U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 2001
Commission file number 333-47986
TELKONET, INC.
(Name of Small Business Issuer in Its Charter)
Utah 87-0627421
(State of Incorporation) (IRS Employer Identification No.)
902 A Commerce Road Annapolis, Maryland 21401
(Address of Principal Executive Offices)
(410) 897-5900
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 22,115,371 shares of Common Stock
($.001 par value) as of August 9, 2001.
Transitional small business disclosure format: Yes [ ] No [x]
TELKONET, INC.
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending June 30,2001
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet: June 30, 2001 and December 31,
2000
Consolidated Statements of Losses: Three Months Ended June
30,2001 and 2000
Six Months Ended June 30,2001 and 2000
November 3, 1999 (Date of Inception) through June 30, 2001
Consolidated Statements of Cash Flows: Six Months Ended June
30, 2001 and 2000
November 3, 1999 (Date of Inception) through June 30, 2001
Notes to Consolidated Financial Statements: June 30, 2001
Item 2. Plan of Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
Item 1. Financial Statements (Unaudited)
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
Unaudited
June 30, 2001 December 31, 2000
------------- -----------------
Current assets:
Cash and equivalents $ 12,999 $ 10,450
Deposits 4,625 4,625
------------ ------------
Total current assets $ 17,624 $ 15,075
Property & Equipment - at cost
Furniture, Equipment, & Leasehold Improvements $ 93,658 $ 89,029
Less: Accum. Depreciation 37,807 22,080
------------ ------------
$ 55,851 $ 66,949
Total Assets $ 73,475 $ 82,024
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 327,279 $ 253,586
Due to Shareholders 7,500 10,000
Line of Credit - Citizen's Bank 150,000 -
Note Payable - 1st Mariner Bank 250,000 -
------------ ------------
$ 734,779 $ 263,586
Stockholders' equity:
Preferred stock, par value $.001 per share; 15,000,000 shares
authorized; none issued at June 30, 2001 and December 31, 2000 $ - $ -
Common stock, par value $.001 per share; 100,000,000 shares
authorized; 22,075,371 and 21,815,371 issued at June 30, 2001
and December 31, 2000, respectively $ 22,075 $ 21,815
Additional paid-in-capital 890,056 760,316
Retained earnings (1,573,435) (963,693)
------------ ------------
$ (661,304) $ (181,562)
------------ ------------
$ 73,475 $ 82,024
============ ============
See accompanying footnotes to the unaudited consolidated financial statements
3
TELKONET, INC
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
Three months ended June 30, Six months ended June 30, For the period from
--------------------------- ------------------------- November 3, 1999
(date of inception)
2001 2000 2001 2000 thru June 30, 2001
---- ---- ---- ---- -------------------
Operating expenses:
Selling, general and administrative $ 230,365 $ 161,001 $ 421,490 $ 261,985 $ 1,228,799
Research & Development 109,024 25,551 156,815 51,138 275,815
Depreciation 7,882 6,396 15,727 7,564 37,535
Interest 10,426 10,232 15,710 10,232 31,286
------------- ------------- ------------- ------------- -------------
Operating expense 357,697 203,179 609,742 330,919 1,573,435
------------- ------------- ------------- ------------- -------------
Net income before taxes (357,697) (203,179) (609,742) (330,919) $ (1,573,435)
Provision for income taxes
Net income $ (357,697) $ (203,179) $ (609,742) $ (330,919) $ (1,573,435)
============= ============= ============= ============= =============
Earnings per common share (0.02) (0.01) (0.03) (0.02) (0.08)
(basic and assuming dilution)
Weighted average shares outstanding
Basic 21,859,149 19,997,591 21,837,260 19,536,003 21,207,801
Diluted
See accompanying footnotes to the unaudited consolidated financial statements
4
TELKONET, INC
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
For the period from
Six Months Ended June 30, November 3, 1999
-------------------------- (date of inception)
2001 2000 thru June 30, 2001
---- ---- ------------------
Cash flows from operating activities:
Net income from operating activities $ (609,742) $ (330,919) (1,573,435)
Adjustments to reconcile net income to net cash: -
Common stock issued in exchange for
services rendered - - 11,387
Depreciation 15,727 10,232 37,535
Change in: -
Deposits - (4,625)
Marketable Securities - (525,000) -
Prepaid expenses and other assets - 273 -
Accounts payable and accrued expenses 73,693 36,097 349,366
----------- ----------- -----------
Net cash from operating activities (520,322) (809,317) (1,179,772)
Cash flows used in investing activities:
Capital expenditures, net of disposals (4,629) (74,646) (93,658)
----------- ----------- -----------
Net cash used in investing activities (4,629) (74,646) (93,658)
Cash flows (used in)/provided by financing activities:
Proceeds from sale of common stock, net of costs 130,000 657,195 878,929
Proceeds from Loans 400,000 - 400,000
Proceeds from stockholder advances - - 10,000
Repayment of stockholder advances (2,500) - (2,500)
Proceeds from stockholder loans - 235,000 235,000
Repayment of stockholder loans - - (235,000)
