Document and Entity Information
Document and Entity Information - USD ($) | 12 Months Ended | ||
Dec. 31, 2017 | Mar. 22, 2018 | Jun. 30, 2017 | |
Document And Entity Information | |||
Entity Registrant Name | TELKONET INC | ||
Entity Central Index Key | 1,094,084 | ||
Document Type | 10-K | ||
Document Period End Date | Dec. 31, 2017 | ||
Amendment Flag | false | ||
Current Fiscal Year End Date | --12-31 | ||
Entity a Well-known Seasoned Issuer | No | ||
Entity a Voluntary Filer | No | ||
Entity's Reporting Status Current | Yes | ||
Entity Filer Category | Smaller Reporting Company | ||
Entity Public Float | $ 23,010,819 | ||
Entity Common Stock, Shares Outstanding | 133,695,111 | ||
Document Fiscal Period Focus | FY | ||
Document Fiscal Year Focus | 2,017 |
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Current assets: | ||
Cash and cash equivalents | $ 8,385,595 | $ 791,858 |
Restricted cash on deposit | 810,000 | 0 |
Accounts receivable, net | 1,610,286 | 1,403,772 |
Inventories | 1,259,536 | 777,202 |
Prepaid expenses and other current assets | 143,566 | 205,328 |
Income taxes receivable | 17,300 | 0 |
Current assets held for sale | 0 | 7,149,971 |
Total current assets | 12,226,283 | 10,328,131 |
Property and equipment, net | 304,170 | 143,907 |
Other assets: | ||
Deposits | 17,130 | 0 |
Total other assets | 17,130 | 0 |
Total Assets | 12,547,583 | 10,472,038 |
Current liabilities: | ||
Accounts payable | 978,207 | 765,617 |
Accrued liabilities and expenses | 668,814 | 925,581 |
Related party payable | 0 | 97,127 |
Line of credit | 682,211 | 1,062,129 |
Deferred revenues-current | 292,106 | 184,793 |
Deferred lease liability - current | 0 | 3,942 |
Customer deposits | 124,380 | 165,830 |
Deferred income taxes - current | 0 | 933,433 |
Current liabilities held for sale | 0 | 869,604 |
Total current liabilities | 2,745,718 | 5,008,056 |
Long-term liabilities: | ||
Deferred revenue - long term | 219,960 | 120,421 |
Deferred lease liability - long term | 48,839 | 23,761 |
Total long-term liabilities | 268,799 | 144,182 |
Commitments and contingencies | ||
Stockholders' Equity | ||
Common stock, par value $.001 per share; 190,000,000 shares authorized; 133,695,111 and 132,774,475 shares issued and outstanding at December 31, 2017 and 2016, respectively | 133,695 | 132,774 |
Additional paid-in-capital | 127,421,402 | 126,955,435 |
Accumulated deficit | (119,724,656) | (123,471,034) |
Total stockholders' equity | 9,533,066 | 5,319,800 |
Total Liabilities and Stockholders' Equity | 12,547,583 | 10,472,038 |
Series A Preferred Stock [Member] | ||
Stockholders' Equity | ||
Preferred stock value | 1,340,566 | 1,340,566 |
Series B Preferred Stock [Member] | ||
Stockholders' Equity | ||
Preferred stock value | $ 362,059 | $ 362,059 |
CONSOLIDATED BALANCE SHEETS (Pa
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Common stock, par value | $ 0.001 | $ 0.001 |
Common stock, shares authorized | 190,000,000 | 190,000,000 |
Common stock, shares issued | 133,695,111 | 132,774,475 |
Common stock, shares outstanding | 133,695,111 | 132,774,475 |
Series A Preferred Stock [Member] | ||
Preferred stock, par value | $ 0.001 | $ 0.001 |
Preferred stock, shares issued | 215 | 215 |
Preferred stock, shares outstanding | 185 | 185 |
Preferred stock, liquidiation preference | $ 1,526,141 | $ 1,452,114 |
Series B Preferred Stock [Member] | ||
Preferred stock, par value | $ 0.001 | $ 0.001 |
Preferred stock, shares issued | 538 | 538 |
Preferred stock, shares outstanding | 52 | 52 |
Preferred stock, liquidiation preference | $ 414,258 | $ 393,435 |
CONSOLIDATED STATEMENTS OF OPER
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Revenues, net: | ||
Product | $ 7,798,680 | $ 7,796,319 |
Recurring | 483,889 | 459,695 |
Total Net Revenues | 8,282,569 | 8,256,014 |
Cost of Sales: | ||
Product | 4,261,100 | 4,024,675 |
Recurring | 176,131 | 124,842 |
Total Cost of Sales | 4,437,231 | 4,149,517 |
Gross Profit | 3,845,338 | 4,106,497 |
Operating Expenses: | ||
Research and development | 1,770,597 | 1,658,640 |
Selling, general and administrative | 5,512,925 | 6,336,879 |
Depreciation and amortization | 51,229 | 34,289 |
Total Operating Expenses | 7,334,751 | 8,029,808 |
Operating Loss | (3,489,413) | (3,923,311) |
Other Income (Expenses): | ||
Interest income (expense), net | 2,434 | (60,246) |
Total Other Income (Expenses) | 2,434 | (60,246) |
Loss from Continuing Operations before Provision for Income Taxes | (3,486,979) | (3,983,557) |
Provision for Income Taxes | 9,762 | 20,114 |
Net loss from continuing operations | (3,496,741) | (4,003,671) |
Discontinued Operations: | ||
Gain from sale of discontinued operations (net of tax) | 6,630,244 | 0 |
Income from Discontinued Operations (Net of Tax) | 612,875 | 2,627,758 |
Net income (loss) attributable to common stockholders | $ 3,746,378 | $ (1,375,913) |
Net income (loss) per common share: | ||
Basic - continuing operations | $ (0.03) | $ (0.03) |
Basic - discontinued operations | 0.05 | 0.02 |
Basic - net income (loss) attributable to common stockholders | 0.03 | (0.01) |
Diluted - continuing operations | (0.03) | (0.03) |
Diluted - discontinued operations | 0.05 | 0.02 |
Diluted - net income (loss) attributable to common stockholders | $ 0.03 | $ (0.01) |
Weighted Average Common Shares Outstanding used in computing basic net loss per share | 133,116,491 | 132,774,475 |
Weighted Average Common Shares Outstanding used in computing diluted net loss per share | 133,116,491 | 132,774,475 |
CONSOLIDATED STATEMENTS OF STOC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) | Series A Preferred Stock [Member] | Series B Preferred Stock [Member] | Common Stock [Member] | Additional Paid-in Capital [Member] | Accumulated Deficit [Member] | Total |
Beginning Balance, Shares at Dec. 31, 2015 | 185 | 55 | 127,054,848 | |||
Beginning Balance, Amount at Dec. 31, 2015 | $ 1,340,566 | $ 382,951 | $ 127,054 | $ 126,135,712 | $ (122,095,121) | $ 5,891,162 |
Shares issued to directors, shares | 392,700 | |||||
Shares issued to directors, value | $ 393 | 71,607 | 72,000 | |||
Stock-based compensation expense related to employee stock options | 55,050 | 55,050 | ||||
Shares issued to preferred stockholders for warrants exercised, shares | 5,211,542 | |||||
Shares issued to preferred stockholders for warrants exercised, value | $ 5,212 | 672,289 | 677,501 | |||
Shares issued on conversion of preferred stock at $0.13 per share, shares | (3) | 115,385 | ||||
Shares issued on conversion of preferred stock at $0.13 per share, value | $ (15,000) | $ 115 | 14,885 | |||
Accrued dividends adjustment due to preferred stock conversion | $ (5,892) | (5,892) | ||||
Net loss/income | (1,375,913) | (1,375,913) | ||||
Ending Balance, Shares at Dec. 31, 2016 | 185 | 52 | 132,774,475 | |||
Ending Balance, Amount at Dec. 31, 2016 | $ 1,340,566 | $ 362,059 | $ 132,774 | 126,955,435 | (123,471,034) | 5,319,800 |
Shares issued to directors, shares | 920,636 | |||||
Shares issued to directors, value | $ 921 | 143,079 | 144,000 | |||
Stock-based compensation expense related to employee stock options | 322,888 | 322,888 | ||||
Shares issued to preferred stockholders for warrants exercised, value | $ 5 | $ 5 | $ 5 | 5 | 5 | 5 |
Net loss/income | 3,746,378 | 3,746,378 | ||||
Ending Balance, Shares at Dec. 31, 2017 | 185 | 52 | 133,695,111 | |||
Ending Balance, Amount at Dec. 31, 2017 | $ 1,340,566 | $ 362,059 | $ 133,695 | $ 127,421,402 | $ (119,724,656) | $ 9,533,066 |
CONSOLIDATED STATEMENTS OF CASH
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Cash Flows from Operating Activities: | ||
Net income (loss) | $ 3,746,378 | $ (1,375,913) |
Less: Net income from discontinued operations | (612,875) | (2,627,758) |
Gain on sale of discontinued operations | (6,630,244) | 0 |
Net loss from continuing operations | (3,496,741) | (4,003,671) |
Adjustments to reconcile net loss from continuing operations to cash used in operating activities of continuing operations: | ||
Stock-based compensation expense | 322,888 | 55,050 |
Stock issued to directors as compensation | 144,000 | 72,000 |
Amortization of deferred financing costs | 0 | 14,633 |
Depreciation and amortization | 51,229 | 34,289 |
Provision for doubtful accounts, net of recoveries | 35,187 | 32,047 |
Related party payable | 0 | 161,075 |
Deferred income taxes | 0 | 199,386 |
Changes in operating assets and liabilities: | ||
Accounts receivable | (241,701) | 512,250 |
Inventories | (482,334) | (124,709) |
Prepaid expenses and other current assets | 61,762 | (59,109) |
Deposits and other long term assets | (17,130) | 23,871 |
Accounts payable | 212,590 | (649,031) |
Accrued liabilities and expenses | (256,767) | 230,554 |
Deferred revenue | 206,852 | 61,410 |
Related party payable | (97,127) | (63,948) |
Customer deposits | (41,450) | 119,375 |
Income taxes receivable | (17,300) | 0 |
Deferred lease liability | 21,136 | (2,424) |
Net Cash Used In Operating Activities of Continuing Operations | (3,594,906) | (3,386,952) |
Net Cash Provided By Operating Activities of Discontinued Operations | 517,242 | 2,759,840 |
Net Cash Used In Operating Activities | (3,077,664) | (627,112) |
Cash Flows From Investing Activities: | ||
Purchase of property and equipment | (211,492) | (36,629) |
Net proceeds from sale of subsidiary | 12,072,811 | 0 |
Change in restricted cash | (810,000) | 31,277 |
Net Cash Provided By (Used In) Investing Activities of Continuing Operations | 11,051,319 | (5,352) |
Cash Flows From Financing Activities: | ||
Payments on notes payable | 0 | (93,340) |
Proceeds from exercise of warrants | 0 | 677,501 |
Proceeds from line of credit | 4,373,600 | 7,203,371 |
Payments on line of credit | (4,753,518) | (7,043,013) |
Net Cash (Used In) Provided By Financing Activities of Continuing Operations | (379,918) | 744,519 |
Net increase in cash and cash equivalents | 7,593,737 | 112,055 |
Cash and cash equivalents at the beginning of the period | 791,858 | 679,803 |
Cash and cash equivalents at the end of the period | 8,385,595 | 791,858 |
Cash transactions: | ||
Cash paid during the year for interest | 17,173 | 57,266 |
Cash paid during the year for income taxes, net of refunds | $ 139,823 | $ 15,090 |
A. SUMMARY OF ACCOUNTING POLICI
A. SUMMARY OF ACCOUNTING POLICIES | 12 Months Ended |
Dec. 31, 2017 | |
Accounting Policies [Abstract] | |
SUMMARY OF ACCOUNTING POLICIES | NOTE A – SUMMARY OF ACCOUNTING POLICIES A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows. 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 rapidly being recognized as a leading solution for reducing energy consumption, operational costs and carbon footprints, and eliminating the need for new energy generation in these marketplaces – all whilst improving occupant comfort and convenience. On March 28, 2017, the Company sold its wholly-owned subsidiary, EthoStream, LLC. Refer to Note P for further details. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Telkonet Communications, Inc., and EthoStream, LLC. The current year and prior year accounts of Ethostream LLC have been classified as held for sale on the consolidated balance sheet and as discontinued operations on the consolidated statement of operations and the consolidated statement of cash flows. All significant intercompany balances and transactions have been eliminated in consolidation. Unless otherwise noted, all financial information in the consolidated financial statement footnotes reflect the Company’s results from continuing operations. Liquidity and Financial Condition The Company reported net income of $3,746,378 for the year ended December 31, 2017, had a net loss from continuing operations of $3,496,741, had cash used in operating activities from continuing operations of $3,594,906, had an accumulated deficit of $119,724,656 and total current assets in excess of current liabilities from continuing operations of $10,162,776 as of December 31, 2017. Since inception, the Company’s primary sources of ongoing liquidity for operations have come through private and public offerings of equity securities, and the issuance of various debt instruments and asset-based lending. On October 23, 2017, an amendment to the revolving credit facility with Heritage Bank of Commerce was executed extending the maturity date of the revolving credit facility to September 30, 2019, unless earlier accelerated under the terms of the agreement. Refer to Note G for further details. The outstanding balance was $682,211 and $1,062,129 as of December 31, 2017 and 2016 and the remaining available borrowing capacity was approximately $202,000 and $107,000. As of December 31, 2017, the Company was in compliance with all financial covenants. The Company intends to utilize net proceeds received from the EthoStream LLC sale to continue executing its strategic plan, which we believe will help us achieve steady sales growth. Concentrations of Credit Risk Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company has never experienced any losses related to these balances. With respect to trade receivables, the Company performs ongoing credit evaluations of its customers’ financial conditions and limits the amount of credit extended when deemed necessary. The Company provides credit to its customers primarily in the United States in the normal course of business. The Company routinely assesses the financial strength of its customers and, as a consequence, believes its trade receivables credit risk exposure is limited. