | $ | 697,672 | $ | 917,874 | $ | (220,202 | ) | |||||||
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. There were $0.2$0.3 million of costs incurred to fulfill contracts in the closing balance of contract assets.
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 six-monthnine month period ended JuneSeptember 30, 2019 is the result of cash payments received and billing in advance of satisfying performance obligations.
NOTE D – ACCOUNTS RECEIVABLE
Components of accounts receivable as of JuneSeptember 30, 2019 and December 31, 2018 are as follows:
| June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||
| Accounts receivable | $ | 2,523,149 | $ | 1,146,832 | $ | 2,102,246 | $ | 1,146,832 | ||||||
| Allowance for doubtful accounts | (67,894 | ) | (65,541 | ) | (22,248 | ) | (65,541 | ) | ||||||
| Accounts receivable, net | $ | 2,455,255 | $ | 1,081,291 | $ | 2,079,998 | $ | 1,081,291 | ||||||
| 16 |
NOTE E – ACCRUED LIABILITIES AND EXPENSES
Accrued liabilities and expenses at JuneSeptember 30, 2019 and December 31, 2018 are as follows:
| June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||
| Accrued payroll and payroll taxes | $ | 254,677 | $ | 241,253 | $ | 291,918 | $ | 241,253 | ||||||
| Accrued expenses | 451,122 | 239,793 | 252,961 | 239,793 | ||||||||||
| Accrued professional | 88,930 | 86,062 | 5,187 | 86,062 | ||||||||||
| Accrued sales taxes, penalties, and interest | 68,376 | 43,400 | 42,357 | 43,400 | ||||||||||
| Product warranties | 32,503 | 46,103 | 30,314 | 46,103 | ||||||||||
| Total accrued liabilities | $ | 895,608 | $ | 656,611 | $ | 622,737 | $ | 656,611 | ||||||
NOTE F – DEBT
Revolving Credit Facility
The Company is a party to a loan and security agreement (the “Heritage Bank Loan Agreement”), with Heritage Bank of Commerce, a California state chartered bank (“Heritage Bank”), governing a revolving credit facility in a principal amount not to exceed $2,000,000 (the “Credit Facility”). Availability of borrowings under the Credit Facility 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 8.50%8.00% at JuneSeptember 30, 2019 and 8.50% at December 31, 2018. 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, for further information on the accounting for warrants, refer to Note I. The warrant has an exercise price of $0.20 and expires October 9, 2021. On February 13,November 6, 2019, the tentheleventh amendment to the Credit Facility was executed extendingto extend the maturity date to September 30, 2020,2021, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement. Agreement, and eliminate the maximum EBITDA loss covenant. The eleventh amendment was effective as of September 30, 2019.
The Heritage Bank Loan Agreement also contains financial covenants that place restrictions on, among other things, the incurrence of debt, granting of liens and sale of assets. The Heritage Bank Loan Agreement also contains financial covenants, including a maximumcovenants. As discussed above, the EBITDA loss covenant measured quarterly,was eliminated in the eleventh amendment to the Credit Facility. The sole financial covenants are a minimum asset coverage ratio measured monthly, and a minimum unrestricted cash balance of $2 million. Duringmillion, both of which are measured at the year ended December 31, 2018 and the quarter ended March 31, 2019, the Company and Heritage Bank entered into several amendments to the Credit Facility to adjust these covenant levels. As long as the Company maintains the minimum unrestricted cash balanceend of $2 million, a violation of the minimum EBITDA level will not trigger an event of default.each month. 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 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 $864,125$909,423 and $121,474 at JuneSeptember 30, 2019 and December 31, 2018 and the remaining available borrowing capacity was approximately $1,056,000$742,000 and $499,000, respectively. As of JuneSeptember 30, 2019, the Company was in compliance with all financial covenants.
| 17 |
NOTE G – PREFERRED STOCK
Preferred stock carries certain preference rights as detailed in the Company’s Amended and Restated 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 JuneSeptember 30, 2019, the liquidation preference of the preferred stock is based on the following order: first, Series B with a preference value of $445,406,$450,655, which includes cumulative accrued unpaid dividends of $185,406,$190,655, and second, Series A with a preference value of $1,636,875,$1,655,535, which includes cumulative accrued unpaid dividends of $711,875.$730,535. As of December 31, 2018, the liquidation preference of the preferred stock is based on the following order: first, Series B with a preference value of $435,081, which includes cumulative accrued unpaid dividends of $175,081, and second, Series A with a preference value of $1,600,168, which includes cumulative accrued unpaid dividends of $675,168.
NOTE H – 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. At JuneSeptember 30, 2019 and December 31, 2018, 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 JuneSeptember 30, 2019 and December 31, 2018 the Company had 135,331,951135,633,350 and 134,793,211 common shares issued and outstanding, respectively.
NOTE I – STOCK OPTIONS AND WARRANTS
Employee Stock Options
The Company maintains an equity incentive plan, (the “Plan”). The Plan was established in 2010 as an incentive plan for officers, employees, non-employee directors, prospective employees and other key persons. It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a better alignment of their interests with those of the Company and its stockholders.
