Exhibit 99.2
 
 
TELKONET, INC.
 
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
 
 
The following unaudited pro forma condensed combined financial statements are based on the historical financial statements of Telkonet, Inc. (“Telkonet,” “we,” “us,” or “our”) and Ethostream, LLC (“Ethostream”) after giving effect to our acquisition of 100% of the outstanding membership units and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. We acquired 100% of the outstanding membership units of Ethostream on March 15, 2007. The proforma balance sheet was prepared as if the acquisition occurred on December 31, 2006 and the statements of operations were prepared as if the acquisition had occurred on the first day of each period presented.
 
The pro forma data is for informational purposes only and may not necessarily reflect future results of operations or financial position or what the results of operations or financial position would have been had Telkonet and Ethostream been operating as combined entities for the periods presented. The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical financial statements, including the notes thereto, of Telkonet included in our Form 10-K for the year ended December 31, 2006, and the historical financial statements included elsewhere in this Form 8-K/A.
 

 
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Telkonet, Inc.
  
Unaudited Pro Forma Condensed Combined Balance Sheet
  
As of December 31, 2006
 
                       
   
Historical
      
Pro Forma
  
   
Telkonet, Inc.
 
Ethostream
 
Combined Total
 
Adjustments
 
Combined
 
ASSETS
 
Current Assets:
                     
Cash and cash equivalents
 
$
1,644,037
  
$
19,758
  
$
1,663,795
  
$
(2,000,000
)     (1)
$
(336,205
)
Income tax receivable
   
291,000
   
-
    
291,000
    
-
    
291,000
  
Accounts Receivable, net of allowance for doubtful accounts of $180,000
   
295,116
   
574,868
    
869,984
    
-
    
869,984
  
Inventory
   
1,306,593
   
153,539
    
1,460,132
    
-
    
1,460,132
  
Current maturities of notes receivable
    
-
    
37,799
    
37,799
    
-
    
37,799
  
Due from related party
    
-
    
30,088
    
30,088
    
-
    
30,088
  
Other
   
229,333
   
-
    
229,333
    
-
    
229,333
  
Total current assets
   
3,766,079
   
816,052
    
4,582,131
  
$
(2,000,000
)
  
2,582,131
  
                                 
Long Term Assets:
                               
Property and equipment, net
   
1,628,788
   
55,793
    
1,684,581
    
-
    
1,684,581
  
Equipment under operating leases, net
   
2,621,767
   
-
    
2,621,767
    
-
       
2,621,767
  
Intangible assets, net
   
2,181,602
   
-
    
2,181,602
    
2,900,000
      (1)  
5,081,602
  
Goodwill
   
1,977,768
   
-
    
1,977,768
    
8,639,234
      (1)  
10,617,002
  
Note receivable, less current portion
    
-
    
27,671
    
27,671
    
-
    
27,671
  
Other
   
340,512
   
3,628
    
344,140
     -    
344,140
  
Total other assets
   
8,750,437
   
87,092
    
8,837,529
    
11,539,234
    
20,376,763
  
                                 
 
  
$
12,516,516
  
$
903,144
  
$
13,419,660
  
$
9,539,234
  
$
22,958,894
  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
                               
Credit Line Payable
 
$
-
  
$
197,320
  
$
197,320
  
$
-
  
$
197,320
  
Current maturities of capital lease obligation
    
-
    
6,078
    
6,078
    
-
    
6,078
  
Accounts payable and accrued liabilities
   
2,865,144
   
428,997
    
3,294,141
    
150,000
      (1)  
3,444,141
  
Note payable - officer
   
980,444
   
-
    
980,444
    
-
    
980,444
  
Due to members
    
-
    
13,766
    
13,766
    
-
    
13,766
  
Customer deposit
    
-
    
50,719
    
50,719
    
-
    
50,719
  
Deferred Revenue
   
202,144
   
73,188
    
275,332
    
-
    
275,332
  
Income tax refund due to officer
   
291,000
   
-
    
291,000
    
-
    
291,000
  
Total current liabilities
   
4,338,732
   
770,068
    
5,108,800
    
150,000
    
5,258,800
  
                                 
Long Term Liabilities:
                               
Deferred lease liability
   
-
   
11,843
    
11,843
    
-
    
11,843
  
Other
   
42,561
   
10,002
    
52,563
    
-
    
52,563
  
Total long term liabilities
   
42,561
   
21,845
    
64,406
          
64,406
  
                                 
Commitments and Contingencies
                               
Minority Interest
   
-
    
-
    
-
    
-
    
-
  
                                 
Stockholders’ equity
   
8,135,223
   
111,231
    
8,246,454
    
9,389,234
    
17,635,688
  
                                 
 
  
$
12,516,516
  
$
903,144
  
$
13,419,660
  
$
9,539,234
  
$
22,958,894
  


 
2


 
Unaudited Pro Forma Condensed Combined Statement of Operations
  
For the Year Ended December 31, 2006
 
                   
   
Historical
  
Pro Forma
  
   
Telkonet
  
Ethostream
 
Pro-forma Adjustments
 
Combined Balances
 
                           
Total Revenue
  
$
5,181,328
  
$
3,315,730
    
-
  
$
8,497,058
  
 
                        
Cost of Sales
    
4,480,659
   
2,098,612
    
-
    
6,579,271
  
                           
Gross Profit
    
700,669
   
1,217,118
    
-
    
1,917,787
  
                           
Costs and Expenses:
                          