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity date of three months or less to be cash equivalents. Restricted Cash on Deposit The restricted cash on deposit of $810,000 as of December 31, 2017 reflects $800,000 placed into an escrow account to support potential indemnification obligations associated with the sale of the Company’s wholly-owned subsidiary, EthoStream. The escrow amount, net of potential claims, will be fully released after an escrow period not to exceed 12 months from the transaction closing on March 29, 2017. Within two business days of receipt of written instructions, signed by an authorized representative of each of Buyer and the Seller, the Escrow Agent shall disburse the funds. On September 29, 2017, the Company received $100,000 from the escrow account for the portion of the escrow account set aside for net working capital adjustments. On December 29, 2017, the Company deposited $10,000 into a brokerage account for the purpose of purchasing Company stock. Accounts Receivable Accounts receivable are uncollateralized customer obligations due under normal trade terms. The Company records allowances for doubtful accounts based on customer-specific analysis and general matters such as current assessment of past due balances and economic conditions. The Company writes off accounts receivable when they become uncollectible. The allowance for doubtful accounts was $22,173 and $34,573 at December 31, 2017 and 2016, respectively. Management identifies a delinquent customer based upon the delinquent payment status of an outstanding invoice, generally greater than 30 days past due date. The delinquent account designation does not trigger an accounting transaction until such time the account is deemed uncollectible. The allowance for doubtful accounts is determined by examining the reserve history and any outstanding invoices that are over 30 days past due as of the end of the reporting period. Accounts are deemed uncollectible on a case-by-case basis, at management’s discretion based upon an examination of the communication with the delinquent customer and payment history. Typically, accounts are only escalated to “uncollectible” status after multiple attempts at collection have proven unsuccessful. The allowance for doubtful accounts for the years ended December 31 are as follows: 2017 2016 Beginning balance $ 34,573 $ 13,299 Provision charged to expense 35,187 32,047 Deductions (47,587 ) (10,773) Ending balance $ 22,173 $ 34,573 Inventories Inventories consist of thermostats, sensors and controllers for Telkonet’s EcoSmart product platform. These inventories are purchased for resale and do not include manufacturing labor and overhead. Inventories are stated at the lower of cost or net realizable value determined by the first in, first out (FIFO) method. The Company’s inventories are subject to technological obsolescence. Management evaluates the net realizable value of its inventories on a quarterly basis and when it is determined that the Company’s carrying cost of such excess and obsolete inventories cannot be recovered in full, a charge is taken against income for the difference between the carrying cost and the estimated realizable amount. The charge (benefit) taken against income was approximately $111,400 and $(18,900) for the years ended December 31, 2017 and 2016, respectively. Property and Equipment In accordance with Accounting Standards Codification ASC 360 “Property Plant and Equipment ” Fair Value of Financial Instruments The Company accounts for the fair value of financial instruments in accordance with ASC 820, which defines fair value for accounting purposes, established a framework for measuring fair value and expanded disclosure requirements regarding fair value measurements. Fair value is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. The Company categorizes financial assets and liabilities that are recurring, at fair value into a three-level hierarchy in accordance with these provisions. · Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; · Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or · Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and are unobservable. The Company’s financial instruments include cash and cash equivalents, restricted cash on deposit, accounts receivable, accounts payable, line of credit, related party payable, and certain accrued liabilities. The carrying amounts of these assets and liabilities approximate fair value due to the short maturity of these instruments (Level 1 instruments), except for the line of credit and the related party payable. The carrying amount of the line of credit and related party payable approximates fair value due to the interest rate and terms approximating those available to the Company for similar obligations (Level 2 instruments). Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10. Recoverability is measured by comparison of the carrying amount to the future net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Based on the annual assessment for impairment performed during 2017 and 2016, no impairment was recorded. 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 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 years ended December 31, 2017 and 2016, there were 4,626,474 and 3,132,725 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.) generally accepted accounting principles (“GAAP”) requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used when accounting for items and matters such as revenue recognition and allowances for uncollectible accounts receivable, inventory obsolescence, depreciation and amortization, long-lived assets, taxes and related valuation allowance, income tax provisions, stock-based compensation, and contingencies. The Company believes that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results may differ from those estimates. 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 derecognition, classification, treatment of interest and penalties, and disclosure of such positions. Revenue Recognition For revenue from product sales, the Company recognizes revenue in accordance with ASC 605-10, “Revenue Recognition” and ASC 605-10-S99 guidelines that require that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Assuming all conditions for revenue recognition have been satisfied, product revenue is recognized when products are shipped and installation revenue is recognized when the services are completed. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The guidelines also address the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Multiple-Element Arrangements (“MEAs”): · VSOE – In most instances, products are sold separately in stand-alone arrangements. Services are also sold separately through renewals of contracts with varying periods. The Company determines VSOE based on pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or stand-alone prices for the service element(s). · TPE – If the Company cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, the Company uses third-party evidence of selling price. The Company determines TPE based on sales of a comparable amount of similar product or service offered by multiple third parties considering the degree of customization and similarity of product or service sold. · ESP – The estimated selling price represents the price at which the Company would sell a product or service if it were sold on a stand-alone basis. When neither VSOE nor TPE exists for all elements, the Company determines ESP for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on the Company’s pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining ESP. Under the estimated selling price method, revenue is recognized in MEAs based on estimated selling prices for all of the elements in the arrangement, assuming all other conditions for revenue recognition have been satisfied. To determine the estimated selling price, the Company establishes the selling price for its products and installation services using the Company’s established pricing guidelines, and the proceeds are allocated between the elements and the arrangement. When MEAs include an element of customer training, the Company determined it is not essential to the functionality, efficiency or effectiveness of the MEA due to its perfunctory nature in relation to the entire arrangement. Therefore the Company has concluded that this obligation is inconsequential and perfunctory. As such, for MEAs that include training, customer acceptance of said training is not deemed necessary in order to record the related revenue, but is recorded when the installation deliverable is fulfilled. Historically, training revenues have not been significant. The Company provides call center support services to properties installed by the Company. The Company receives monthly service fees from such properties for its services. The Company recognizes the service fee ratably over the term of the contract. The prices for these services are fixed and determinable prior to delivery of the service. The fair value of these services is known due to objective and reliable evidence from standalone executed contracts. The Company reports such revenues as recurring revenues. Deferred revenue includes deferrals for the monthly support service fees. Long-term deferred revenue represents support service fees to be earned or provided beginning after December 31, 2018. Revenue recognized that has not yet been billed to a customer results in an asset as of the end of the period. As of December 31, 2017 and 2016, there was $261,800 and $214,821 recorded within accounts receivable, respectively, related to revenue recognized that has not yet been billed. Sales Taxes Unless provided with a resale or tax exemption certificate, the Company assesses and collects sales tax on sales transactions and records the amount as a liability. It is recognized as a liability until remitted to the applicable state. Total revenues do not include sales tax as the Company is considered a pass through conduit for collecting and remitting sales taxes. Guarantees and Product Warranties The Company records a liability for potential warranty claims in cost of sales at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. The products sold are generally covered by a warranty for a period of one year. In the event the Company determines that its current or future product repair and replacement costs exceed its estimates, an adjustment to these reserves would be charged to earnings in the period such determination is made. For the years ended December 31, 2017 and 2016, the Company experienced returns of approximately 1% to 3% of material’s included in cost of sales. As of December 31, 2017 and 2016, the Company recorded warranty liabilities in the amount of $59,892 and $95,540, respectively, using this experience factor range. Product warranties for the years ended December 31 is as follows: 2017 2016 Beginning balance $ 95,540 $ 66,555 Warranty claims incurred (84,087 ) (115,120 ) Provision charged to expense 48,439 144,105 Ending balance $ 59,892 $ 95,540 Advertising The Company follows the policy of charging the costs of advertising to expenses as incurred. The Company incurred $33,520 and $31,573 in advertising costs during the years ended December 31, 2017 and 2016, respectively. Research and Development The Company accounts for research and development costs in accordance with the ASC 730-10, “Research and Development”. Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. Total expenditures on research and product development for 2017 and 2016 were $1,770,597 and $1,658,640, respectively. Stock-Based Compensation The Company accounts for stock-based awards in accordance with ASC 718-10, “Share-Based Compensation”, which requires a fair value measurement and recognition of compensation expense for all share-based payment awards made to the Company’s employees and directors, including employee stock options and restricted stock awards. The Company estimates the fair value of stock options granted using the Black-Scholes valuation model. This model requires the Company to make estimates and assumptions including, among other things, estimates regarding the length of time an employee will hold vested stock options before exercising them, the estimated volatility of the Company’s common stock price and the number of options that will be forfeited prior to vesting. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Changes in these estimates and assumptions can materially affect the determination of the fair value of stock-based compensation and consequently, the related amount recognized in the Company’s consolidated statements of operations. The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. For 2017 and prior years, expected stock price volatility is based on the historical volatility of the Company’s stock for the related expected term. Stock-based compensation expense in connection with options granted to employees for the years ended December 31, 2017 and 2016 was $322,888 and $55,050, respectively. Deferred Lease Liability Rent expense is recorded on a straight-line basis over the term of the lease. Rent escalations and rent abatement periods during the term of the lease create a deferred lease liability which represents the excess of cumulative rent expense recorded to date over the actual rent paid to date. Reclassifications Certain amounts on the condensed consolidated balance sheets as of December 31, 2016 and statements of cash flows have been reclassified to conform to the current year presentation. The Company reclassified $106,743 from current assets of discontinued operations to cash and cash equivalents for certain EthoStream assets not sold to DCI on March 29, 2017. The Company reclassified $150,936 from current liabilities of discontinued operations to accrued liabilities and expenses for certain EthoStream liabilities not assumed by DCI on March 29, 2017. The reclassifications were not material and had no effect on the Company’s total current assets, current liabilities or stockholders’ equity as of December 31, 2016. |
B. NEW ACCOUNTING PRONOUNCEMENT
B. NEW ACCOUNTING PRONOUNCEMENTS | 12 Months Ended |
Dec. 31, 2017 | |
New Accounting Pronouncements and Changes in Accounting Principles [Abstract] | |