The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees of the Company under the Plan as of JuneSeptember 30, 2019.
| Options Outstanding | Options Outstanding | Options Exercisable | Options Outstanding | Options Exercisable | ||||||||||||||||||||||||||||||||||||||
| Exercise Prices | Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | Number Outstanding | Weighted Remaining Contractual Life (Years) | Weighted Exercise Price | Number Exercisable | Weighted Exercise Price | |||||||||||||||||||||||||||||||
| $0.01 - $0.15 | 2,000,000 | 7.26 | $ | 0.14 | 2,000,000 | $ | 0.14 | |||||||||||||||||||||||||||||||||||
| $0.16 - $0.99 | 1,349,793 | 4.09 | 0.18 | 1,190,059 | 0.18 | |||||||||||||||||||||||||||||||||||||
| $0.01 - $0.15 | 2,000,000 | 7.51 | $ | 0.14 | 2,000,000 | $ | 0.14 | 3,349,793 | 5.98 | $ | 0.16 | 3,190,059 | $ | 0.16 | ||||||||||||||||||||||||||||
| $0.16 - $0.99 | 1,349,793 | 4.35 | 0.18 | 1,171,488 | 0.18 | |||||||||||||||||||||||||||||||||||||
| 3,349,793 | 6.24 | $ | 0.16 | 3,171,488 | $ | 0.16 | ||||||||||||||||||||||||||||||||||||
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Transactions involving stock options issued to employees are summarized as follows:
| Number of Shares | Weighted Average Price Per Share | Number of Shares | Weighted Average Price Per Share | |||||||||||
| Outstanding at January 1, 2018 | 4,376,474 | $ | 0.18 | 4,376,474 | $ | 0.18 | ||||||||
| Granted | 67,394 | 0.14 | 67,394 | 0.14 | ||||||||||
| Exercised | – | – | – | – | ||||||||||
| Cancelled or expired | (1,094,075 | ) | 0.17 | (1,094,075 | ) | 0.17 | ||||||||
| Outstanding at December 31, 2018 | 3,349,793 | $ | 0.16 | 3,349,793 | $ | 0.16 | ||||||||
| Granted | – | – | – | – | ||||||||||
| Exercised | – | – | – | – | ||||||||||
| Cancelled or expired | – | – | – | – | ||||||||||
| Outstanding at June 30, 2019 | 3,349,793 | $ | 0.16 | |||||||||||
| Outstanding at September 30, 2019 | 3,349,793 | $ | 0.16 | |||||||||||
During the sixnine months ended JuneSeptember 30, 2019, andno options were granted, exercised, cancelled or expired. For the nine months ended September 30, 2018, no options were granted noror exercised and there were any1,094,075 options exercised. During the six months ended June 30, 2019 and 2018, zero and 1,069,075 optionsthat were cancelled or expired, respectively.expired. Total stock-based compensation expense in connection with options granted to employees recognized in the condensed consolidated statements of operations for the three months ended JuneSeptember 30, 2019 and 2018 was $1,815 and $1,531,$1,530, respectively. Total stock-based compensation expense in connection with options granted to employees recognized in the condensed consolidated statements of operations for the sixnine months ended JuneSeptember 30, 2019 was $3,631,$5,446, and $3,061,$4,590, 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.
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||
| Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||
| $ | 0.20 | 250,000 | 2.27 | $ | 0.20 | 250,000 | $ | 0.20 | ||||||||||
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||
| Exercise Prices | Number Outstanding | Weighted Remaining Contractual Life (Years) | Weighted Exercise Price | Number Exercisable | Weighted Exercise Price | |||||||||||||
| $ | 0.20 | 250,000 | 2.02 | $ | 0.20 | 250,000 | $ | 0.20 | ||||||||||
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Transactions involving warrants are summarized as follows:
| Number of Shares | Weighted Average Price Per Share | |||||||
| Outstanding at January 1, 2018 | 250,000 | $ | 0.20 | |||||
| Issued | – | – | ||||||
| Exercised | – | – | ||||||
| Cancelled or expired | – | – | ||||||
| Outstanding at December 31, 2018 | 250,000 | 0.20 | ||||||
| Issued | – | – | ||||||
| Exercised | – | – | ||||||
| Cancelled or expired | – | – | ||||||
| Outstanding at June 30, 2019 | 250,000 | $ | 0.20 | |||||
| Number of Shares | Weighted Average Price Per Share | |||||||
| Outstanding at January 1, 2018 | 250,000 | $ | 0.20 | |||||
| Issued | – | – | ||||||
| Exercised | – | – | ||||||
| Cancelled or expired | – | – | ||||||
| Outstanding at December 31, 2018 | 250,000 | $ | 0.20 | |||||
| Issued | – | – | ||||||
| Exercised | – | – | ||||||
| Cancelled or expired | – | – | ||||||
| Outstanding at September 30, 2019 | 250,000 | $ | 0.20 | |||||
There were no warrants granted, exercised, cancelled or forfeited during the sixnine months ended JuneSeptember 30, 2019 and 2018.
NOTE J – RELATED PARTY TRANSACTIONS
During the sixnine months ended JuneSeptember 30, 2019 and during the year ended December 31, 2018, the Company agreed to issue common stock in the amount of $72,000$105,000 and $144,000, respectively, and pay cash consideration of $5,000 and $0, respectively, to the Company’s non-employee directors as compensation for their attendance and participation in the Company’s Board of Director and committee meetings.
NOTE K – COMMITMENTS AND CONTINGENCIES
Leases
On January 1, 2019 the Company adopted ASC Topic 842 “Leases” (“ASC 842”), which supersedes ASC Topic 840 “Leases” (“ASC 840”), using the alternative transition method of adoption. Under this method of adoption, the Company has recognized and measured all leases that exist as at January 1, 2019 (the effective date) using a modified retrospective transition approach. Comparative periods are presented in accordance with Topic 840 and do not include any retrospective adjustments to comparative periods to reflect the adoption of Topic 842. Any cumulative-effect adjustments to retained earnings is recognized as of January 1, 2019. Upon adoption, we recognized our leases with greater than one year in duration on the balance sheet as right-of-use assets and lease liabilities. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification is based on criteria that are largely similar to those applied in prior lease accounting, but without explicit lines. We have made certain assumptions in judgments when applying ASC 842. Those judgments of most significance are as follows:
| · | We elected the package of practical expedients available for transition which allow us to not reassess the following: |
| o | Whether expired or existing contracts contain leases under the new definition of the lease; |
| o | Lease classification for expired or existing leases; and |
| o | Whether previously capitalized initial direct costs would qualify for capitalization under ASC 842. |
| 20 |
| · | We did not elect to use hindsight for transition when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset. |
| · | For all asset classes, we elected to not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less. |
| · | For all asset classes, we elected to not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component. |
We determine if an arrangement is a lease at inception. Operating leases are included in our consolidated balance sheet as right-of-use assets, operating lease liabilities - current and operating lease liabilities – long term. Upon adoption, the Company determined there were no financing leases. Our current operating leases are for facilities and office equipment. 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. We recognize our minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. Payments are set on a pre-determined schedule within each lease agreement. We amortize this expense over the term of the lease beginning with the date of the standard adoption for current leases and beginning with the date of initial possession, which is the date we enter the leased space and begin to make improvements in the preparation for its intended use, for future leases. Variable lease components represent amounts that are not fixed in nature and are not tied to an index or rate, and are recognized as incurred. Variable lease components consist primarily of common area maintenance, taxes and insurance.