----------- ----------- -----------
Net cash used in financing activities 527,500 892,195 1,286,429
Net increase in cash and cash equivalents 2,549 8,232 12,999
Cash and cash equivalents at January 1 10,450 - -
Cash and cash equivalents at March 31 $ 12,999 $ 8,232 12,999
----------- ----------- -----------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ - $ - -
Income taxes paid - - -
Common stock issued for services - 164 11,387
Acquisition: -
Assets Acquired - - 1
Accumulated Deficit - - 2,643
Liabilities Assumed - - (2,642)
----------- ----------- -----------
$ - $ - 1
----------- ----------- -----------
See accompanying footnotes to the unaudited consolidated financial statements
5
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
- ---------------------------------------
General
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB, and therefore, do not
include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results from developmental stage operations for the six-month period ended June
30,2001 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2001. The unaudited consolidated financial
statements should be read in conjunction with the consolidated December 31, 2000
financial statements and footnotes thereto included in the Company's SEC Form
10-KSB dated April 16, 2001.
The Registrant began operations on November 3, 1999, and accordingly, income
statements and statements of cash flows for the comparable periods of the
preceding fiscal years have not been presented.
NOTE B-BUSINESS COMBINATION
- ---------------------------
On August 25, 2000, Telkonet Communications, Inc. ("TCI") completed an Agreement
and Plan of Reorganization ("Agreement") with Comstock Coal Company, Inc.
("Comstock") in a transaction accounted for using the purchase method of
accounting. The total purchase price and carrying value of net assets acquired
of Comstock was $ 1. From Comstock's inception, until the date of the merger,
Comstock was an inactive corporation with no assets and liabilities. As a result
of the acquisition, there was a change in control of the public entity.
Subsequent to the date of the merger, Comstock Coal Company, Inc. changed its
name to Telkonet, Inc. ("Company"), with Telkonet Communications, Inc. becoming
a wholly owned subsidiary of the Company.
Effective with the Agreement, all previously outstanding common stock, preferred
stock, options and warrants owned by former Common stock stockholders were
exchanged for an aggregate of 1,980,000 shares of Telkonet Communications,
Inc.'s common stock. The value of the stock that was issued was the historical
cost of Comstock's net tangible assets, which did not differ materially from
their fair value. The results of operations subsequent to the date of
acquisition are included in the Company's consolidated statement of losses. In
accordance with Accounting Principles Opinion No. 16, Telkonet Communications,
Inc. is the acquiring entity.
6
TELKONET , INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
NOTE B-BUSINESS COMBINATION (Continued)
- ---------------------------------------
The total purchase price and carrying value of net assets acquired of Comstock
was $ 1. The net assets acquired were as follows:
Net assets $ 1
Accumulated deficit 2,643
Net liabilities (2,642)
--------
$ 1
========
In accordance with Statement of Position No. 98-5, the Company expensed, as
organization costs, in the three months ended September 30, 2000, $ 1,980, which
represents the excess of the purchase price of Comstock over the net assets
acquired.
NOTE C- BASIS OF PRESENTATION
- -----------------------------
Telkonet Communications, Inc., a wholly-owned subsidiary of Telkonet, Inc.,
formerly Comstock Coal Company, Inc., was formed on November 3, 1999 under the
laws of the state of Delaware. Telkonet Communications, Inc. is a development
stage enterprise, as defined by Statement of Financial Accounting Standards No.
7 ("SFAS No. 7") and is seeking to develop, produce and market proprietary
equipment enabling the transmission of voice and data over electric utility
lines. From its inception through the date of these financial statements
Telkonet Communications, Inc. has recognized no revenues and has incurred
significant operating expenses.
The consolidated financial statements include the accounts of the Company, and
its wholly owned subsidiary, Telkonet Communications, Inc. Significant
inter-company transactions have been eliminated in consolidation.
7
Item 2. Management's Plan of Operation
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this Report.
Description of the Company
- --------------------------
The Company was formed to develop applications for emerging power-line carrier
technologies. The Company believes that the power line represents an attractive
opportunity to deliver telephony and Internet connectivity to consumers in
developing countries and businesses around the world. Because the power line is
the most ubiquitous wired network in the home, service providers and consumers
avoid the expense, time and inconvenience of installing new wiring.