NEW ACCOUNTING PRONOUNCEMENTS | In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) Revenue recognition under ASC 606 is based on when an entity satisfies its performance obligation(s) by transferring control of product and/or services as opposed to being entitled to the benefits. For contracts comprised of product and services (“turnkey”), the Company currently recognizes product revenues when shipped and service revenues only when substantially fulfilled, in essence at points in time. Currently, direct costs are recognized in the period incurred. In contrast, the entire contract will now be recognized over time until the contract has been substantially fulfilled. Direct costs will be deferred accordingly. The standard allows for either an input or output method of determining a contract’s measure of progress. Based upon the nature of our projects, an output method is the more appropriate choice and will be measured as room installations are completed. The Company has concluded that the most significant impact relates to the t iming of revenue recognition for turnkey contracts where product has shipped, but an insignificant amount of rooms have been installed. Transactions consisting solely of product will continue to be recognized when shipped. The Company does not offer installation services for competitors’ product. FASB ASU No. 2014-09 may be applied using either a full retrospective approach, under which all years included in the financial statements will be presented under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the revised guidance for the year of adoption, but not for prior years. We adopted the modified retrospective approach, where entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings on January 1, 2018. We elected to apply the rules to all contracts not completed at January 1, 2018. W e are substantially complete with our evaluation and expect to record a cumulative decrease to retained earnings of approximately $0.43 million. The cumulative impact of adopting ASC 606 is based on the Company’s best estimates at the time of the preparation of this Annual Report. The actual impact is subject to change prior to the filing of Form 10-Q for the quarter ending March 31, 2018. The Company anticipates the effect of adopting the standard on its controls environment and other business systems and processes will be insignificant. The Company is finalizing the impact of ASC 606 on the disclosures for its financial statements footnotes and expects the disclosures to be enhanced in the first quarter of 2018. In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements. Upon adoption, the Company expects that the ROU asset and lease liability will be recognized in the balance sheets in amounts that will be material. 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. In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The new standard provides guidance on the classification of certain transactions in the statement of cash flows, such as contingent consideration payments made in connection with a business combination and debt prepayment or extinguishment costs. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within that fiscal year. When adopted, the new guidance will be applied retrospectively. The adoption of ASU 2016-15 will not have an impact on the Company’s consolidated financial statements. In November 2016, the Financial Accounting Standards Board issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, (“Update 2016-18”). Update 2016-18 provides guidance on the classification of restricted cash in the statement of cash flows. The amendments are effective for interim and annual periods beginning after December 15, 2017. The amendments in Update 2016-18 should be adopted on a retrospective basis. We expect that the adoption of this amendment may have a material effect on our consolidated financial statements due to the material balance of restricted cash on hand as of December 31, 2017. In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation — Scope of Modification Accounting (“ASU 2017-09”), which provides guidance about the types of changes to terms or conditions of a share-based payment award that would require an entity to apply modification accounting. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09 will not have an impact on the Company’s 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. |
C. GOODWILL
C. GOODWILL | 12 Months Ended |
Dec. 31, 2017 | |
Goodwill and Intangible Assets Disclosure [Abstract] | |
GOODWILL | NOTE C – GOODWILL As of December 31, 2016, the goodwill associated with EthoStream of $5,796,430 was reclassified to current assets held for sale based on the Company’s decision to sell EthoStream in the fourth quarter of 2016. Due to the sale of Ethostream in 2017, the balance at December 31, 2017 is zero. |
D. ACCOUNTS RECEIVABLE
D. ACCOUNTS RECEIVABLE | 12 Months Ended |
Dec. 31, 2017 | |
Receivables [Abstract] | |
ACCOUNTS RECEIVABLE | NOTE D – ACCOUNTS RECEIVABLE Components of accounts receivable as of December 31, 2017 and 2016 are as follows: 2017 2016 Accounts receivable $ 1,632,459 $ 1,438,345 Allowance for doubtful accounts (22,173 ) (34,573 ) Accounts receivable, net $ 1,610,286 $ 1,403,772 |
E. PROPERTY AND EQUIPMENT
E. PROPERTY AND EQUIPMENT | 12 Months Ended |
Dec. 31, 2017 | |
Property, Plant and Equipment [Abstract] | |
PROPERTY AND EQUIPMENT | NOTE E – PROPERTY AND EQUIPMENT The Company’s property and equipment as of December 31, 2017 and 2016 consists of the following: 2017 2016 Development test equipment $ 19,110 $ 19,110 Computer software 76,134 76,134 Office equipment 51,142 36,904 Office fixtures and furniture 330,568 151,330 Leasehold improvements 18,016 – Total 494,970 283,478 Accumulated depreciation and amortization (190,800 ) (139,571 ) Total property and equipment $ 304,170 $ 143,907 Depreciation and amortization expense included as a charge to income was $51,229 and $34,289 for the years ended December 31, 2017 and 2016, respectively. |
F. ACCRUED LIABILITIES AND EXPE
F. ACCRUED LIABILITIES AND EXPENSES | 12 Months Ended |
Dec. 31, 2017 | |
Payables and Accruals [Abstract] | |
ACCRUED LIABILITIES AND EXPENSES | NOTE F – ACCRUED LIABILITIES AND EXPENSES Accrued liabilities and expenses as of December 31, 2017 and 2016 are as follows: 2017 2016 Accrued liabilities and expenses $ 294,709 $ 223,011 Accrued payroll and payroll taxes 230,931 331,908 Accrued sales taxes, penalties, and interest 83,282 274,869 Accrued interest – 253 Product warranties 59,892 95,540 Total accrued liabilities and expenses $ 668,814 $ 925,581 |
G. DEBT
G. DEBT | 12 Months Ended |
Dec. 31, 2017 | |
Debt Disclosure [Abstract] | |
DEBT | NOTE G – DEBT Kross Promissory Note On August 4, 2016, the Board of Directors authorized the Company to reimburse Peter T. Kross (“Mr. Kross”), $161,075 for expenses incurred related to his successful contested proxy. Effective June 27, 2016, Mr. Kross is a director of the Company and considered a related party. On August 30, 2016, Mr. Kross accepted an unsecured promissory note (“Kross Note”) for $161,075 from the Company. The outstanding principal balance bore interest at the annual rate of 3.00%. Payment of interest and principal began on September 1, 2016 and continued monthly on the first day of each month thereafter through and including June 1, 2017. The Company was required to pay equal monthly installments of $16,330 which included all remaining principal and accrued interest owed by the Company to Mr. Kross under the Kross Note. The Company could have prepaid in advance any unpaid principal or interest due under the Kross Note without premium or penalty. The principal balance of the Kross Note as of December 31, 2017 and 2016 was zero and $97,127, respectively. Revolving Credit Facility On September 30, 2014, the Company and its wholly-owned subsidiary, EthoStream, as co-borrowers (collectively, the “Borrowers”), entered into a loan and security agreement (the “Heritage Bank Loan Agreement”), with Heritage Bank of Commerce, a California state chartered bank (“Heritage Bank”), governing a new revolving credit facility in a principal amount not to exceed $2,000,000 (the “Credit Facility”). Availability of borrowings under the Credit Facility from time to time is subject to a borrowing base calculation based on the Company’s eligible accounts receivable and eligible inventory each multiplied by an applicable advance rate, with an overall limitation tied to the Company’s eligible accounts receivable. The Heritage Bank Loan Agreement is available for working capital and other general business purposes. The outstanding principal balance of the Credit Facility bears interest at the Prime Rate plus 3.00%, which was 7.50% at December 31, 2017 and 6.75% at December 31, 2016. On October 9, 2014, as part of the Heritage Bank Loan Agreement, Heritage Bank was granted a warrant to purchase 250,000 shares of Telkonet common stock. The warrant has an exercise price of $0.20 and expires October 9, 2021. On February 17, 2016, an amendment to the Credit Facility was executed extending the maturity date to September 30, 2018, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement. The Heritage Bank Loan Agreement contains financial covenants that place restrictions on, among other things, the incurrence of debt, granting of liens, sale of assets, require the Company to maintain a minimum EBITDA level, measured quarterly, and a minimum asset coverage ratio, measured monthly. A violation of any of these covenants could result in an event of default under the Heritage Bank Loan Agreement. Upon the occurrence of such an event of default or certain other customary events of defaults, payment of any outstanding amounts under the Credit Facility may be accelerated 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 $682,211 and $1,062,129 at December 31, 2017 and 2016 and the remaining available borrowing capacity was approximately $202,000 and $107,000, respectively. As of December 31, 2017, the Company was in compliance with all financial covenants. On March 29, 2017 an amendment to the Credit Facility was executed amending the quarterly and year to date EBITDA compliance measurements for 2017. On August 29, 2017, the Credit Facility was further amended to allow for the issuance of corporate credit cards providing credit not to exceed $100,000. The Borrower may request credit advances in an aggregate outstanding amount not to exceed the borrowing limits set forth in the amendment. On October 23, 2017, an amendment to the revolving credit facility with Heritage Bank was executed to amend certain terms of the Heritage Bank Loan Agreement. Among the terms of the amendment was that if the Company deviates from its projected EBITDA for the quarters ended September 30, 2017 or December 31, 2017, the Company will be deemed to be in compliance as of the measurement date if the Company’s unrestricted cash maintained at Heritage Bank is in excess of $5,000,000. The amendment also extends the revolving credit facility’s maturity date by one year to September 30, 2019. |
H. REDEEMABLE PREFERRED STOCK
H. REDEEMABLE PREFERRED STOCK | 12 Months Ended |
Dec. 31, 2017 | |
Equity [Abstract] | |
REDEEMABLE PREFERRED STOCK | NOTE H – REDEEMABLE PREFERRED STOCK Series A The Company has designated 215 shares of preferred stock as Series A Preferred Stock (“Series A”). Each share of Series A is convertible, at the option of the holder thereof, at any time, into shares of the Company’s common stock at a conversion price of $0.363 per share. On November 16, 2009, the Company sold 215 shares of Series A with attached warrants to purchase an aggregate of 1,628,800 shares of the Company’s common stock at $0.33 per share. The Series A shares were sold at a price per share of $5,000 and each Series A share is convertible into approximately 13,774 shares of common stock at a conversion price of $0.363 per share. The Company received $1,075,000 from the sale of the Series A shares. In prior years, 30 of the preferred shares issued on November 16, 2009 were converted to shares of the Company’s common stock. In a prior year, the redemption feature available to the Series A holders expired. Series B The Company has designated 538 shares of preferred stock as Series B Preferred Stock (“Series B”). Each share of Series B is convertible, at the option of the holder thereof, at any time, into shares of the Company’s common stock at a conversion price of $0.13 per share. On August 4, 2010, the Company sold 267 shares of Series B with attached warrants to purchase an aggregate of 5,134,626 shares of the Company’s common stock at $0.13 per share. The Series B shares were sold at a price per share of $5,000 and each Series B share was convertible into approximately 38,461 shares of common stock at a conversion price of $0.13 per share. The Company received $1,335,000 from the sale of the Series B shares on August 4, 2010. On April 8, 2011, the Company sold 271 additional shares of Series B with attached warrants to purchase an aggregate of 5,211,542 shares of the Company’s common stock at $0.13 per share. The Series B shares were sold at a price per share of $5,000 and each Series B share was convertible into approximately 38,461 shares of common stock at a conversion price of $0.13 per share. The Company received $1,355,000 from the sale of the Series B shares on April 8, 2011. In prior years, 486 of the preferred shares issued on August 4, 2010 and April 8, 2011 were converted to shares of the Company’s common stock. In a prior year, the redemption feature available to the Series B holders expired. Preferred stock carries certain preference rights as detailed in the Company’s Amended Articles of Incorporation related to both the payment of dividends and as to payments upon liquidation in preference to any other class or series of capital stock of the Company. As of December 31, 2017, the liquidation preference of the preferred stock is based on the following order: first, Series B with a preference value of $414,258, which includes cumulative accrued unpaid dividends of $154,258, and second, Series A with a preference value of $1,526,141, which includes cumulative accrued unpaid dividends of $601,141. As of December 31, 2016, the liquidation preference of the preferred stock is based on the following order: first, Series B with a preference value of $393,435, which includes cumulative accrued unpaid dividends of $133,435, and second, Series A with a preference value of $1,452,114, which includes cumulative accrued unpaid dividends of $527,114. |
I. CAPITAL STOCK
I. CAPITAL STOCK | 12 Months Ended |
Dec. 31, 2017 | |
Equity [Abstract] | |
CAPITAL STOCK | NOTE I – 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 December 31, 2017 and 2016, there were 185 shares of Series A and 52 shares of Series B outstanding, respectively. The Company has authorized 190,000,000 shares of common stock with a par value of $.001 per share. As of December 31, 2017 and 2016, the Company had 133,695,111 and 132,774,475 common shares issued and outstanding, respectively. During the years ended December 31, 2017 and 2016, the Company issued 920,636 and 392,700 shares of common stock, respectively to directors for services performed during 2017 and 2016. These shares were valued at $144,000 and $72,000, respectively, which approximated the fair value of the shares when they were issued. During the year ended December 31, 2016, 5,211,542 warrants were exercised for an aggregate of 5,211,542 shares of the Company’s common stock at $0.13 per share. These warrants were originally granted to shareholders of the April 8, 2011 Series B preferred stock issuance. The Company received proceeds of $677,501 from the exercise of warrants. During the year ended December 31, 2016, 3 shares of Series B preferred stock were converted to, in aggregate, 115,385 shares of common stock. No shares were converted in 2017. |