The Company does not, upon adoption of ASC 842, control a specific space or underlying asset used in providing a service by a third-party service provider, under any third party service agreements. There are no such arrangements that meet the definition under ASC 842.
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 F for further discussion.
We lease certain property under non-cancelable operating leases, primarily facilities. The impact of the adoption of ASC 842 at January 1, 2019 created a right-of-use asset of $1,042,004, lease liability of $1,095,761 and unwound the $71,877 balance of the deferred lease liability account.
The components of lease expense for the sixnine months ended JuneSeptember 30, 2019 were as follows:
| Operating lease expense: | ||||||||
| Operating lease cost - fixed | $ | 118,949 | $ | 170,562 | ||||
| Variable lease cost | 61,883 | 97,903 | ||||||
| Total operating lease cost | $ | 180,832 | $ | 268,465 | ||||
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Other information related to leases as of JuneSeptember 30, 2019 was as follows:
| Operating lease liability - current | $ | 218,614 | $ | 221,920 | ||||
| Operating lease liability - long-term | $ | 830,907 | $ | 794,273 | ||||
| Operating cash outflows from operating leases | $ | 109,794 | $ | 164,794 | ||||
| Weighted-average remaining lease term of operating leases | 6.1 years | 5.9 years | ||||||
| Weighted-average discount rate of operating leases | 8.5% | 8.5% |
Future annual minimum operating lease payments as of JuneSeptember 30, 2019 were as follows:
| 2019 (excluding the six months ended June 30, 2019) | $ | 110,005 | ||||||
| 2019 (excluding the nine months ended September 30, 2019) | $ | 55,003 | ||||||
| 2020 | 223,835 | 223,835 | ||||||
| 2021 | 242,299 | 242,299 | ||||||
| 2022 | 195,176 | 195,176 | ||||||
| 2023 | 193,169 | 193,169 | ||||||
| 2024 and thereafter | 384,119 | 384,119 | ||||||
| Total minimum lease payments | $ | 1,348,603 | $ | 1,293,601 | ||||
| Less imputed interest | (299,082 | ) | (277,408 | ) | ||||
| Total | $ | 1,049,521 | $ | 1,016,193 | ||||
Future annual minimum lease payments under non-cancelable leases as of December 31, 2018 prior to our adoption of ASU 2016-02, Leases (Topic 842) are as follows:
| 2019 | $ | 211,448 | ||
| 2020 | 223,417 | |||
| 2021 | 242,785 | |||
| 2022 | 195,176 | |||
| 2023 | 193,168 | |||
| 2024 and thereafter | 380,714 | |||
| Total | $ | 1,446,708 |
Rental expenses charged to operations for the three months ended JuneSeptember 30, 2019 and 2018 was $91,306were $87,633 and $87,067.$84,620, respectively. Rental expenses charged to operations for the sixnine months ended JuneSeptember 30, 2019 and 2018 was $180,832were $268,465 and $170,949,$255,568, respectively.
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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, 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
The following table sets forth the change in the sales tax accrual as of JuneSeptember 30, 2019 and December 31, 2018:
| June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
| Balance, beginning of year | $ | 43,400 | $ | 83,282 | $ | 43,400 | $ | 83,282 | ||||||||
| Sales tax collected | 92,226 | 101,145 | 138,527 | 101,145 | ||||||||||||
| Provisions | (3,544 | ) | 30,465 | (6,437 | ) | 30,465 | ||||||||||
| Interest and penalties | – | – | – | – | ||||||||||||
| Payments | (63,707 | ) | (171,492 | ) | (133,133 | ) | (171,492 | ) | ||||||||
| Balance, end of period | $ | 68,375 | $ | 43,400 | $ | 42,357 | $ | 43,400 | ||||||||
NOTE L – BUSINESS CONCENTRATION
For the sixnine months ended JuneSeptember 30, 2019, three customers represented 15%16%, 12%16%, and 11%12% of total net revenues. For the sixnine months ended JuneSeptember 30, 2018, oneno single customer represented approximately 11%10% or more of total net revenues. As of JuneSeptember 30, 2019, threetwo customers represented 17%, 15%28% and 13%14% of the Company’s net accounts receivable. As of December 31, 2018, two customers represented 29% and 11% of the Company’s net accounts receivable.
Purchases from one supplier approximated $1,855,000,$2,522,000, or 83%84%, of purchases for the sixnine months ended JuneSeptember 30, 2019 and $1,975,000,$3,261,000, or 88%90%, of purchases for the sixnine months ended JuneSeptember 30, 2018. TotalsThe amount due to this supplier, net of deposits werepaid, was approximately $440,000$353,000 as of JuneSeptember 30, 2019. Deposits paid exceeded totals due to this supplier exceeded the total due by $320,352approximately $320,000 as of December 31, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the accompanying condensed consolidated financial statements and related notes thereto for the three and sixnine months ended JuneSeptember 30, 2019, 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, 2018, filed with the US Securities and Exchange Commission (the “SEC”) on April 1, 2019.
