A. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|9 Months Ended|
Sep. 30, 2015
|Organization, Consolidation and Presentation of Financial Statements [Abstract]|
|NOTE A - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES||
A summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial statements follows.
The accompanying unaudited condensed consolidated financial statements of Telkonet, Inc. (the Company, Telkonet) have been prepared in accordance with Rule S-X of the Securities and Exchange Commission (the SEC) and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, the results from operations for the nine months ended September 30, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2014 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC.
Business and Basis of Presentation
Telkonet, Inc., formed in 1999 and incorporated under the laws of the State of Utah, is made up of two synergistic business divisions, EcoSmart Energy Management Technology and EthoStream High Speed Internet Access (HSIA) Network.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Telkonet Communications, Inc., and EthoStream, LLC (EthoStream). All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company reported net income of $48,853 for the nine months ended September 30, 2015, had cash used in operating activities of $424,881, has an accumulated deficit of $121,857,164 and total current assets in excess of current liabilities of $154,395 as of September 30, 2015.
Although the Company had net income for the year ended December 31, 2014 and for the nine months ended September 30, 2015 and total current assets in excess of current liabilities of as of September 30, 2015, these results have not been achieved on a consistent basis. The Companys ability to continue as a going concern is subject to its ability to consistently generate a profit and positive operating cash flows and/or obtain necessary funding from outside sources, including by the sale of securities or assets, or obtaining loans from financial institutions, where possible. The Company may also experience net operating losses in the future and the uncertainty regarding contingent liabilities cast doubt on its ability to satisfy such liabilities and the Company cannot make any representations for fiscal 2015 and beyond. These matters raise doubt about the Companys ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Anticipated cash flows from operations may be insufficient to satisfy the Companys ongoing capital requirements for at least the next 12 months. 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 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 Companys eligible accounts receivable and eligible inventory each multiplied by an applicable advance rate, with an overall limitation tied to the Companys eligible accounts receivable. The Loan Agreement is available for working capital and other lawful general corporate purposes. The outstanding principal balance of the Credit Facility bears interest at the Prime Rate plus 3.00%. The Credit Facility matures on September 30, 2016, unless earlier accelerated under the terms of the Loan Agreement. The outstanding balance was $961,771 on the Credit Facility as of September 30, 2015 and the remaining available borrowing capacity was approximately $447,000 at September 30, 2015. As of September 30, 2015, the Company was in compliance with all financial covenants.
Management intends to review the options for raising additional capital including, but not limited to, asset-based or equity financing, private placements, and/or disposition of assets. Management believes that with additional financing, the Company will be able to generate additional revenues that will allow the Company to continue as a going concern. In addition, any equity financing may be dilutive to stockholders and any additional debt financing would increase expenses and may involve restrictive covenants. There can be no assurance that the Company will be successful in obtaining additional funding. If the Company is unable to obtain additional funding or is required to raise it on undesirable terms, it may have a material adverse effect on the Companys financial condition.
Restricted Cash on Deposit
During 2014, the Company was awarded a contract with a bonding requirement. The Company satisfied this requirement during the year ended December 31, 2014 with cash collateral supported by an irrevocable standby letter of credit in the amount of $63,000. The Company continues to execute contracts with bonding requirements and maintains this cash collateral on deposit for current and future projects. The amount is presented as restricted cash on deposit on the condensed consolidated balance sheet as of September 30, 2015 and December 31, 2014. The outstanding balance as of September 30, 2015 and December 31, 2014 was $31,267 and $63,000, respectively.
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 by dividing net income (loss) by the weighted average number of shares outstanding of common stock. Diluted income (loss) per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the year. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company's outstanding stock options and warrants. For the nine months ended September 30, 2015 and 2014, there were 7,413,635 and 11,290,139 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 and intangible asset valuations, impairment assessments, taxes and related valuation allowance, income tax provisions, stock-based compensation, and contingencies. The Company believes that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results may differ from those estimates.
The Company accounts for income taxes in accordance with ASC 740-10 Income Taxes. Under this method, deferred income taxes (when required) are provided based on the difference between the financial reporting and income tax bases of assets and liabilities and 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.
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 managements judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The guidelines also address the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.
Multiple-Element Arrangements (MEAs): The Company accounts for contracts that have both product and installation under the MEAs guidance in ASC 605-25. Arrangements under such contracts may include multiple deliverables, a combination of equipment and services. The deliverables included in the MEAs are separated into more than one unit of accounting when (i) the delivered equipment has value to the customer on a stand-alone basis, and (ii) delivery of the undelivered service element(s) is probable and substantially in the Companys control. Arrangement consideration is then allocated to each unit, delivered or undelivered, based on the relative selling price of each unit of accounting based first on vendor-specific objective evidence (VSOE) if it exists, second on third-party evidence (TPE) if it exists and on estimated selling price (ESP) if neither VSOE or TPE exist.
When MEAs include an element of customer training, it is not essential to the functionality, efficiency or effectiveness of the MEA. 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 and also to properties installed by other providers. In addition, the Company provides the property with the portal to access the Internet. The Company receives monthly service fees from such properties for its services and Internet access. 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.
Guarantees and Product Warranties
The Company records a liability for potential warranty claims in cost of sales at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. The products sold are generally covered by a warranty for a period of one year. In the event the Company determines that its current or future product repair and replacement costs exceed its estimates, an adjustment to these reserves would be charged to earnings in the period such determination is made. For the nine months ended September 30, 2015 and the year ended December 31, 2014, the Company experienced returns of approximately 1% to 2% of materials included in the cost of sales. As of September 30, 2015 and December 31, 2014, the Company recorded warranty liabilities in the amount of $81,612 and $44,288, respectively, using this experience factor range.
Product warranties for the nine months ended September 30, 2015 and the year ended December 31, 2014 are as follows:
On July 15, 2011, the Company executed a sublease agreement for approximately 12,000 square feet of commercial office space in Germantown, Maryland. Because the Company no longer has access to this subleased space, the Company recorded a charge of $59,937 in accrued liabilities and expenses related to this abandonment during 2011. On June 27, 2012 the subtenant exercised the option to extend the expiration of the term of the sublease from January 31, 2013 to December 31, 2015 and the Company recorded an additional charge of $132,174. The remaining liability at September 30, 2015 was $11,068 and at December 31, 2014 was $46,673.
The entire disclosure for the general note to the financial statements for the reporting entity which may include, descriptions of the basis of presentation, business description, significant accounting policies, consolidations, reclassifications, new pronouncements not yet adopted and changes in accounting principles.
No definition available.