J. STOCK OPTIONS AND WARRANTS
J. STOCK OPTIONS AND WARRANTS | 12 Months Ended |
Dec. 31, 2017 | |
Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | |
STOCK OPTIONS AND WARRANTS | NOTE J – STOCK OPTIONS AND WARRANTS 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. The Plan is administered by the Board of Directors or the compensation committee, which is comprised of not less than two non-employee directors who are independent. A total of 10,000,000 shares of stock were reserved and available for issuance under the Plan. The exercise price per share for the stock covered by a stock option granted shall be determined by the administrator at the time of grant but shall not be less than 100 percent of the fair market value on the date of grant. The term of each stock option shall be fixed by the administrator, but no stock option shall be exercisable more than ten years after the date the stock option is granted. As of December 31, 2017, there were approximately 1,752,968 shares remaining for issuance in the Plan. It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a better alignment of their interests with those of the Company and its stockholders. The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees of the Company under the Plan as of December 31, 2017. Options Outstanding Options Exercisable Exercise Prices Number Weighted Average Weighted Average Number Weighted Average $ 0.01 - $0.15 3,050,000 5.99 $ 0.14 3,050,000 $ 0.14 $ 0.16 - $1.00 1,326,474 5.51 0.20 1,116,474 0.20 4,376,474 5.85 $ 0.16 4,166,474 $ 0.16 Transactions involving stock options issued to employees are summarized as follows: Number of Weighted Average Exercise Outstanding at January 1, 2016 1,825,225 $ 0.28 Granted 1,300,000 0.17 Exercised – – Cancelled or expired (292,500 ) 0.69 Outstanding at December 31, 2016 2,832,725 $ 0.18 Granted 3,000,000 0.14 Exercised – – Cancelled or expired (1,456,251 ) 0.17 Outstanding at December 31, 2017 4,376,474 $ 0.16 The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures. The Company estimates the volatility of the Company’s common stock based on the calculated historical volatility of the Company’s common stock using the share price data for the trailing period equal to the expected term prior to the date of the award. The Company bases the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on the Company’s common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation for those awards that are expected to vest. In accordance with ASC 718-10, the Company calculates share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The following table summarizes the assumptions used to estimate the fair value of options granted during the years ended December 2017 and 2016, using the Black-Scholes option-pricing model: 2017 2016 Expected life of option (years) 7 3 Risk-free interest rate 1.22% 0.96% Assumed volatility 81% 83% Expected dividend rate 0 0 Expected forfeiture rate 10% 25% The total estimated fair value of the options granted during the years ended December 31, 2017 and 2016 was $360,000 and $99,742. The total fair value of underlying shares related to options that vested during the years ended December 31, 2017 and 2016 was $368,544 and $160,923. Future compensation expense related to non-vested options at December 31, 2017 was $21,426 and will be recognized over the next 3.5 years. The aggregate intrinsic value of the vested options was zero as of December 31, 2017 and 2016. Total stock-based compensation expense recognized in the consolidated statements of operations for the years ended December 31, 2017 and 2016 was $322,888 and $55,050, respectively. Warrants The following table summarizes the changes in warrants outstanding and the related exercise prices for the warrants issued to non-employees of the Company. Warrants Outstanding Warrants Exercisable Exercise Prices Number Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Weighted Average Exercise Price $ 0.20 250,000 3.77 $ 0.20 250,000 0.20 Transactions involving warrants are summarized as follows: Number of Weighted Average Exercise Outstanding at January 1, 2016 5,638,410 $ 0.20 Issued – – Exercised (5,211,542 ) 0.13 Cancelled or expired (126,868 ) 3.00 Outstanding at December 31, 2016 300,000 0.20 Issued – – Exercised – – Cancelled or expired (50,000 ) 0.18 Outstanding at December 31, 2017 250,000 $ 0.20 There were no warrants granted or exercised and 50,000 cancelled or forfeited during the year ended December 31, 2017. There were no warrants granted, 5,211,542 warrants exercised and 126,868 cancelled or forfeited during the year ended December 31, 2016. |
K. RELATED PARTY TRANSACTIONS
K. RELATED PARTY TRANSACTIONS | 12 Months Ended |
Dec. 31, 2017 | |
Related Party Transactions [Abstract] | |
RELATED PARTY TRANSACTIONS | NOTE K – RELATED PARTY TRANSACTIONS On August 4, 2016, the Board of Directors authorized the Company to reimburse Peter T. Kross (“Mr. Kross”), $161,075 for expenses incurred related to his successful contested proxy. Effective June 27, 2016, Mr. Kross is a director of the Company and considered a related party. On August 30, 2016, Mr. Kross accepted an unsecured promissory note (“Kross Note”) for $161,075 from the Company. The outstanding principal balance bore interest at the annual rate of 3.00%. Payment of interest and principal began on September 1, 2016 and continued monthly on the first day of each month thereafter through and including June 1, 2017. The Company was required to pay equal monthly installments of $16,330 which included all remaining principal and accrued interest owed by the Company to Mr. Kross under the Kross Note. The Company could have prepaid in advance any unpaid principal or interest due under the Kross Note without premium or penalty. The principal balance of the Kross Note as of December 31, 2017 and 2016 was zero and $97,127. During the years ended December 31, 2017 and 2016, the Company agreed to issue common stock in the amount of $144,000 and $72,000 to the Company’s non-employee directors as compensation for their attendance and participation in the Company’s Board of Director and committee meetings. On July 1, 2016, each newly elected Board of Director member, Mr. Kross, Mr. Blatt and Mr. Byrnes were each granted 100,000 stock options per the Company’s Board of Director compensation plan. These options have an expiration period of ten years, vest quarterly over five years and have an exercise price of $0.19. |
L. INCOME TAXES
L. INCOME TAXES | 12 Months Ended |
Dec. 31, 2017 | |
Income Tax Disclosure [Abstract] | |
INCOME TAXES | On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the Internal Revenue Code. The Tax Act is generally applicable for tax years beginning after December 31, 2017, but certain provisions of the Tax Act have an impact upon the Company’s financial statements for 2017, such as the reduction of the U.S. federal corporate tax rate from 35% to 21%. The Securities and Exchange Commission issued Staff Accounting Bulletin 118 to address uncertainty regarding the application of ASC 740 to the income tax effects of the Tax Cuts and Jobs Act, signed into law on December 22, 2017. The bulletin provides a measurement period (not to exceed one year from the Tax Act enactment date) for companies to complete the accounting under ASC 740. To the extent that a company’s accounting for certain income tax effects is incomplete, but is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The company was able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows: Reduction in the Federal Corporate Income Tax Rate: The Tax Act reduces the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. The change in tax rate requires a revaluation of the end of year deferred assets and liabilities of the Company. For these deferred tax assets, we recorded a decrease of $12.7 million with a corresponding adjustment to the deferred income tax expense of $12.7 million. The Company follows ASC 740-10 “Income Taxes” which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A reconciliation of tax expense computed at the statutory federal tax rate on income (loss) from operations before income taxes to the actual income tax (benefit) / expense is as follows: 2017 2016 Tax provision (benefits) computed at the statutory rate $ 1,000,507 $ (1,304,289 ) State taxes 8,419 (26,981 ) Tax credits (67,357 ) – Book expenses not deductible for tax purposes 6,782 16,380 Tax Cut and Jobs Act impact 12,721,278 – Sale of subsidiary 45,327 – Other(prior period adjustments) 5,750 2,747 13,720,706 (1,312,143 ) Change in valuation allowance for deferred tax assets (13,710,944 ) 1,332,257 Income tax expense $ 9,762 $ 20,114 During 2017, approximately $1,200,000 of state net operating loss carryforwards expired and the Company lowered its effective state tax rate. The aggregate effect of these items resulted in a reduction to the allowance of approximately $100,000. Deferred income taxes include the net tax effects of net operating loss (NOL) carry forwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows: 2017 2016 Deferred Tax Assets: Net operating loss carry forwards $ 21,077,944 $ 34,458,920 Intangibles 422,955 781,920 Credits 67,357 – Other 512,796 580,125 Total deferred tax assets 22,081,052 35,820,965 Deferred Tax Liabilities: Intangibles – (933,433 ) Total deferred tax liabilities – (933,433 ) Valuation allowance (22,081,052 ) (35,820,965 ) Net deferred tax liabilities $ – $ (933,433 ) A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. As of December 31, 2017 and December 31, 2016, the Company’s valuation allowance, established for the tax benefit that may not be realized, totaled approximately $22,080,000 and $35,820,000, respectively. The overall decrease in the valuation allowance is related to the reduction of the federal income tax rate. At December 31, 2017 the Company had net operating loss carryforwards of approximately $89,500,000 and $45,500,000 for federal and state income tax purposes which will expire at various dates from 2018 thru 2037. The Company had indefinite-lived goodwill, which is not amortized for financial reporting purposes. However, this asset was amortized over 15 years for tax purposes. As such, income tax expense and a deferred income tax liability arose as a result of the tax-deductibility of this asset. The resulting deferred income tax liability, which was expected to continue to increase over time, had an indefinite life, resulting in what was referred to as a “naked tax credit.” This deferred income tax liability could have remained on the Company’s balance sheet permanently unless there was an impairment of the related asset (for financial reporting purposes), or the business to which those assets relate were to be disposed. Due to the fact that the aforementioned deferred income tax liability could have had an indefinite life, it was not netted against the Company’s deferred tax assets when determining the required valuation allowance. Doing so would result in the understatement of the valuation allowance and related income tax expense. The deferred tax liability of $933,433 at December 31, 2016, related to EthoStream was reduced to zero as a result of the sale of EthoStream. The Company’s NOL and tax credit carryovers may be significantly limited under Section 382 of the Internal Revenue Code (IRC). NOL and tax credit carryovers are limited under Section 382 when there is a significant “ownership change” as defined in the IRC. During 2005 and in prior years, the Company may have experienced such ownership changes that could have imposed such imitations. The limitation imposed by Section 382 would place an annual limitation on the amount of NOL and tax credit carryovers that can be utilized. When the Company completes the necessary studies, the amount of NOL carryovers available may be reduced significantly. However, since the valuation allowance fully reserves for all available carryovers, the effect of the reduction would be offset by a reduction in the valuation allowance. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is generally no longer subject to U.S. federal income tax examinations by tax authorities for years before 2013 and various states before 2013. Although these years are no longer subject to examination by the Internal Revenue Service (IRS) and various state taxing authorities, net operating loss carryforwards generated in those years may still be adjusted upon examination by the IRS or state taxing authorities if they have been or will be used in a future period. The Company follows the provisions of uncertain tax positions as addressed in FASB Accounting Standards Codification 740-10-65-1. The Company has no tax positions at December 31, 2017 or 2016 for which the ultimate deductibility is highly uncertain. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expense. No such interest or penalties were recognized during the periods presented. The Company had no accruals for interest and penalties at December 31, 2017 or 2016. The Company’s utilization of any net operating loss carryforwards may be unlikely due to its continuing losses. |
M. COMMITMENTS AND CONTINGENCIE
M. COMMITMENTS AND CONTINGENCIES | 12 Months Ended |
Dec. 31, 2017 | |
Commitments and Contingencies Disclosure [Abstract] | |