Business
Telkonet, Inc. (the “Company”, “Telkonet”), 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”). 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. 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 “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 2019 and future periods. These forward-looking statements are based on current expectations and current assumptions which management believes are reasonable. However, these statements involve risks and uncertainties that could cause actual results to differ materially from any future results encompassed within the forward-looking statements. Factors that could cause or contribute to such differences include those risks affecting the Company’s business as described in the Company’s filings with the SEC, including the current reports on Form 8-K, which factors are incorporated herein by reference. The Company expressly disclaims a duty to provide updates to forward-looking statements, whether as a result of new information, future events or other occurrences.
Critical Accounting Policies and Estimates and New Accounting Pronouncements
Please refer to the Company’s Form 10-K filed April 1, 2019 for critical accounting policies and estimates. For information regarding recent accounting pronouncements and their effect on the Company, see “New Accounting Pronouncements” in Note B of the Notes to Unaudited Condensed Consolidated Financial Statements contained herein.
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Revenues
The tabletables below outlinesoutline product versus recurring revenues, along with respective percentages for the comparable periods:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | Variance | Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2019 | September 30, 2018 | Variance | ||||||||||||||||||||||||||||||||||||||||||||||
| Product | $ | 3,380,892 | 95% | $ | 2,820,805 | 95% | $ | 560,087 | 20% | $ | 1,995,788 | 91% | $ | 1,319,046 | 90% | $ | 676,742 | 51% | ||||||||||||||||||||||||||||||
| Recurring | 189,143 | 5% | 153,357 | 5% | 35,786 | 23% | 202,855 | 9% | 144,970 | 10% | 57,885 | 40% | ||||||||||||||||||||||||||||||||||||
| Total | $ | 3,570,035 | 100% | $ | 2,974,162 | 100% | $ | 595,873 | 20% | $ | 2,198,643 | 100% | $ | 1,464,016 | 100% | $ | 734,627 | 50% | ||||||||||||||||||||||||||||||
| Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | Variance | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2019 | September 30, 2018 | Variance | ||||||||||||||||||||||||||||||||||||||||||||||
| Product | $ | 5,967,561 | 94% | $ | 4,324,463 | 94% | $ | 1,643,098 | 38% | $ | 7,963,349 | 93% | $ | 5,643,509 | 93% | $ | 2,319,840 | 41% | ||||||||||||||||||||||||||||||
| Recurring | 365,676 | 6% | 254,895 | 6% | 110,781 | 44% | 568,531 | 7% | 399,865 | 7% | 168,666 | 42% | ||||||||||||||||||||||||||||||||||||
| Total | $ | 6,333,237 | 100% | $ | 4,579,358 | 100% | $ | 1,753,879 | 38% | $ | 8,531,880 | 100% | $ | 6,043,374 | 100% | $ | 2,488,506 | 41% | ||||||||||||||||||||||||||||||
Product Revenue
Product revenue principally arises from the sale and installation of the EcoSmart energy management platform. The EcoSmart Suite of products consists of thermostats, sensors, controllers, wireless networking products, switches, outlets and a control platform.
For the three and sixnine months ended JuneSeptember 30, 2019, product revenue increased by 20%51% or $0.56$0.68 million and 38%41% or $1.64$2.32 million, respectively, when compared to the prior year. Increases are primarily attributable to volume generated from value added resellers and distribution partners. Beginning in the third quarter of 2019, the Company began implementing portfolio pricing increases, which are expected to positively impact product revenue.
For the three months ended JuneSeptember 30, 2019, hospitalitythe majority of the increase in product revenues increased $0.27 million to $2.33 million compared toover the prior year period.period was due to hospitality revenues increasing $0.54 million to $1.76 million and education revenues increasing $0.16 million to $0.16 million. For the three months ended June 30, 2019, education revenues decreased $0.19 million to $0.45 million compared to the prior year period. For the three months ended June 30, 2019, government revenues increased $0.43 million to $0.49 million compared to the prior year period. For the three months ended JuneSeptember 30, 2019, actual product revenues increased by $0.79$1.12 million while installation revenues decreased by $0.10$0.46 million.
For the sixnine months ended JuneSeptember 30, 2019, hospitalitythe increase in product revenues increased $0.48 million to $4.02 million compared toover the prior year period.period was due to hospitality revenues increasing $1.03 million to $5.79 million, government revenues increasing $0.87 million to $0.94 million, and education and MDU revenues both increasing $0.21 to $0.86 million and $0.37 million, respectively. For the sixnine months ended June 30, 2019, government revenues increased $0.85 million to $0.93 million compared to the prior year period. For the six months ended JuneSeptember 30, 2019, actual product revenues increased by $2.06$3.18 million while installation revenues decreased by $0.30$0.75 million.
Product revenues derived from value added resellers and distribution partners were $2.65$1.88 million for the three months ended JuneSeptember 30, 2019, an increase of 12%102% compared to the prior year period. Product revenues derived from value added resellers and distribution partners were $4.73$6.36 million for the sixnine months ended JuneSeptember 30, 2019, an increase of 30%39% compared to the prior year period.
Backlogs were approximately $3.60 million and $4.00 million to beginat the beginning of the three and sixnine month periods ended JuneSeptember 30, 2019. The Company ended the third quarter with a backlog of approximately $3.60 million.
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Recurring Revenue
Recurring revenue is attributed to our call center support services. The Company recognizes revenue ratably over the service monthperiod for monthly support revenues and defers revenue for annual support services over the term of the service period. Recurring revenue consists of Telkonet’s EcoCare service and support program.
For the three and sixnine months ended JuneSeptember 30, 2019, recurring revenue increased by 23%40% and 44%42%, respectively, when compared to the prior year period. Increases were related to increased unit sales with call center support services included.