The Company has applied for patents that cover its unique technology, and
intends to utilize recently announced advancements in transmission speeds to
build next generation devices for field tests and marketing demonstrations.
TCI's technology would be licensed or sold to strategic customers and partners
with vertical markets where TCI's products and services would satisfy demand for
communication services. TCI has developed second generation working prototypes
for two products designed to provide telephony services and Internet
connectivity through transmission over existing power line networks: The primary
product enables Internet connectivity provided by several options for broadband
connectivity, to be accessed along power lines by end user communities. The
second product combines digital signaling equipment and
voice-over-Internet-protocol (VOIP) to deliver telephony services to end users
via existing standard power-line infrastructure.
On July 31, 2001 the Company announced that it has completed the initial product
development phase of their proprietary communications system, which utilizes the
existing electrical wiring infrastructure in residential and commercial
buildings for Internet connectivity. The Telkonet System receives the Internet
signal in the traditional manner from either a standard telephone line, DSL line
or from a satellite connection at your home or office. The telephone line or
satellite cable connection is then plugged into the Telkonet Gateway a small
appliance not much larger than a box of cereal that is attached to the
electrical system. Once the installation of the Gateway is complete the Internet
signal is transmitted through the existing electrical wiring to every standard
electrical outlet in the building. To access the Internet the user simply plugs
the Telkonet Plug-In Internet Modem (the size of a small standard modem) into
any electrical outlet and then plugs the computer into the modem for clear
connectivity at whatever speeds are offered by the users Internet service
Provider.
On August 2, 2001 Telkonet announced successful system tests were recently
performed in the Washington D.C. metropolitan area, where Telkonet's Plug-In
connectivity solution was demonstrated in a 28-unit residential apartment
building and a 5-story commercial office building. Clear and unrestricted
high-speed data connectivity was successfully achieved from the basements to the
furthest receptacles on the top floors.
8
Further commercial testing is scheduled for suburban shopping malls, where the
system is desired by Retail merchants to obtain flexible and secure transmission
for several business data applications, including credit card transactions.
There are many commercial applications for the Telkonet technology, especially
in older structures such as hotels, schools and office buildings where Internet
service is desired, but new wiring that would allow for satisfactory high-speed
communication is cost prohibitive. Telkonet's solution is ideal for these
situations because the wires are already there and all you have to do is just
plug it in.
Forward Looking Statements
- --------------------------
CERTAIN STATEMENTS INCLUDED HEREIN OR INCORPORATED BY REFERENCE CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT"). THE COMPANY DESIRES TO TAKE
ADVANTAGE OF CERTAIN "SAFE HARBOR" PROVISIONS OF THE REFORM ACT AND IS INCLUDING
THIS SPECIAL NOTE TO ENABLE THE COMPANY TO DO SO. FORWARD-LOOKING STATEMENTS
INCLUDED OR INCORPORATED BY REFERENCE IN THIS PART INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH WOULD CAUSE THE COMPANY'S ACTUAL
RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER
MATERIALLY FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD LOOKING STATEMENTS.
Plan of Operation
- -----------------
The Company is still in the development stage and is yet to earn revenues from
operations. The Company may experience fluctuations in operating results in
future periods due to a variety of factors including, but not limited to, market
acceptance of the Internet and power line communication technologies as a medium
for customers to purchase the Company's products, the Company's ability to
acquire and deliver high quality products at a price lower than currently
available to consumers, the Company's ability to obtain additional financing in
a timely manner and on terms favorable to the Company, the Company's ability to
successfully attract customers at a steady rate and maintain customer
satisfaction, Company promotions, branding and sales programs, the amount and
timing of operating costs and capital expenditures relating to the expansion of
the Company's business, operations and infrastructure and the implementation of
marketing programs, key agreements and strategic alliances, the number of
products offered by the Company, the number of returns experienced by the
Company, and general economic conditions specific to the Internet, power-line
communications, and the communications industry.
Revenues
- --------
The Company generated no revenues from operations from its inception. The
Company believes it will begin earning revenues from operations within the next
twelve months as it transitions from a development stage company to that of an
active growth and acquisition stage company.
Costs and expenses
- ------------------
>From its inception on November 3, 1999 through June 30, 2001, the Company has
not generated any revenues. The Company has incurred expenses of $ 1,573,435
during this period. These expenses were associated principally with compensation
to employees, product development costs and professional services. During the
first half of 2001, expenses increased by 84% over the first half of 2000. Such
an increase is due to increase in development activity associated with the
completion of its second-generation powerline systems for both Internet
distribution and Telephony, the beginning of the system demonstration phase, and
an increase in sales and marketing activities.