COMMITMENTS AND CONTINGENCIES | Office Leases Obligations In October 2013, the Company entered into a lease agreement for 6,362 square feet of commercial office space in Waukesha, Wisconsin for its corporate headquarters. The Waukesha lease would have expired in April 2021, but was subsequently amended and extended through April 2026. On April 7, 2017 the Company executed an amendment to its’ existing lease in Waukesha, Wisconsin to expand another 3,982 square feet, bringing the total leased space to 10,344 square feet. In addition, the lease term was extended from May 1, 2021 to April 30, 2026. The commencement date for this amendment was July 15, 2017. In January 2016, the Company entered into a lease agreement for 2,237 square feet of commercial office space in Germantown, Maryland for its Maryland employees. The Germantown lease as amended, was set to expire at the end of January 2018. In November 2017, the Company entered into a second amendment to the lease agreement extending the lease through the end of January 2019. In May 2017, the Company entered into a lease agreement for 5,838 square feet of floor space in Waukesha, Wisconsin for its inventory warehousing operations. The Waukesha lease expires in May 2024. Commitments for minimum rentals under non-cancelable leases as of December 31, 2017 are as follows: Years ending December 31, 2018 $ 205,324 2019 159,253 2020 164,903 2021 182,512 2022 190,141 2023 and thereafter 573,883 Total $ 1,476,016 Rental expenses charged to operations for the years ended December 31, 2017 and 2016 was $284,714 and $169,807, respectively. Employment and Consulting Agreements The Company has employment agreements with certain of its key employees which include non-disclosure and confidentiality provisions for protection of the Company’s proprietary information. Jason L. Tienor, President and Chief Executive Officer, is employed pursuant to an amended and restated employment agreement with us dated January 3, 2016, which was executed in January, 2017. The agreement amends and restates an employment agreement dated May 1, 2015. Mr. Tienor’s amended and restated employment agreement has a term of one (1) year, which may be extended by mutual agreement of the parties thereto, and provides, among other things, for an annual base salary of $212,200 per year and bonuses and benefits based on the Company’s internal policies and participation in our incentive and benefit plans. This amendment has since expired. The agreement also calls for a bonus to be paid upon the sale of the Company’s subsidiary resulting in a purchase price (before any closing costs or working capital adjustments) equal to or greater than twelve million five hundred thousand dollars ($12,500,000). The bonus will be equal to twenty five thousand dollars ($25,000) plus one third of five percent of each dollar in excess of a purchase price of twelve million five hundred dollars ($12,500,000). Upon execution of the employment agreement in 2017, 1,000,000 stock options were granted with an exercise price per share equal to fair market value and vest over a three year period. However, the stock options vested immediately upon the sale of the Company’s subsidiary, Ethostream LLC, in March 2017. Jeffrey J. Sobieski, Chief Technology Officer, is employed pursuant to an amended and restated employment agreement with us dated January 3, 2016, which was executed in January, 2017. The agreement amends and restates an employment agreement dated May 1, 2015. Mr. Sobieski’s amended and restated employment agreement has a term of one (1) year, which may be extended by mutual agreement of the parties thereto, and provides for a base salary of $201,575 per year and bonuses and benefits based upon the Company’s internal policies and participation in the Company’s incentive and benefit plans. This amendment has since expired. The agreement also calls for a bonus to be paid upon the sale of the Company’s subsidiary resulting in a purchase price (before any closing costs or working capital adjustments) equal to or greater than twelve million five hundred thousand dollars ($12,500,000). The bonus will be equal to twenty five thousand dollars ($25,000) plus one third of five percent of each dollar in excess of a purchase price of twelve million five hundred dollars ($12,500,000). Upon execution of the employment agreement in 2017, 1,000,000 stock options were granted with an exercise price per share equal to fair market value and vest over a three year period. However, the stock options vested immediately upon the sale of the Company’s subsidiary, Ethostream LLC, in March 2017. Richard E. Mushrush, Chief Financial Officer, is employed pursuant to an employment agreement with us dated May 1, 2017. Mr. Mushrush’s employment agreement has a term of one (1) year, which may be extended by mutual agreement of the parties thereto, and provides for a base salary of $122,000 per year and bonuses and benefits based upon the Company’s internal policies and participation in the Company’s incentive and benefit plans. In addition to the foregoing, stock options are periodically granted to employees under the Company’s 2010 equity incentive plan at the discretion of the Compensation Committee of the Board of Directors. Executives of the Company are eligible to receive stock option grants, based upon individual performance and the performance of the Company as a whole. Litigation The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, 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. Indemnification Agreements On March 31, 2010, the Company entered into Indemnification Agreements with executives Jason L. Tienor, President and Chief Executive Officer and Jeffrey J. Sobieski, then Chief Operating Officer. On April 24, 2012, the Company entered into an Indemnification Agreement with director Timothy S. Ledwick. On July 1, 2016, the Company entered into Indemnification Agreements with director’s Arthur E. Byrnes, Peter T. Kross and Leland D. Blatt. On January 1, 2017, the Company entered into an Indemnification Agreement with Chief Financial Officer Richard E. Mushrush. The Indemnification Agreements provide that the Company will indemnify the Company's officers and directors, to the fullest extent permitted by law, relating to, resulting from or arising out of any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation by reason of the fact that such officer or director (i) is or was a director, officer, employee or agent of the Company or (ii) is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. In addition, the Indemnification Agreements provide that the Company will make an advance payment of expenses to any officer or director who has entered into an Indemnification Agreement, in order to cover a claim relating to any fact or occurrence arising from or relating to events or occurrences specified in this paragraph, subject to receipt of an undertaking by or on behalf of such officer or director to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company as authorized under the Indemnification Agreement. Sales Taxes During 2012, the Company engaged a sales tax consultant to assist in determining the extent of its potential sales tax exposure. Based upon this analysis, management determined the Company had probable exposure for certain unpaid obligations, including interest and penalty, of approximately $1,100,000 including and prior to the year ended December 31, 2011. The Company has approximately $83,000 and $275,000 accrued as of December 31, 2017 and 2016, respectively. During the year ended December 31, 2016, the State of Wisconsin performed a sales and use tax audit covering the period from January 1, 2012 through December 31, 2015. The audit resulted in approximately $120,000 in additional use tax and interest. As of December 31, 2017, the Company paid in full the additional use tax liability and interest associated with the sales and use tax audit. Prior to 2017, the Company successfully executed and paid in full, Voluntary Disclosure Programs (“VDAs”) in thirty six states totaling approximately $765,000 and is current with the subsequent filing requirements. No VDA’s were filed in 2017, and the Company has completed its filings of VDA’s. The following table sets forth the change in the sales tax accrual during the years ended December 31: 2017 2016 Balance, beginning of year $ 274,869 $ 229,768 Sales tax collected 297,673 452,016 Provisions (reversals) (33,000 ) 151,000 Interest and penalties (5,890 ) (3,017 ) Payments (450,370 ) (554,898 ) Balance, end of year $ 83,282 $ 274,869 |
N. BUSINESS CONCENTRATION
N. BUSINESS CONCENTRATION | 12 Months Ended |
Dec. 31, 2017 | |
Risks and Uncertainties [Abstract] | |
BUSINESS CONCENTRATION | NOTE N – BUSINESS CONCENTRATION For the years ended December 31, 2017 and 2016, no single customer represented 10% or more of the Company’s total net revenues. As of December 31, 2017, three customers accounted for 54% of the Company’s net accounts receivable. As of December 31, 2016, two customers accounted for 24% of the Company’s net accounts receivable. Purchases from one supplier approximated $2,796,000, or 79%, of total purchases for the year ended December 31, 2017 and approximately $2,235,000, or 62%, of total purchases for the year ended December 31, 2016. Total due to this supplier, net of deposits, was $202,258 and $45,037 as of December 31, 2017 and 2016, respectively. |
O. EMPLOYEE BENEFIT PLAN
O. EMPLOYEE BENEFIT PLAN | 12 Months Ended |
Dec. 31, 2017 | |
Disclosure Text Block Supplement [Abstract] | |
EMPLOYEE BENEFIT PLAN | NOTE O – EMPLOYEE BENEFIT PLAN The Company has an employee savings plan covering substantially all employees who are at least 21 years of age and have completed at least 6 months of service. The plan provides for matching contributions equal to 100% of each dollar contributed by the employee up to 4% of the employee’s salary. The Company’s matching contributions vest immediately. The Company may also elect to make discretionary contributions. The Company made contributions to the plan of approximately $123,000 and $172,000 for the years ended December 31, 2017 and 2016, respectively. |
P. DISCONTINUED OPERATIONS
P. DISCONTINUED OPERATIONS | 12 Months Ended |
Dec. 31, 2017 | |
Discontinued Operations and Disposal Groups [Abstract] | |
P. DISCONTINUED OPERATIONS | NOTE P – DISCONTINUED OPERATIONS In October of 2016, the Company, under the direction and authority of the Board of Directors, committed to a plan to offer for sale EthoStream, the Company’s wholly–owned High-Speed Internet Access (“HSIA”) subsidiary. As a result of this decision to sell EthoStream, the operating results of EthoStream as of and for the year ended December 31, 2016 were reclassified as discontinued operations and as assets and liabilities held for sale in the consolidated financial statements as detailed in the table below. During the year ended December 31, 2017, the Company, and EthoStream, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with DCI-Design Communications LLC (“DCI”), a Delaware limited liability company, whereby DCI acquired all of the assets and certain liabilities of EthoStream for a base purchase price of $12,750,000. The Purchase Agreement includes that proceeds of $900,000 are to be withheld from the $12,750,000 base purchase price and placed into an escrow account to support potential indemnification obligations of up to $800,000 and net working capital adjustments of up to $100,000. The escrow amount, net of potential claims, would be fully released after an escrow period not to exceed 12 months after closing. The assets included, among other items, certain inventory, contracts and intellectual property. DCI acquired only the liabilities provided for in the Purchase Agreement. On March 29, 2017, pursuant to the terms and the conditions of the Purchase Agreement, the Company closed on the sale. On September 27, 2017, the Company reached a final settlement with DCI on net working capital as set forth in the Purchase Agreement and subsequently received $100,000 from the escrow account for the portion of the escrow account set aside for net working capital adjustments and cash proceeds of $311,000 from DCI in the settlement of net working capital adjustments. During the year ended December 31, 2017, the Company recorded a gain from the sale of EthoStream (net of tax) of $6,630,244. The following table summarizes the balance sheet information from discontinued operations: December 31, 2017 2016 Accounts receivable, net $ – $ 456,478 Inventories – 350,506 Other current assets – 12,980 Other asset - goodwill – 5,796,430 Other asset – intangible asset, net – 533,577 Current assets held for sale – 7,149,971 Accounts payable – 465,346 Accrued liabilities and expenses – 90,187 Deferred revenues – 37,509 Customer deposits – 200,466 Deferred lease liability – 76,096 Current liabilities held for sale – 869,604 Net assets of discontinued operations $ – $ 6,280,367 The following table summarizes the statements of operations information for discontinued operations for the years ended December 31, 2017 and 2016. 2017 2016 Revenues, net: Product $ 653,839 $ 3,529,012 Recurring 925,837 3,894,998 Total Net Revenues 1,579,676 7,424,010 Cost of Sales: Product 393,804 2,235,641 Recurring 209,868 925,212 Total Cost of Sales 603,672 3,160,853 Gross Profit 976,004 4,263,157 Operating Expenses: Research and development – 2,511 Selling, general and administrative 252,378 1,191,385 Depreciation and amortization 60,420 242,117 Total Operating Expenses 312,798 1,436,013 Income from Discontinued Operations before Provision for Income Taxes 663,206 2,827,144 Provision for Income Taxes 50,331 199,386 Income from Discontinued Operations (net of tax) $ 612,875 $ 2,627,758 The consolidated statements of cash flows do not present the cash flows from discontinued operations for investing activities or financing activities because there were no investing or financing activities associated with the discontinued operations in the years ended December 31, 2017 and 2016. |
A. SUMMARY OF ACCOUNTING POLI23
A. SUMMARY OF ACCOUNTING POLICIES (Policies) | 12 Months Ended |
Dec. 31, 2017 | |
Accounting Policies [Abstract] | |
Business and Basis of Presentation | 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 rapidly being recognized as a leading solution for reducing energy consumption, operational costs and carbon footprints, and eliminating the need for new energy generation in these marketplaces – all whilst improving occupant comfort and convenience. On March 28, 2017, the Company sold its wholly-owned subsidiary, EthoStream, LLC. Refer to Note P for further details. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Telkonet Communications, Inc., and EthoStream, LLC. The current year and prior year accounts of Ethostream LLC have been classified as held for sale on the consolidated balance sheet and as discontinued operations on the consolidated statement of operations and the consolidated statement of cash flows. All significant intercompany balances and transactions have been eliminated in consolidation. Unless otherwise noted, all financial information in the consolidated financial statement footnotes reflect the Company’s results from continuing operations. |