Cost of Sales
| Three Months Ended | ||||||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | Variance | ||||||||||||||||||||||
| Product | $ | 2,077,066 | 61% | $ | 1,376,729 | 49% | $ | 700,337 | 51% | |||||||||||||||
| Recurring | 77,072 | 41% | 66,482 | 43% | 10,590 | 16% | ||||||||||||||||||
| Total | $ | 2,154,138 | 60% | $ | 1,443,211 | 49% | $ | 710,927 | 49% | |||||||||||||||
The tables below outline product versus recurring cost of sales, along with respective percentages of revenue for the comparable periods:
| Three Months Ended | ||||||||||||||||||||||||
| September 30, 2019 | September 30, 2018 | Variance | ||||||||||||||||||||||
| Product | $ | 1,259,151 | 63% | $ | 881,444 | 67% | $ | 377,707 | 43% | |||||||||||||||
| Recurring | 74,437 | 37% | 68,467 | 47% | 5,970 | 9% | ||||||||||||||||||
| Total | $ | 1,333,588 | 61% | $ | 949,911 | 65% | $ | 383,677 | 40% | |||||||||||||||
| Six Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | Variance | September 30, 2019 | September 30, 2018 | Variance | |||||||||||||||||||||||||||||||||||||||||||
| Product | $ | 3,767,664 | 63% | $ | 2,370,966 | 55% | $ | 1,396,698 | 59% | $ | 5,026,815 | 63% | $ | 3,252,409 | 58% | $ | 1,774,406 | 55% | ||||||||||||||||||||||||||||||
| Recurring | 163,114 | 45% | 126,479 | 50% | 36,635 | 29% | 237,551 | 42% | 194,947 | 49% | 42,604 | 22% | ||||||||||||||||||||||||||||||||||||
| Total | $ | 3,930,778 | 62% | $ | 2,497,445 | 55% | $ | 1,433,333 | 57% | $ | 5,264,366 | 62% | $ | 3,447,356 | 57% | $ | 1,817,010 | 53% | ||||||||||||||||||||||||||||||
Costs of Product Sales
Costs of product revenue include equipmentmaterials and installation labor related to EcoSmart technology. For the three and sixnine months ended JuneSeptember 30, 2019, product costs increased by 51%43% and 59%55%, respectively, compared to the prior year periods.
For the three month comparison, the variance was primarily attributable to an increase of $0.34$0.28 million in material costs, an increase of $0.16$0.03 million in logistical expenses, inclusive of import tariffs an increase of $0.15 million in the use of installation subcontractors and an increase of $0.07$0.04 million to the inventory obsolescence reserve. Material costs as a percentage of product revenues was 50%,were 39% for the three months ended September 30, 2019, a decrease of 3%14%, compared to the prior year period.period as a result of a formal pricing increase implemented during the three months ended September 30, 2019 and changes in the product and customer mix.
For the sixnine month comparison, the variance was primarily attributable to an increase of $0.75$1.03 million in material costs, an increase of $0.41$0.43 million in logistical expenses, inclusive of import tariffs and an increase of $0.27$0.26 million in the use of installation subcontractors. These increases were partially offset by a $0.03 million decrease to the inventory obsolescence reserve. Material costs as a percentage of product revenues was 43%,were 42% for the nine months ended September 30, 2019, a decrease of 3%6%, compared to the prior year period.
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Costs of Recurring Revenue
Recurring costs are comprised primarily of labor for our customer service department.call center support labor. For the three and sixnine months ended JuneSeptember 30, 2019, recurring costs increased by 16%9% and 29%22%, respectively, when compared to the prior year periods. These variances were primarily due to increases in salary benefits and recruiting efforts offset by a decrease in temporary staffing.
Gross Profit
| Three Months Ended | ||||||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | Variance | ||||||||||||||||||||||
| Product | $ | 1,303,826 | 39% | $ | 1,444,076 | 51% | $ | (140,250 | ) | (10% | ) | |||||||||||||
| Recurring | 112,071 | 59% | 86,875 | 57% | 25,196 | 29% | ||||||||||||||||||
| Total | $ | 1,415,897 | 40% | $ | 1,530,951 | 51% | $ | (115,054 | ) | (8% | ) | |||||||||||||
The tables below outline product versus recurring gross profit, along with respective gross profit percentages for the comparable periods:
| Six Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | Variance | September 30, 2019 | September 30, 2018 | Variance | |||||||||||||||||||||||||||||||||||||||||||
| Product | $ | 2,199,897 | 37% | $ | 1,953,497 | 45% | $ | 246,400 | 13% | $ | 736,637 | 37% | $ | 437,602 | 33% | $ | 299,035 | 68% | ||||||||||||||||||||||||||||||
| Recurring | 202,562 | 55% | 128,416 | 50% | 74,146 | 58% | 128,418 | 63% | 76,503 | 53% | 51,915 | 68% | ||||||||||||||||||||||||||||||||||||
| Total | $ | 2,402,459 | 38% | $ | 2,081,913 | 45% | $ | 320,546 | 15% | $ | 865,055 | 39% | $ | 514,105 | 35% | $ | 350,950 | 68% | ||||||||||||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||
| September 30, 2019 | September 30, 2018 | Variance | ||||||||||||||||||||||
| Product | $ | 2,936,534 | 37% | $ | 2,391,100 | 42% | $ | 545,434 | 23% | |||||||||||||||
| Recurring | 330,980 | 58% | 204,918 | 51% | 126,062 | 62% | ||||||||||||||||||
| Total | $ | 3,267,514 | 38% | $ | 2,596,018 | 43% | $ | 671,496 | 26% | |||||||||||||||
Gross Profit on Product Revenue
Gross profit for the three and sixnine months ended JuneSeptember 30, 2019 decreased 10%increased 68% and increased 13%23%, respectively, when compared to the prior year periods.
For the three months ended JuneSeptember 30, 2019, the actual gross profit percentage decreased 12%increased 4% to 39%37%. Contributing to the decrease were increases in logistical expenses, use of installation subcontractors and the inventory obsolescence reserve, partially offset byincrease was a decrease in material costs as a percentage of product revenues.revenues, partially offset by increased logistical expenses, inclusive of import tariffs and the inventory obsolescence reserve. Tariffs imposed on Chinese imports resulted in an adverse impact of approximately 7% on the actual gross profit percentage for the three months ended September 30, 2019.
