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