Liquidity and Financial Condition | Liquidity and Financial Condition The Company reported net income of $3,746,378 for the year ended December 31, 2017, had a net loss from continuing operations of $3,496,741, had cash used in operating activities from continuing operations of $3,594,906, had an accumulated deficit of $119,724,656 and total current assets in excess of current liabilities from continuing operations of $10,162,776 as of December 31, 2017. Since inception, the Company’s primary sources of ongoing liquidity for operations have come through private and public offerings of equity securities, and the issuance of various debt instruments and asset-based lending. On October 23, 2017, an amendment to the revolving credit facility with Heritage Bank of Commerce was executed extending the maturity date of the revolving credit facility to September 30, 2019, unless earlier accelerated under the terms of the agreement. Refer to Note G for further details. The outstanding balance was $682,211 and $1,062,129 as of December 31, 2017 and 2016 and the remaining available borrowing capacity was approximately $202,000 and $107,000. As of December 31, 2017, the Company was in compliance with all financial covenants. The Company intends to utilize net proceeds received from the EthoStream LLC sale to continue executing its strategic plan, which we believe will help us achieve steady sales growth. |
Concentrations of Credit Risk | Concentrations of Credit Risk Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company has never experienced any losses related to these balances. With respect to trade receivables, the Company performs ongoing credit evaluations of its customers’ financial conditions and limits the amount of credit extended when deemed necessary. The Company provides credit to its customers primarily in the United States in the normal course of business. The Company routinely assesses the financial strength of its customers and, as a consequence, believes its trade receivables credit risk exposure is limited. |
Cash and Cash Equivalents | Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity date of three months or less to be cash equivalents. |
Restricted Cash on Deposit | Restricted Cash on Deposit The restricted cash on deposit of $810,000 as of December 31, 2017 reflects $800,000 placed into an escrow account to support potential indemnification obligations associated with the sale of the Company’s wholly-owned subsidiary, EthoStream. The escrow amount, net of potential claims, will be fully released after an escrow period not to exceed 12 months from the transaction closing on March 29, 2017. Within two business days of receipt of written instructions, signed by an authorized representative of each of Buyer and the Seller, the Escrow Agent shall disburse the funds. On September 29, 2017, the Company received $100,000 from the escrow account for the portion of the escrow account set aside for net working capital adjustments. On December 29, 2017, the Company deposited $10,000 into a brokerage account for the purpose of purchasing Company stock. |
Accounts Receivable | Accounts Receivable Accounts receivable are uncollateralized customer obligations due under normal trade terms. The Company records allowances for doubtful accounts based on customer-specific analysis and general matters such as current assessment of past due balances and economic conditions. The Company writes off accounts receivable when they become uncollectible. The allowance for doubtful accounts was $22,173 and $34,573 at December 31, 2017 and 2016, respectively. Management identifies a delinquent customer based upon the delinquent payment status of an outstanding invoice, generally greater than 30 days past due date. The delinquent account designation does not trigger an accounting transaction until such time the account is deemed uncollectible. The allowance for doubtful accounts is determined by examining the reserve history and any outstanding invoices that are over 30 days past due as of the end of the reporting period. Accounts are deemed uncollectible on a case-by-case basis, at management’s discretion based upon an examination of the communication with the delinquent customer and payment history. Typically, accounts are only escalated to “uncollectible” status after multiple attempts at collection have proven unsuccessful. The allowance for doubtful accounts for the years ended December 31 are as follows: 2017 2016 Beginning balance $ 34,573 $ 13,299 Provision charged to expense 35,187 32,047 Deductions (47,587 ) (10,773) Ending balance $ 22,173 $ 34,573 |
Inventories | Inventories Inventories consist of thermostats, sensors and controllers for Telkonet’s EcoSmart product platform. These inventories are purchased for resale and do not include manufacturing labor and overhead. Inventories are stated at the lower of cost or net realizable value determined by the first in, first out (FIFO) method. The Company’s inventories are subject to technological obsolescence. Management evaluates the net realizable value of its inventories on a quarterly basis and when it is determined that the Company’s carrying cost of such excess and obsolete inventories cannot be recovered in full, a charge is taken against income for the difference between the carrying cost and the estimated realizable amount. The charge (benefit) taken against income was approximately $111,400 and $(18,900) for the years ended December 31, 2017 and 2016, respectively. |
Property and Equipment | Property and Equipment In accordance with Accounting Standards Codification ASC 360 “Property Plant and Equipment ” |
Fair Value of Financial Instruments | Fair Value of Financial Instruments The Company accounts for the fair value of financial instruments in accordance with ASC 820, which defines fair value for accounting purposes, established a framework for measuring fair value and expanded disclosure requirements regarding fair value measurements. Fair value is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. The Company categorizes financial assets and liabilities that are recurring, at fair value into a three-level hierarchy in accordance with these provisions. · Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; · Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or · Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and are unobservable. The Company’s financial instruments include cash and cash equivalents, restricted cash on deposit, accounts receivable, accounts payable, line of credit, related party payable, and certain accrued liabilities. The carrying amounts of these assets and liabilities approximate fair value due to the short maturity of these instruments (Level 1 instruments), except for the line of credit and the related party payable. The carrying amount of the line of credit and related party payable approximates fair value due to the interest rate and terms approximating those available to the Company for similar obligations (Level 2 instruments). |
Long-Lived Assets | Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10. Recoverability is measured by comparison of the carrying amount to the future net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Based on the annual assessment for impairment performed during 2017 and 2016, no impairment was recorded. |
Income (Loss) per Common Share | 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 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 years ended December 31, 2017 and 2016, there were 4,626,474 and 3,132,725 shares of common stock underlying options and warrants excluded due to these instruments being anti-dilutive, respectively. |
Use of Estimates | Use of Estimates The preparation of financial statements in conformity with United States of America (U.S.) generally accepted accounting principles (“GAAP”) requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used when accounting for items and matters such as revenue recognition and allowances for uncollectible accounts receivable, inventory obsolescence, depreciation and amortization, long-lived assets, taxes and related valuation allowance, income tax provisions, stock-based compensation, and contingencies. The Company believes that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results may differ from those estimates. |
Income Taxes | 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 derecognition, classification, treatment of interest and penalties, and disclosure of such positions. |
Revenue Recognition | Revenue Recognition For revenue from product sales, the Company recognizes revenue in accordance with ASC 605-10, “Revenue Recognition” and ASC 605-10-S99 guidelines that require that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Assuming all conditions for revenue recognition have been satisfied, product revenue is recognized when products are shipped and installation revenue is recognized when the services are completed. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The guidelines also address the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Multiple-Element Arrangements (“MEAs”): · VSOE – In most instances, products are sold separately in stand-alone arrangements. Services are also sold separately through renewals of contracts with varying periods. The Company determines VSOE based on pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or stand-alone prices for the service element(s). · TPE – If the Company cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, the Company uses third-party evidence of selling price. The Company determines TPE based on sales of a comparable amount of similar product or service offered by multiple third parties considering the degree of customization and similarity of product or service sold. · ESP – The estimated selling price represents the price at which the Company would sell a product or service if it were sold on a stand-alone basis. When neither VSOE nor TPE exists for all elements, the Company determines ESP for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on the Company’s pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining ESP. Under the estimated selling price method, revenue is recognized in MEAs based on estimated selling prices for all of the elements in the arrangement, assuming all other conditions for revenue recognition have been satisfied. To determine the estimated selling price, the Company establishes the selling price for its products and installation services using the Company’s established pricing guidelines, and the proceeds are allocated between the elements and the arrangement. When MEAs include an element of customer training, the Company determined it is not essential to the functionality, efficiency or effectiveness of the MEA due to its perfunctory nature in relation to the entire arrangement. Therefore the Company has concluded that this obligation is inconsequential and perfunctory. As such, for MEAs that include training, customer acceptance of said training is not deemed necessary in order to record the related revenue, but is recorded when the installation deliverable is fulfilled. Historically, training revenues have not been significant. The Company provides call center support services to properties installed by the Company. The Company receives monthly service fees from such properties for its services. The Company recognizes the service fee ratably over the term of the contract. The prices for these services are fixed and determinable prior to delivery of the service. The fair value of these services is known due to objective and reliable evidence from standalone executed contracts. The Company reports such revenues as recurring revenues. Deferred revenue includes deferrals for the monthly support service fees. Long-term deferred revenue represents support service fees to be earned or provided beginning after December 31, 2018. Revenue recognized that has not yet been billed to a customer results in an asset as of the end of the period. As of December 31, 2017 and 2016, there was $261,800 and $214,821 recorded within accounts receivable, respectively, related to revenue recognized that has not yet been billed. |
Sales Taxes | Sales Taxes Unless provided with a resale or tax exemption certificate, the Company assesses and collects sales tax on sales transactions and records the amount as a liability. It is recognized as a liability until remitted to the applicable state. Total revenues do not include sales tax as the Company is considered a pass through conduit for collecting and remitting sales taxes. |
Guarantees and Product Warranties | 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 years ended December 31, 2017 and 2016, the Company experienced returns of approximately 1% to 3% of material’s included in cost of sales. As of December 31, 2017 and 2016, the Company recorded warranty liabilities in the amount of $59,892 and $95,540, respectively, using this experience factor range. Product warranties for the years ended December 31 is as follows: 2017 2016 Beginning balance $ 95,540 $ 66,555 Warranty claims incurred (84,087 ) (115,120 ) Provision charged to expense 48,439 144,105 Ending balance $ 59,892 $ 95,540 |
Advertising | Advertising The Company follows the policy of charging the costs of advertising to expenses as incurred. The Company incurred $33,520 and $31,573 in advertising costs during the years ended December 31, 2017 and 2016, respectively. |
Research and Development | Research and Development The Company accounts for research and development costs in accordance with the ASC 730-10, “Research and Development”. Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. Total expenditures on research and product development for 2017 and 2016 were $1,770,597 and $1,658,640, respectively. |