For the sixnine months ended JuneSeptember 30, 2019, the actual gross profit percentage decreased 8%5% to 37%. Contributing to the decrease were increases in logistical expenses and the use of installation subcontractors, partially offset by a decrease in material costs as a percentage of product revenues. Tariffs imposed on Chinese imports resulted in an adverse impact of approximately 7% on the actual gross profit percentage for the nine months ended September 30, 2019.
Gross Profit on Recurring Revenue
Gross profit for the three and sixnine months ended JuneSeptember 30, 2019 increased 29%68% and 58%62%, respectively, when compared to the prior year periods. Increases were related to increased unit sales with call center support services included.services.
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For the three months ended JuneSeptember 30, 2019, the actual gross profit percentage increased 2%10% to 59%63% when compared to the prior year period. For the sixnine months ended JuneSeptember 30, 2019, the actual gross profit percentage increased 5%7% to 55%58% when compared to the prior year period.
Operating Expenses
| Three Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | Variance | ||||||||||||||
| Total | $ | 1,919,432 | $ | 1,739,587 | $ | 179,845 | 10% | |||||||||
The tables below outline operating expenses for the comparable periods, along with percentage change:
| Six Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | Variance | ||||||||||||||
| Total | $ | 3,746,038 | $ | 3,472,185 | $ | 273,853 | 8% | |||||||||
| Three Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | Variance | ||||||||||||||
| Total | $ | 1,602,549 | $ | 1,804,653 | $ | (202,104 | ) | (11% | ) | |||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | Variance | ||||||||||||||
| Total | $ | 5,348,587 | $ | 5,276,837 | $ | 71,750 | 1% | |||||||||
During the three and sixnine months ended JuneSeptember 30, 2019, operating expenses decreased by 11% and increased by 10% and 8%1%, respectively, when compared to the prior year periods as outlined below.
Research and Development
| Three Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | Variance | ||||||||||||||
| Total | $ | 425,670 | $ | 431,856 | $ | (6,186 | ) | (1% | ) | |||||||
| Three Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | Variance | ||||||||||||||
| Total | $ | 448,690 | $ | 539,652 | $ | (90,962 | ) | (17% | ) | |||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | Variance | ||||||||||||||
| Total | $ | 912,296 | $ | 870,636 | $ | 41,660 | 5% | |||||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | Variance | ||||||||||||||
| Total | $ | 1,360,986 | $ | 1,410,287 | $ | (49,301 | ) | (3% | ) | |||||||
Research and development costs are related to both present and future products and are expensed in the period incurred. Current research and development costs are associated with product development and integration. During the three and sixnine months ended JuneSeptember 30, 2019, research and development costs decreased by 1%17% and increased by 5%3%, respectively, when compared to the prior year periods. For the three month comparison, the variance is not attributable to any one specific expense.a decrease in expenses incurred with third-party consultants. For the sixnine month comparison the variance is dueattributable to a $0.05 million increasedecreases in consulting expenses incurred with third-party consultants and salary expense, partially offset by decreasesincreases in various othertravel and certification expenses.
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Selling, General and Administrative Expenses
| Three Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | Variance | ||||||||||||||
| Total | $ | 1,476,719 | $ | 1,291,103 | $ | 185,616 | 14% | |||||||||
| Three Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | Variance | ||||||||||||||
| Total | $ | 1,137,084 | $ | 1,248,204 | $ | (111,120 | ) | (9% | ) | |||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | Variance | ||||||||||||||
| Total | $ | 2,799,767 | $ | 2,568,006 | $ | 231,761 | 9% | |||||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | Variance | ||||||||||||||
| Total | $ | 3,936,851 | $ | 3,816,210 | $ | 120,641 | 3% | |||||||||
During the three and sixnine months ended JuneSeptember 30, 2019, selling, general and administrative expenses decreased by 9% and increased 3% over the prior year periods, by 14% and 9%, respectively. For the three month comparison, the variance is dueattributable to a $0.04$0.13 million increasedecrease in professional services, a $0.04 million increase to the bad debt reserve and $0.06 million decrease in software consulting services, partially offset by a $0.07$0.02 million increase in personnelaudit fees and a $0.05 million increase in commission expenses. For the sixnine month comparison, the variance is dueattributable to a $0.09 million net increase due to changes in salary, recruiting efforts and sales commissions and a $0.09$0.12 million increase in sales commissions, a $0.12 million increase in audit and legal and audit services.fees offset by a $0.11 million decrease to the bad debt reserve.