9
Liquidity and Capital Resources
- -------------------------------
As of June 30, 2001, the Registrant had a working capital deficit of $717,155.
As a result of the Company's operating losses from its inception through June
30, 2001, the Registrant generated a cash flow deficit of $ 1,200,672 from
operating activities. Cash flows from financing totaled $ 527,500 during the
period January 1,2001 through June 30, 2001. The Company met its cash
requirements during the period through two lines of credit and a $150,000
Private Equity Placement of which $130,000 was received at June 30, 2001.
While the Company has raised capital to meet its working capital and financing
needs in the past, additional financing is required in order to meet the
Company's current and projected cash flow deficits from operations and
development. The Company continues to seek financing in the form of equity in
order to provide additional working capital. The Company currently has no
commitments for financing. There are no assurances the Company will be
successful in raising the funds required.
Product Research and Development
- --------------------------------
Company-sponsored research and development costs related to both present and
future products are expended in the period incurred. Total expenditures on
research and product development for the first half of 2001 were $ 156,815
compared to $ 51,138 for the first half of 2000.
Acquisition or Disposition of Plant and Equipment
- -------------------------------------------------
The Company does not anticipate the sale of any significant property, plant or
equipment during the next twelve months. The Company does not anticipate the
acquisition of any significant property, plant or equipment during the next 12
months, other than computer equipment and peripherals used in the Company's
day-to-day operations.
Number of Employees
- -------------------
During the period ended June 30, 2001, the Company had seven (7) employees. In
order for the Company to attract and retain quality personnel, the Company
anticipates that it will continue to offer competitive salaries to current and
future employees. In addition, the Company anticipates increasing its employment
base to ten (10) to fifteen (15) employees during the next 12 months. As the
Company continues to expand, the Company will incur additional costs for
personnel. This projected increase in personnel is dependent upon the Company
generating revenues and obtaining sources of financing. There are no assurances
the Company will be successful in raising the funds required or generating
revenues sufficient to fund the projected increase in the number of employees.
Trends, Risks and Uncertainties
- -------------------------------
The Company has sought to identify what it believes to be the most significant
risks to its business, but cannot predict whether or to what extent any of such
risks may be realized nor can there be any assurances that the Company has
identified all possible risks that might arise. Investors should carefully
consider all of such risk factors before making an investment decision with
respect to the Company's stock. The Company's prospects must be evaluated with a
view to the risks encountered by a company in an early stage of development,
particularly in light of the uncertainties relating to the new and evolving
10
power line modulation and transmission technologies. The Company will be
incurring costs to develop, introduce and enhance its products, to establish
marketing relationships, to acquire and develop products that will compliment
each other and to build an administrative organization. To the extent that such
expenses are not subsequently followed by commensurate revenues, the Company's
business, and the results of operations and financial condition will be
materially adversely affected. There can be no assurance that the Company will
be able to generate sufficient revenues from the sale of their first product and
other product candidates. The Company expects negative cash flow from operations
to continue for the next 6 months as it continues to develop and market its
business. The Company will be required to sell additional equity or debt
securities. The sale of additional equity or convertible debt securities will
result in additional dilution to the Company's stockholders.
Potential fluctuations in quarterly operating results
- -----------------------------------------------------
The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, most of which are outside the
Company's control, including: the level of use of the Internet; the demand for
high-tech goods; trends in broadband service provisioning, the amount and timing
of capital expenditures and other costs relating to the expansion of the
Company's operations; price competition or pricing changes in the industry;
technical difficulties; general economic conditions, and economic conditions
specific to the Internet and Communications Industry.
Limited public market, possible volatility of share price
- ---------------------------------------------------------
The Company's Common Stock is currently quoted on the NASD OTC Bulletin Board
under the ticker symbol TLKO.OB. As of June 30, 2001, there were approximately
22,075,371 shares of Common Stock outstanding. An additional 40,000 share were
issued upon receipt of the funding committed. There can be no assurance that a
trading market will be sustained in the future. Factors such as, but not limited
to, technological innovations, new products, acquisitions or strategic alliances
entered into by the Company or its competitors, failure to meet security
analysts' expectations, government regulatory action, patent or proprietary
rights developments, and market conditions for technology stocks in general
could have a material effect on the volatility of the Company's stock price.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2 - Changes in Securities and Use of Proceeds
(a) None
(b) None
(c) None
11
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K filed during the six months
ended June 30, 2001.
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Telkonet, Inc.
Registrant
August 13, 2001 By: /s/ L. Peter Larson
- -------------- --------------------------
Date