Stock-Based Compensation | Stock-Based Compensation The Company accounts for stock-based awards in accordance with ASC 718-10, “Share-Based Compensation”, which requires a fair value measurement and recognition of compensation expense for all share-based payment awards made to the Company’s employees and directors, including employee stock options and restricted stock awards. The Company estimates the fair value of stock options granted using the Black-Scholes valuation model. This model requires the Company to make estimates and assumptions including, among other things, estimates regarding the length of time an employee will hold vested stock options before exercising them, the estimated volatility of the Company’s common stock price and the number of options that will be forfeited prior to vesting. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Changes in these estimates and assumptions can materially affect the determination of the fair value of stock-based compensation and consequently, the related amount recognized in the Company’s consolidated statements of operations. The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. For 2017 and prior years, expected stock price volatility is based on the historical volatility of the Company’s stock for the related expected term. Stock-based compensation expense in connection with options granted to employees for the years ended December 31, 2017 and 2016 was $322,888 and $55,050, respectively. |
Deferred Lease Liability | Deferred Lease Liability Rent expense is recorded on a straight-line basis over the term of the lease. Rent escalations and rent abatement periods during the term of the lease create a deferred lease liability which represents the excess of cumulative rent expense recorded to date over the actual rent paid to date. |
Reclassifications | Reclassifications Certain amounts on the condensed consolidated balance sheets as of December 31, 2016 and statements of cash flows have been reclassified to conform to the current year presentation. The Company reclassified $106,743 from current assets of discontinued operations to cash and cash equivalents for certain EthoStream assets not sold to DCI on March 29, 2017. The Company reclassified $150,936 from current liabilities of discontinued operations to accrued liabilities and expenses for certain EthoStream liabilities not assumed by DCI on March 29, 2017. The reclassifications were not material and had no effect on the Company’s total current assets, current liabilities or stockholders’ equity as of December 31, 2016. |
A. SUMMARY OF ACCOUNTING POLI24
A. SUMMARY OF ACCOUNTING POLICIES (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
Accounting Policies [Abstract] | |
Schedule of allowance for doubtful accounts | The allowance for doubtful accounts for the years ended December 31 are as follows: 2017 2016 Beginning balance $ 34,573 $ 13,299 Provision charged to expense 35,187 32,047 Deductions (47,587 ) (10,773) Ending balance $ 22,173 $ 34,573 |
Schedule of product warranties | Product warranties for the years ended December 31 is as follows: 2017 2016 Beginning balance $ 95,540 $ 66,555 Warranty claims incurred (84,087 ) (115,120 ) Provision charged to expense 48,439 144,105 Ending balance $ 59,892 $ 95,540 |
D. ACCOUNTS RECEIVABLE (Tables)
D. ACCOUNTS RECEIVABLE (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
Receivables [Abstract] | |
Schedule of accounts receivable | Components of accounts receivable as of December 31, 2017 and 2016 are as follows: 2017 2016 Accounts receivable $ 1,632,459 $ 1,438,345 Allowance for doubtful accounts (22,173 ) (34,573 ) Accounts receivable, net $ 1,610,286 $ 1,403,772 |
E. PROPERTY AND EQUIPMENT (Tabl
E. PROPERTY AND EQUIPMENT (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
Property, Plant and Equipment [Abstract] | |
Schedule of property and equipment | The Company’s property and equipment as of December 31, 2017 and 2016 consists of the following: 2017 2016 Development test equipment $ 19,110 $ 19,110 Computer software 76,134 76,134 Office equipment 51,142 36,904 Office fixtures and furniture 330,568 151,330 Leasehold improvements 18,016 – Total 494,970 283,478 Accumulated depreciation and amortization (190,800 ) (139,571 ) Total property and equipment $ 304,170 $ 143,907 |
F. ACCRUED LIABILITIES AND EX27
F. ACCRUED LIABILITIES AND EXPENSES (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
Payables and Accruals [Abstract] | |
Schedule of accrued liabilities and expenses | Accrued liabilities and expenses as of December 31, 2017 and 2016 are as follows: 2017 2016 Accrued liabilities and expenses $ 294,709 $ 223,011 Accrued payroll and payroll taxes 230,931 331,908 Accrued sales taxes, penalties, and interest 83,282 274,869 Accrued interest – 253 Product warranties 59,892 95,540 Total accrued liabilities and expenses $ 668,814 $ 925,581 |
J. STOCK OPTIONS AND WARRANTS (
J. STOCK OPTIONS AND WARRANTS (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | |
Schedule of options outstanding and exercisable | 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 December 31, 2017. Options Outstanding Options Exercisable Exercise Prices Number Weighted Average Weighted Average Number Weighted Average $ 0.01 - $0.15 3,050,000 5.99 $ 0.14 3,050,000 $ 0.14 $ 0.16 - $1.00 1,326,474 5.51 0.20 1,116,474 0.20 4,376,474 5.85 $ 0.16 4,166,474 $ 0.16 |
Schedule of option activity | Transactions involving stock options issued to employees are summarized as follows: Number of Weighted Average Exercise Outstanding at January 1, 2016 1,825,225 $ 0.28 Granted 1,300,000 0.17 Exercised – – Cancelled or expired (292,500 ) 0.69 Outstanding at December 31, 2016 2,832,725 $ 0.18 Granted 3,000,000 0.14 Exercised – – Cancelled or expired (1,456,251 ) 0.17 Outstanding at December 31, 2017 4,376,474 $ 0.16 |
Schedule of valuation assumptions | The following table summarizes the assumptions used to estimate the fair value of options granted during the years ended December 2017 and 2016, using the Black-Scholes option-pricing model: 2017 2016 Expected life of option (years) 7 3 Risk-free interest rate 1.22% 0.96% Assumed volatility 81% 83% Expected dividend rate 0 0 Expected forfeiture rate 10% 25% |
Schedule of warrants outstanding and exercisable | The following table summarizes the changes in warrants outstanding and the related exercise prices for the warrants issued to non-employees of the Company. Warrants Outstanding Warrants Exercisable Exercise Prices Number Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Weighted Average Exercise Price $ 0.20 250,000 3.77 $ 0.20 250,000 0.20 |
Schedule of warrant activity | Transactions involving warrants are summarized as follows: Number of Weighted Average Exercise Outstanding at January 1, 2016 5,638,410 $ 0.20 Issued – – Exercised (5,211,542 ) 0.13 Cancelled or expired (126,868 ) 3.00 Outstanding at December 31, 2016 300,000 0.20 Issued – – Exercised – – Cancelled or expired (50,000 ) 0.18 Outstanding at December 31, 2017 250,000 $ 0.20 |
L. INCOME TAXES (Tables)
L. INCOME TAXES (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
Income Tax Disclosure [Abstract] | |
Schedule of reconcilation of tax expense | 2017 2016 Tax provision (benefits) computed at the statutory rate $ 1,000,507 $ (1,304,289 ) State taxes 8,419 (26,981 ) Tax credits (67,357 ) – Book expenses not deductible for tax purposes 6,782 16,380 Tax Cut and Jobs Act impact 12,721,278 – Sale of subsidiary 45,327 – Other(prior period adjustments) 5,750 2,747 13,720,706 (1,312,143 ) Change in valuation allowance for deferred tax assets (13,710,944 ) 1,332,257 Income tax expense $ 9,762 $ 20,114 |
Schedule of deferred tax assets and liabilties | Deferred income taxes include the net tax effects of net operating loss (NOL) carry forwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows: 2017 2016 Deferred Tax Assets: Net operating loss carry forwards $ 21,077,944 $ 34,458,920 Intangibles 422,955 781,920 Credits 67,357 – Other 512,796 580,125 Total deferred tax assets 22,081,052 35,820,965 Deferred Tax Liabilities: Intangibles – (933,433 ) Total deferred tax liabilities – (933,433 ) Valuation allowance (22,081,052 ) (35,820,965 ) Net deferred tax liabilities $ – $ (933,433 ) |
M. COMMITMENTS AND CONTINGENC30
M. COMMITMENTS AND CONTINGENCIES (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
Commitments and Contingencies Disclosure [Abstract] | |
Schedule of office lease obligations | Commitments for minimum rentals under non-cancelable leases as of December 31, 2017 are as follows: Years ending December 31, 2018 $ 205,324 2019 159,253 2020 164,903 2021 182,512 2022 190,141 2023 and thereafter 573,883 Total $ 1,476,016 |
Schedule of sales tax accrual | The following table sets forth the change in the sales tax accrual during the years ended December 31: 2017 2016 Balance, beginning of year $ 274,869 $ 229,768 Sales tax collected 297,673 452,016 Provisions (reversals) (33,000 ) 151,000 Interest and penalties (5,890 ) (3,017 ) Payments (450,370 ) (554,898 ) Balance, end of year $ 83,282 $ 274,869 |
P. DISCONTINUED OPERATIONS (Tab
P. DISCONTINUED OPERATIONS (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
Discontinued Operations and Disposal Groups [Abstract] | |
Schedule of discontinued operations activity | The following table summarizes the balance sheet information from discontinued operations: December 31, 2017 2016 Accounts receivable, net $ – $ 456,478 Inventories – 350,506 Other current assets – 12,980 Other asset - goodwill – 5,796,430 Other asset – intangible asset, net – 533,577 Current assets held for sale – 7,149,971 Accounts payable – 465,346 Accrued liabilities and expenses – 90,187 Deferred revenues – 37,509 Customer deposits – 200,466 Deferred lease liability – 76,096 Current liabilities held for sale – 869,604 Net assets of discontinued operations $ – $ 6,280,367 The following table summarizes the statements of operations information for discontinued operations for the years ended December 31, 2017 and 2016. 2017 2016 Revenues, net: Product $ 653,839 $ 3,529,012 Recurring 925,837 3,894,998 Total Net Revenues 1,579,676 7,424,010 Cost of Sales: Product 393,804 2,235,641 Recurring 209,868 925,212 Total Cost of Sales 603,672 3,160,853 Gross Profit 976,004 4,263,157 Operating Expenses: Research and development – 2,511 Selling, general and administrative 252,378 1,191,385 Depreciation and amortization 60,420 242,117 Total Operating Expenses 312,798 1,436,013 Income from Discontinued Operations before Provision for Income Taxes 663,206 2,827,144 Provision for Income Taxes 50,331 199,386 Income from Discontinued Operations (net of tax) $ 612,875 $ 2,627,758 |
A. SUMMARY OF ACCOUNTING POLI32
A. SUMMARY OF ACCOUNTING POLICIES (Details - Doubtful accounts) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Accounting Policies [Abstract] | ||
Beginning balance | $ 34,573 | $ 13,299 |
Provision charged to expense | 35,187 | 32,047 |
Deductions | (47,587) | (10,773) |
Ending balance | $ 22,173 | $ 34,573 |
A. SUMMARY OF ACCOUNTING POLI33
A. SUMMARY OF ACCOUNTING POLICIES (Details-Product warranties) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Product warranties | ||
Beginning balance | $ 95,540 | $ 66,555 |
Warranty claims incurred | (84,087) | (115,120) |
Provision charged to expense | 48,439 | 144,105 |
Ending balance | $ 59,892 | $ 95,540 |
A. SUMMARY OF ACCOUNTING POLI34
A. SUMMARY OF ACCOUNTING POLICIES (Details Narrative) - USD ($) | 12 Months Ended | ||||
Dec. 31, 2017 | Dec. 31, 2016 | Dec. 29, 2017 | Sep. 29, 2017 | Dec. 31, 2015 | |
Net loss | $ (3,496,741) | $ (4,003,671) | |||
Cash used in operating activities | (3,077,664) | (627,112) | |||
Accumulated deficit | (119,724,656) | (123,471,034) | |||
Working capital | 10,162,776 | ||||
Line of credit balance | 682,211 | 1,062,129 | |||
Line of credit | 682,211 | 0 | |||
Line of credit remaining borrowing capacity | 202,000 | 107,000 | |||
Restricted cash | 810,000 | 0 | |||
Allowance for doubtful accounts | 22,173 | 34,573 | $ 13,299 | ||
Inventory value adjustment | $ 111,400 | 18,900 | |||
Property and equipment useful lives | 2 to 10 years | ||||
Intangible useful life (in years) | 12 years | ||||
Impairment on long-lived assets | $ 0 | $ 0 | |||
Shares excluded from EPS calculation | 4,626,474 | 3,132,725 | |||
Guarantees and product warranty return percentage | 1.00% | 3.00% | |||
Advertising expense | $ 33,520 | $ 31,573 | |||
Research and development expenses | 1,770,597 | 1,658,640 | |||
Stock based compensation expenses | 322,888 | 55,050 | |||
Warranty liabilities | 59,892 | 95,540 | $ 66,555 | ||
Accounts receivable | 978,207 | 765,617 | |||
Escrow deposit | 800,000 | $ 10,000 | $ 100,000 | ||
Discontinued operation cash | 106,743 | ||||
Revenue recognized that has not been billed [Member] | |||||
Accounts receivable | $ 261,800 | $ 214,821 |
C. INTANGIBLE ASSETS AND GOODWI
C. INTANGIBLE ASSETS AND GOODWILL (Details-Intangible Assets) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Indefinite-lived Intangible Assets [Line Items] | ||
Goodwill | $ 0 | |
Goodwill SSI [Member] | ||
Indefinite-lived Intangible Assets [Line Items] | ||
Current assets held for sale | $ 5,796,430 |
D. ACCOUNTS RECEIVABLE (Details
D. ACCOUNTS RECEIVABLE (Details) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Components of accounts receivable | ||
Accounts receivable | $ 1,632,459 | $ 1,438,345 |
Allowance for doubtful accounts | (22,173) | (34,573) |
Accounts receivable, net | $ 1,610,286 | $ 1,403,772 |
E. PROPERTY AND EQUIPMENT (Deta
E. PROPERTY AND EQUIPMENT (Details) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Total property and equipment | $ 494,970 | $ 283,478 |
Accumulated depreciation and amortization | (190,800) | (139,571) |
Property and equipment, net | 304,170 | 143,907 |
Development test equipment [Member] | ||
Total property and equipment | 19,110 | 19,110 |
Computer software [Member] | ||
Total property and equipment | 76,134 | 76,134 |
Office equipment [Member] | ||
Total property and equipment | 51,142 | 36,904 |
Office Furniture and fixtures [Member] | ||
Total property and equipment | 330,568 | 151,330 |
Leasehold Improvements [Member] | ||
Total property and equipment | $ 18,016 | $ 0 |
E. PROPERTY AND EQUIPMENT (De38
E. PROPERTY AND EQUIPMENT (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Property, Plant and Equipment [Abstract] | ||
Depreciation and amortization expense | $ 51,229 | $ 34,289 |