EBITDA from Operations
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 and amortization (“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 and amortization 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), income (loss) from operations, or any other measure for determining operating performance of 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 sixnine months ended JuneSeptember 30, 2019 and 2018, the Company excluded items in the following general category described below:
| · | Stock-based compensation: The Company believes that because of the variety of equity awards used by companies, varying methodologies for determining stock-based compensation and the assumptions and estimates involved in those determinations, the exclusion of non-cash stock-based compensation expense related to employee stock options 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 related to employee stock options allows for a more transparent comparison of its financial results to the previous period. |
RECONCILIATION OF NET LOSS FROM
OPERATIONS TO ADJUSTED EBITDA
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
| Net loss from operations | $ | (518,575 | ) | $ | (206,582 | ) | $ | (1,364,180 | ) | $ | (1,390,748 | ) | $ | (753,869 | ) | $ | (1,281,008 | ) | $ | (2,118,048 | ) | $ | (2,671,756 | ) | ||||||||
| Gain on sale of fixed assets | (150 | ) | – | (150 | ) | – | ||||||||||||||||||||||||||
| Interest (income) expense, net | 15,040 | (4,054 | ) | 20,600 | (1,524 | ) | 16,525 | (9,540 | ) | 37,125 | (11,063 | ) | ||||||||||||||||||||
| Provision for income taxes | – | 2,000 | – | 2,000 | – | – | – | 2,000 | ||||||||||||||||||||||||
| Depreciation and amortization | 17,043 | 16,628 | 33,975 | 33,543 | 16,775 | 16,797 | 50,750 | 50,340 | ||||||||||||||||||||||||
| EBITDA | (486,492 | ) | (192,008 | ) | (1,309,605 | ) | (1,356,729 | ) | (720,719 | ) | (1,273,751 | ) | (2,030,323 | ) | (2,630,479 | ) | ||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||||||||
| Stock-based compensation | 1,815 | 1,531 | 3,631 | 3,061 | 1,815 | 1,530 | 5,446 | 4,590 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | (484,677 | ) | $ | (190,478 | ) | $ | (1,305,974 | ) | $ | (1,353,668 | ) | $ | (718,904 | ) | $ | (1,272,221 | ) | $ | (2,024,877 | ) | $ | (2,625,889 | ) | ||||||||
Liquidity and Capital Resources
For the six-monthnine-month period ended JuneSeptember 30, 2019, the Company reported a net loss of $1,364,179$2,118,048 and had cash used in operating activities of $2,035,842$1,977,408 and ended the period with an accumulated deficit of $124,535,585$125,289,454 and total current assets in excess of current liabilities of $4,717,535.$3,997,628. At JuneSeptember 30, 2019, the Company had $3,380,382$3,484,114 of cash and approximately $1,056,000$742,000 of availability on its credit facility. The credit facility is a $2,000,000 line of credit, which is subject to a borrowing base calculation based on the Company’s eligible accounts receivable and eligible inventory each multiplied by an applicable advance rate, with an overall limitation tied to the Company’s eligible accounts receivable. As of JuneSeptember 30, 2019, we had borrowing capacity of $2,000,000, and an outstanding balance of $909,423 and approximately $864,000, resulting in the approximate$742,000 of availability of $1,056,000 on the credit facility. During the twelve-month period between January 1, 2018 and December 31, 2018, the Company’s cash balance decreased from $8,385,595 to $4,678,891, or approximately $309,000 per month. In comparison, during the nine-month period between January 1, 2019 and September 30, 2019, the Company’s cash balance decreased from $4,678,891 to $3,484,114, or approximately $133,000 per month. This improvement is the result of improved revenues and cost management efforts.
Since inception, the Company has incurred operating losses and has reported negative cash flows from operating activities. Since 2012, the Company has made significant investments in the engineering, development and marketing of an intelligent automation platform, including but not limited to, hardware and software enhancements, support services and applications. The funding for these development efforts has contributed to the ongoing operating losses and use of cash. Operating losses have been financed by debt and equity transactions, credit facility capacity, the sale of a wholly-owned subsidiary and management of working capital levels. The report from our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2018 stated there is substantial doubt about our ability to continue as a going concern.
The Company’s ability to continue as a going concern is dependent upon generating profitable operations in the future and/or securing the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. There can be no assurance that the Company will be able to secure such financing at commercially reasonable terms, if at all. If cash resources become insufficient to meet the Company’s ongoing obligations, the Company will be required to scale back or discontinue portions of its operations or discontinue operations entirely, whereby, the Company’s shareholders may lose some or all of their investment.
We have not identified, and cannot be certain we will be able to identify, a course of action that guarantees the achievement of profitable operations in the foreseeable future.
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In June 2018, the Company’s Board engaged an investment bank to identify strategic alternatives to maximize shareholder value, including but not limited to, a sale of the Company, an investment in the Company, a merger or other business combination, a sale of all or substantially all assets or a strategic joint venture. At August 13,November 14, 2019, no definitive alternatives had been identified.
During the quarter ended September 30, 2019, the Company began initiating a number of cost elimination and liquidity management actions, including, reviewing opportunities to decrease spend with third party consultants and providers, strategically reviewing whether or not to fill employee positions in the event of vacancies, and implementing sales campaigns to sell slow-moving inventory and reducing existing inventory volumes. Management expects these actions will continue to reduce operating losses. The full impact of these actions is not expected to be reflected in the Company’s financial statements in the next twelve months. There is no guarantee these actions, nor any other actions identified, will yield profitable operations in the foreseeable future.
The Company expects to draw on its’ cash reserves and utilize the credit facility to the extent availability exists to finance its near term working capital needs. We expect to continue to incur operating losses and negative operating cash flows for one year beyond the date of these financial statements. Accordingly, and in light of the Company’s historic and continuing losses, there is substantial doubt about the Company’s ability to continue as a going concern.
Working Capital
Working capital (current assets in excess of current liabilities) from operations decreased by $1,488,766$2,210,062 during the sixnine months ended JuneSeptember 30, 2019 from working capital of $6,206,299 at December 31, 2018 to working capital of $4,717,533$3,996,237 at JuneSeptember 30, 2019.
Revolving Credit Facility
The Company is a party to a loan and security agreement (the “Heritage Bank Loan Agreement”), with Heritage Bank of Commerce, a California state chartered bank (“Heritage Bank”), governing a revolving credit facility in a principal amount not to exceed $2,000,000 (the “Credit Facility”). Availability of borrowings under the Credit Facility 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 8.50%8.00% at JuneSeptember 30, 2019 and 8.50% at December 31, 2018. 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.stock, for further information on the accounting for warrants, refer to Note I. The warrant has an exercise price of $0.20 and expires October 9, 2021. On February 13,November 6, 2019, the tentheleventh amendment to the Credit Facility was executed extendingto extend the maturity date to September 30, 2020,2021, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement.Agreement, and eliminate the maximum EBITDA loss covenant. The eleventh amendment was effective as of September 30, 2019.
The Heritage Bank Loan Agreement also contains financial covenants that place restrictions on, among other things, the incurrence of debt, granting of liens and sale of assets. The Heritage Bank Loan Agreement also contains financial covenants, including a maximumcovenants. As discussed above, the EBITDA loss covenant measured quarterly,was eliminated in the eleventh amendment to the Credit Facility. The sole financial covenants are a minimum asset coverage ratio measured monthly, and a minimum unrestricted cash balance of $2 million. Duringmillion, both of which are measured at the year ended December 31, 2018 and the quarter ended March 31, 2019, the Company and Heritage Bank entered into several amendments to the Credit Facility to adjust these covenant levels. As long as the Company maintains the minimum unrestricted cash balanceend of $2 million, a violation of the minimum EBITDA level will not trigger an event of default.each month. 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 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 $864,125$909,423 and $121,474 at JuneSeptember 30, 2019 and December 31, 2018 and the remaining available borrowing capacity was approximately $1,056,000$742,000 and $499,000, respectively. As of JuneSeptember 30, 2019, the Company was in compliance with all financial covenants.
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Cash Flow Analysis
Cash used in operations was $2,035,842$1,977,408 and $2,179,004$3,674,311 during the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively. As of JuneSeptember 30, 2019, our primary capital needs included costs incurred to increase energy management sales, inventory procurement, and managing current liabilities. The working capital changes during the sixnine months ended JuneSeptember 30, 2019 were primarily related to an approximate $1,393,000$991,000 increase in accounts receivable, $269,000$112,000 decrease in contract liabilities, $200,000$108,000 increase in contract assets, partially offset by a $647,000$596,000 increase in accounts payable, a $239,000 increase$234,000 decrease in accrued liabilities,inventory, and a $136,000$204,000 decrease in prepaid and other current assets. The working capital changes during the sixnine months ended JuneSeptember 30, 2018 were primarily related to an approximate $373,000$615,000 increase in accounts receivable,inventories, a $453,000$515,000 increase in prepaid expense and other current assets, a $370,000 decrease in contract liabilities, a $335,000 decrease in accounts payable, partially offset by a $277,000 decrease$298,000 increase in inventory,other accrued expenses, and a $124,000 decrease in customer deposits, a $512,000 decrease in deferred revenues and an $18,000$285,000 decrease in accounts payable. Accountsreceivable. The increase in accounts receivable fluctuates based onis primarily the negotiated billing terms with customersresult of revenue growth and collections.invoice timing as opposed to collection difficulties. 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 with changes in inventory levels, volume of inventory purchases, and negotiated supplier and vendor terms.
Cash used in investing activities was $5,318, and $7,493$7,492 during the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively. During the sixnine months ended JuneSeptember 30, 2019, the cash used by investing activities reflects a decrease of $5,318 associated with the purchase of property and equipment. During the sixnine months ended JuneSeptember 30, 2018, the cash used by investing activities reflects a decrease of $7,493$7,492 associated with the purchase of property and equipment.
Cash provided from financing activities was $742,651$787,949 compared to cash used of $682,211$426,481 during the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively. Proceeds borrowed from the line of credit were $5,604,000$9,079,000 and cash used for payments on the line of credit were $4,861,349$8,291,051 during the sixnine months ended JuneSeptember 30, 2019. Proceeds borrowed from the line of credit were $200,000$1,100,000 and cash used for payments on the line of credit were $882,211$1,526,481 during the sixnine months ended JuneSeptember 30, 2018.
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, the adverse impact of tariffs and competition will continue to present a challenging operating environment through 2019; therefore working capital management will continue to be a high priority for 2019. 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 Waukesha, Wisconsin lease may require additional furniture, shelving, computer equipment and peripherals to be used in the Company’s day-to-day operations.
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Item 4. Controls and Procedures.
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 Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the 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 our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2019. Based on these evaluations, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures required by paragraph (b) of Rule 13a-15 and 15d-15 were not effective as of September 30, 2019 as a result of the material weaknesses discussed below.
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 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, 2018 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, 2018 based on the COSO framework criteria.
ManagementAs previously disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, our management did not properly design or maintain effective controls over 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 generally accepted accounting principles 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.
We are reviewing actions to remediate the identified 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 identifies 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 (i) as of and for the year ended December 31, 2018 and 2017 included in thisthe Annual Report on Form 10-K and (ii) as of September 30, 2019 and 2018 included in this Form 10-Q were fairly stated in accordance with GAAP. Accordingly, management believes that despite ourNotwithstanding the identified material weaknesses, our management has concluded that (i) the audited condensed consolidated financial statements included in the Annual Report on Form 10-K for the yearsyear ended December 31, 2018 and 2017 are(ii) the unaudited condensed consolidated financial statements included in this quarterly filing fairly stated,represent in all material respects our financial position, results of operations, cash flows and changes in stockholders’ equity as of and for the periods presented in accordance with U.S. GAAP.
Under applicable Securities Law, the Company is not required to obtain an attestation report from the Company's independent registered public accounting firm regarding internal control over financial reporting, and accordingly, such an attestation has not been obtained or included in thisthe Annual Report.Report on Form 10-K for the year ended December 31, 2018.
Changes in Internal Controls
Other than the material weaknesses discussed above, during the quarter ended JuneSeptember 30, 2019, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
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.
There were no material changes during the quarter to the Risk Factors disclosed in Item 1A – “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2018.
| Exhibit Number | Description Of Document | |
10.1 | ||
| 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jason L. Tienor | |
| 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Richard E. Mushrush | |
| 32.1 | Certification of Jason L. Tienor pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Richard E. Mushrush pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Schema Document | |
| 101.CAL | XBRL Calculation Linkbase Document | |
| 101.DEF | XBRL Definition Linkbase Document | |
| 101.LAB | XBRL Label Linkbase Document | |
| 101.PRE | XBRL Presentation Linkbase Document |
Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Telkonet, Inc. Registrant | ||
| Date: | By: | /s/ Jason L. Tienor |
Jason L. Tienor Chief Executive Officer (principal executive officer) | ||
| Date: | By: | /s/ Richard E. Mushrush |
Richard E. Mushrush Chief Financial Officer (principal financial officer) | ||