F. ACCRUED LIABILITIES AND EX39
F. ACCRUED LIABILITIES AND EXPENSES (Details) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 | Dec. 31, 2015 |
Accrued liabilities and expenses | |||
Accrued liabilities and expenses | $ 294,709 | $ 223,011 | |
Accrued payroll and payroll taxes | 230,931 | 331,908 | |
Accrued sales taxes, penalties, and interest | 83,282 | 274,869 | |
Accrued interest | 0 | 253 | |
Product warranties | 59,892 | 95,540 | $ 66,555 |
Total accrued liabilities and expenses | $ 668,814 | $ 925,581 |
G. DEBT (Details Narrative)
G. DEBT (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Debt Instrument [Line Items] | ||
Line of credit balance | $ 682,211 | $ 1,062,129 |
Line of credit remaining borrowing capacity | 202,000 | $ 107,000 |
Kross Promissory Note [Member] | Kross [Member] | ||
Debt Instrument [Line Items] | ||
Debt issuance date | Aug. 4, 2016 | |
Debt face value | $ 161,075 | |
Debt interest rate | 3.00% | |
Debt maturity date | Jun. 1, 2017 | |
Debt periodic frequency | monthly | |
Debt periodic payment | $ 16,330 | |
Note payable - related party | $ 0 | 97,127 |
Revolving Credit Facility [Member] | Heritage Bank [Member] | ||
Debt Instrument [Line Items] | ||
Line of credit issuance date | Sep. 30, 2014 | |
Line of credit maximum borrowing capacity | $ 2,000,000 | |
Line of credit interest rate description | Prime rate plus 3.00% | |
Line of credit maturity date | Sep. 30, 2019 | |
Line of credit balance | $ 682,211 | 1,062,129 |
Line of credit remaining borrowing capacity | $ 202,000 | $ 107,000 |
Effective interest rate | 7.50% | 6.75% |
H. REDEEMABLE PREFERRED STOCK (
H. REDEEMABLE PREFERRED STOCK (Details Narrative) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Series B Preferred Stock [Member] | ||
Liquidation preference | $ 414,258 | $ 393,435 |
Unpaid dividends | 154,258 | 133,435 |
Series A Preferred Stock [Member] | ||
Liquidation preference | 1,526,141 | 1,452,114 |
Unpaid dividends | $ 601,141 | $ 527,114 |
I. CAPITAL STOCK (Details Narra
I. CAPITAL STOCK (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Preferred stock, shares authorized | 15,000,000 | 15,000,000 |
Common stock, par value | $ 0.001 | $ 0.001 |
Common stock, shares authorized | 190,000,000 | 190,000,000 |
Common stock, shares outstanding | 133,695,111 | 132,774,475 |
Common stock, shares issued | 133,695,111 | 132,774,475 |
Shares issued to directors, value | $ 144,000 | $ 72,000 |
Proceeds from warrants exercised | $ 0 | $ 677,501 |
Directors [Member] | ||
Shares issued to directors, shares | 920,636 | 392,700 |
Shares issued to directors, value | $ 144,000 | $ 72,000 |
Series A Preferred Stock [Member] | ||
Preferred stock, par value | $ 0.001 | $ 0.001 |
Preferred stock, shares issued | 215 | 215 |
Preferred stock, shares outstanding | 185 | 185 |
Series B Preferred Stock [Member] | ||
Preferred stock, par value | $ 0.001 | $ 0.001 |
Preferred stock, shares issued | 538 | 538 |
Preferred stock, shares outstanding | 52 | 52 |
Warrants [Member] | Common Stock [Member] | ||
Warrants exercised, shares | 5,211,542 | |
Stock converted, shares issued | 5,211,542 | |
Series B Preferred Stock [Member] | Common Stock [Member] | ||
Stock converted, shares converted | 3 | |
Stock converted, shares issued | 115,385 |
J. STOCK OPTIONS AND WARRANTS43
J. STOCK OPTIONS AND WARRANTS (Details-Options Outstanding and Exercisable) - Employee Stock Options [Member] - $ / shares | 12 Months Ended | ||
Dec. 31, 2017 | Dec. 31, 2016 | Dec. 31, 2015 | |
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items] | |||
Options outstanding | 4,376,474 | 2,832,725 | 1,825,225 |
Options outstanding, weighted average remaining contractual life (Years) | 5 years 10 months 6 days | ||
Options outstanding, weighted average exercise price | $ 0.16 | $ 0.18 | $ 0.28 |
Options exercisable | 4,166,474 | ||
Options exercisable, weighted average exercise price | $ 0.16 | ||
$0.01 - $0.15 [Member] | |||
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items] | |||
Options outstanding | 3,050,000 | ||
Options outstanding, weighted average remaining contractual life (Years) | 5 years 11 months 26 days | ||
Options outstanding, weighted average exercise price | $ 0.14 | ||
Options exercisable | 3,050,000 | ||
Options exercisable, weighted average exercise price | $ 0.14 | ||
$0.16 - $1.00 [Member] | |||
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items] | |||
Options outstanding | 1,326,474 | ||
Options outstanding, weighted average remaining contractual life (Years) | 5 years 6 months 3 days | ||
Options outstanding, weighted average exercise price | $ 0.20 | ||
Options exercisable | 1,116,474 | ||
Options exercisable, weighted average exercise price | $ 0.20 |
J. STOCK OPTIONS AND WARRANTS44
J. STOCK OPTIONS AND WARRANTS (Details-Option Activity) - Employee Stock Options [Member] - $ / shares | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Number of shares | ||
Options outstanding, beginning balance | 2,832,725 | 1,825,225 |
Options granted | 3,000,000 | 1,300,000 |
Options exercised | 0 | 0 |
Options cancelled or expired | (1,456,251) | (292,500) |
Options outstanding, ending balance | 4,376,474 | 2,832,725 |
Weighted Average Price Per Share | ||
Weighted average price per share - beginning balance | $ 0.18 | $ 0.28 |
Weighted average price per share - granted | 0.14 | 0.17 |
Weighted average price per share - exercised | ||
Weighted average price per share - cancelled or expired | 0.17 | 0.69 |
Weighted average price per share - ending balance | $ 0.16 | $ 0.18 |
J. STOCK OPTIONS AND WARRANTS45
J. STOCK OPTIONS AND WARRANTS (Details-Assumptions) - Employee Stock Options [Member] | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Expected life of option (years) | 7 years | 3 years |
Risk-free interest rate | 1.22% | 0.96% |
Assumed volatility | 81.00% | 0.83% |
Expected dividend rate | 0.00% | 0.00% |
Expected forfeiture rate | 10.00% | 25.00% |
J. STOCK OPTIONS AND WARRANTS46
J. STOCK OPTIONS AND WARRANTS (Details-Warrants Outstanding and Exercisable) - Warrant [Member] - $ / shares | 12 Months Ended | ||
Dec. 31, 2016 | Dec. 31, 2017 | Dec. 31, 2015 | |
Warrants outstanding | 300,000 | 250,000 | 5,638,410 |
Warrants, weighted average exercise price | $ 0.20 | $ 0.20 | $ 0.20 |
$0.20 [Member] | |||
Warrants outstanding | 250,000 | ||
Warrants outstanding, weighted average remaining contractual life (Years) | 3 years 9 months 7 days | ||
Warrants, weighted average exercise price | $ 0.20 | ||
Warrants exercisable | 250,000 | ||
Warrants exercisable, weighted average exercise price | $ 0.20 |
J. STOCK OPTIONS AND WARRANTS47
J. STOCK OPTIONS AND WARRANTS (Details-Warrant Activity) - Warrant [Member] - $ / shares | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Warrants outstanding, beginning balance | 300,000 | 5,638,410 |
Warrants issued | 0 | 0 |
Warrants exercised | 0 | (5,211,542) |
Warrants cancelled or expired | (50,000) | (126,868) |
Warrants outstanding, ending balance | 250,000 | 300,000 |
Weighted average price per share - beginning balance | $ 0.20 | $ 0.20 |
Weighted average price per share - issued | ||
Weighted average price per share - exercised | 0.13 | |
Weighted average price per share - cancelled or expired | 0.18 | 3 |
Weighted average price per share - ending balance | $ 0.20 | $ 0.20 |
J. STOCK OPTIONS AND WARRANTS48
J. STOCK OPTIONS AND WARRANTS (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Fair value of options granted | $ 360,000 | $ 99,742 |
Fair value of options vested | 368,544 | 160,923 |
Future compensation expense related to non-vested options | $ 21,426 | |
Compensation expense amortization period | 3 years 6 months | |
Aggregate intrinsic value of vested options | $ 0 | 0 |
Stock-based compensation expense | $ 322,888 | $ 55,050 |
2010 Plan [Member] | ||
Shares authorized under the plan | 10,000,000 | |
Shares available for issuance | 1,752,968 |
K. RELATED PARTY TRANSACTIONS (
K. RELATED PARTY TRANSACTIONS (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Due to related parties | $ 0 | $ 97,127 |
Credit line outstanding balance | 682,211 | 0 |
Payments on notes payable | 0 | 93,340 |
Non-employee Directors [Member] | ||
Stock issued for compensation, value | 144,000 | $ 72,000 |
Kross [Member] | ||
Options granted | 100,000 | |
Blatt [Member] | ||
Options granted | 100,000 | |
Byrnes [Member] | ||
Options granted | 100,000 | |
Kross Promissory Note [Member] | ||
Long-term debt outstanding | $ 0 | $ 97,127 |
Debt stated interest rate | 3.00% | |
Debt face amount | $ 161,075 | |
Debt payment terms | monthly | |
Debt periodic payment | $ 16,330 | |
Debt maturity date | Jun. 1, 2017 |
L. INCOME TAXES (Details-Reconc
L. INCOME TAXES (Details-Reconciliation) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Income Tax Disclosure [Abstract] | ||
Tax provision (benefit) computed at the statutory rate | $ 1,000,507 | $ (1,304,289) |
State taxes | 8,419 | (26,981) |
Tax credits | (67,357) | 0 |
Book expenses not deductible for tax purposes | 6,782 | 16,380 |
Tax Cut and Jobs Act impact | 12,721,278 | 0 |
Sale of subsidiary | 45,327 | 0 |
Other (prior period adjustments) | 5,750 | 2,747 |
Total adjustments to tax provision | 13,720,706 | (1,312,143) |
Change in valuation allowance for deferred tax assets | (13,710,944) | 1,332,257 |
Income tax expense | $ 9,762 | $ 20,114 |
L. INCOME TAXES (Details-Deferr
L. INCOME TAXES (Details-Deferred Taxes) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Deferred Tax Assets: | ||
Net operating loss carry forwards | $ 21,077,944 | $ 34,458,920 |
Intangibles | 422,955 | 781,920 |
Credits | 67,357 | 0 |
Other | 512,796 | 580,125 |
Total deferred tax assets | 22,081,052 | 35,820,965 |
Deferred Tax Liabilities: | ||
Intangibles | 0 | (933,433) |
Total deferred tax liabilities | 0 | (933,433) |
Valuation allowance | (22,081,052) | (35,820,965) |
Net deferred tax liabilities | $ 0 | $ (933,433) |
L. INCOME TAXES (Details Narrat
L. INCOME TAXES (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Operating loss expiration dates | 2018 thru 2037 | |
Net deferred tax liabilities | $ 0 | $ (933,433) |
EthoStream [Member] | ||
Net deferred tax liabilities | $ (933,433) | |
Federal [Member] | ||
Change in deferred tax valuation allowance | (12,700,000) | |
State Jurisdiction [Member] | ||
Operating loss carryforward | 45,500,000 | |
Operating loss carryforward expired during the year | 1,200,000 | |
Change in deferred tax valuation allowance | $ (100,000) |
M. COMMITMENTS AND CONTINGENC53
M. COMMITMENTS AND CONTINGENCIES (Details-Lease Commitments) | Dec. 31, 2017USD ($) |
Commitments and Contingencies Disclosure [Abstract] | |
2,018 | $ 205,324 |
2,019 | 159,253 |
2,020 | 164,903 |
2,021 | 182,512 |
2,022 | 190,141 |
2023 and thereafter | 573,883 |
Total | $ 1,476,016 |
M. COMMITMENTS AND CONTINGENC54
M. COMMITMENTS AND CONTINGENCIES (Details-Sales Tax Accrual) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Change in the sales tax accrual | ||
Balance, Beginning of year | $ 274,869 | $ 229,768 |
Sales tax collected | 297,673 | 452,016 |
Provisions (reversals) | (33,000) | 151,000 |
Interest and penalties | (5,890) | (3,017) |
Payments | (450,370) | (554,898) |
Balance, End of year | $ 83,282 | $ 274,869 |
M. COMMITMENTS AND CONTINGENC55
M. COMMITMENTS AND CONTINGENCIES (Details Narrative) | 12 Months Ended | ||
Dec. 31, 2017USD ($)ft² | Dec. 31, 2016USD ($) | Dec. 31, 2015USD ($) | |
Rental expenses | $ | $ 284,714 | $ 169,807 | |
Sales tax accrual | $ | $ 83,282 | $ 274,869 | $ 229,768 |
Waukesha, WI Office Space [Member] | |||
Lease expiration date | Apr. 30, 2026 | ||
Leased square feet | 10,344 | ||
Germantown, MD [Member] | |||
Lease expiration date | Jan. 31, 2019 | ||
Leased square feet | 2,237 | ||
Waukesha, WI Floor Space [Member] | |||
Lease expiration date | May 31, 2024 | ||
Leased square feet | 5,838 |
N. BUSINESS CONCENTRATION (Deta
N. BUSINESS CONCENTRATION (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Supplier Concentration Risk [Member] | ||
Concentration percentage | 79.00% | 62.00% |
Purchases from major suppliers | $ 2,796,000 | $ 2,235,000 |
Due to suppliers | $ 202,258 | $ 45,037 |
Accounts Receivable [Member] | Three Customers [Member] | ||
Concentration percentage | 54.00% | |
Accounts Receivable [Member] | Two Customers [Member] | ||
Concentration percentage | 24.00% |
O. EMPLOYEE BENEFIT PLAN (Deta
O. EMPLOYEE BENEFIT PLAN (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Disclosure Text Block Supplement [Abstract] | ||
Company contributions | $ 123,000 | $ 172,000 |
P. DISCONTINUED OPERATIONS (Det
P. DISCONTINUED OPERATIONS (Details - Balance Sheet) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Current assets held for sale | $ 0 | $ 7,149,971 |
Current liabilities held for sale | 0 | 869,604 |
Segment Discontinued Operations [Member] | ||
Accounts receivable, net | 0 | 456,478 |
Inventories | 0 | 350,506 |
Other current assets | 0 | 12,980 |
Other asset - goodwill | 0 | 5,796,430 |
Other asset - intangible asset, net | 0 | 533,577 |
Current assets held for sale | 0 | 7,149,971 |
Accounts payable | 0 | 465,346 |
Accrued liabilities and expenses | 0 | 90,187 |
Deferred revenues | 0 | 37,509 |
Customer deposits | 0 | 200,466 |
Deferred lease liability | 0 | 76,096 |
Current liabilities held for sale | 0 | 869,604 |
Net assets of discontinued operations | $ 0 | $ 6,280,367 |
P. DISCONTINUED OPERATIONS (D59
P. DISCONTINUED OPERATIONS (Details - Income Statement) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Income from Discontinued Operations (net of tax) | $ 612,875 | $ 2,627,758 |
Segment Discontinued Operations [Member] | ||
Revenues - Product | 653,839 | 3,529,012 |
Revenues - Recurring | 925,837 | 3,894,998 |
Total Net Revenue | 1,579,676 | 7,424,010 |
Cost of Sales - Product | 393,804 | 2,235,641 |
Cost of Sales - Recurring | 209,868 | 925,212 |
Total Cost of Sales | 603,672 | 3,160,853 |
Gross Profit | 976,004 | 4,263,157 |
Research and development | 0 | 2,511 |
Selling, general and administrative | 252,378 | 1,191,385 |
Depreciation and amortization | 60,420 | 242,117 |
Total Operating Expenses | 312,798 | 1,436,013 |
Income from Discontinued Operations before Provision for Income Taxes | 663,206 | 2,827,144 |
Provision for Income Taxes | 50,331 | 199,386 |
Income from Discontinued Operations (net of tax) | $ 612,875 | $ 2,627,758 |