Research and Development
    
1,925,746
   
-
    
-
    
1,925,746
  
Selling, General and Administrative
    
14,346,364
   
1,198,076
    
-
    
15,544,440
  
Impairment write-down in investment in affiliate
    
92,000
   
-
    
-
    
92,000
  
Non-Employee Stock Options and Warrants
    
277,344
   
-
    
-
    
277,344
  
Employee stock options
    
1,080,895
   
-
    
-
    
1,080,895
  
Depreciation and Amortization
    
540,906
   
19,428
    
290,000
      (2)  
850,334
  
Total Operating Expense
    
18,263,255
   
1,217,504
    
290,000
    
19,770,759
  
                           
Loss from Operations
    
(17,562,586
)
  
(386
)
  
(290,000
)    
  
(17,852,972
)
                           
Other Income (Expenses):
                          
Financing activities
    
(4,626,679
)
  
-
    
-
    
(4,626,679
)
Officers’ life insurance
    
-
    
(4,140
)
  
-
    
(4,140
)
Interest Income
    
327,184
   
7,621
    
-
    
334,805
  
Interest Expense
    
(5,594,604
)
  
(28,754
)
  
-
    
(5,623,358
)
Total Other Income (Expenses)
    
(9,894,099
)
  
(25,273
)
  
-
    
(9,919,372
)
                           
Loss Before Minority Interest and Provision for Income Taxes
    
(27,456,685
)
  
(25,659
)
  
(290,000
)
  
(27,772,344
)
                           
Minority Interest
    
19,569
   
-
    
-
    
19,569
  
                           
Loss before income taxes
    
(27,437,116
)
  
(25,659
)
  
(290,000
)
  
(27,752,775
)
Provision for Income Taxes
    
-
   
-
    
-
    
-
  
Net Loss
  
$
(27,437,116
)
$
(25,659
)
$
(290,000
)
$
(27,752,775
)
                           
Loss per common share (basic and dilutive)
    
($0.54
)
  
 
          
($0.51
)
Weighted average common shares outstanding
    
50,823,652
    
 
    
3,459,609
    
54,283,261
  


 
3
 
 
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
 
 
1. Basis of Presentation
 
The following unaudited pro forma condensed combined balance sheet is derived from the balance sheets of Ethostream, LLC, a Wisconsin limited liability company (“Ethostream”) and Telkonet, Inc. at December 31, 2006. The unaudited pro forma condensed combined balance sheet reflects our acquisition of 100% of the outstanding membership units of Ethostream by Telkonet, Inc. The proforma balance sheet was prepared as if the acquisition occurred on December 31, 2006 and the statements of operations were prepared as if the acquisition had occurred on the first day of each period presented.
 
In accordance with the rules and regulations of the SEC, unaudited financial statements may omit or condense information and disclosures normally required for a complete set of financial statements prepared in accordance with generally accepted accounting principles. However, management believes that the notes to the financial statements as presented contain disclosures adequate to make the information presented not misleading.
 
The adjustments necessary to fairly present the unaudited pro forma condensed combined financial statements have been made based on available information and in the opinion of management are reasonable. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with these unaudited pro forma condensed combined financial statements.
 
The unaudited pro forma condensed combined financial data is for comparative purposes only and does not purport to represent what our financial position or results of operations would actually have been had the events noted above in fact occurred on the assumed dates or to project the financial position or results of operations for any future date or future period. The unaudited pro forma condensed combined financial data should be read in conjunction with the notes hereto.
 
2. Ethostream, LLC Acquisition
 
On March 15, 2007, Telkonet, Inc. acquired 100% of the outstanding membership units of Ethostream, LLC, a network solutions integration company that offers installation, sales and service to the hospitality industry. The Ethostream acquisition will enable Telkonet to provide installation and support for PLC products and third party applications to customers across North America. The purchase price of $11,756,097 was comprised of $2.0 million in cash and 3,459,609 shares of the Telkonet, Inc. common stock. The entire stock portion of the purchase price is being held in escrow to satisfy certain potential indemnification obligations of the sellers under the purchase agreement. The shares held in escrow are distributable over the three years following the closing. The aggregate number of shares issuable to the sellers is subject to downward adjustment in the event the Company’s common stock trades at or above a price of $4.50 per share for twenty consecutive trading days during the one year period following the closing.
 
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The acquisition of Ethostream was accounted for using the purchase method in accordance with SFAS 141, “Business Combinations.” The value of the Company’s common stock issued as a part of the acquisition was determined based on the most recent price of the Company's common stock prior to the acquisition date. The results of operations for Ethostream have been included in the Consolidated Statements of Operations since the date of acquisition.  The components of the purchase price were as follows:

 
  
As Reported
March 15, 2007
  
Common stock
 
$
9,756,097
  
Cash
   
2,000,000
 
Direct acquisition costs
   
150,000
 
Total Purchase Price
 
$
11,906,097
  
 
3. Allocation of Purchase Price:

Current assets
  
$
1,029,615
  
Property, plant and equipment
    
51,724
  
Other assets 
    
31,299
  
Subscriber lists (*)
    
2,900,000
  
Goodwill 
    
8,639,234
  
Total assets acquired 
    
12,651,872
  
Accounts payable and accrued liabilities 
    
745,775
  
Total liabilities assumed 
    
745,775
  
Net assets acquired
  
$
11,906,097
  
 
(*) As of May 29, 2007, the attributable value of the subscriber lists has increased to $2,900,000 based upon an up-dated estimate and may be further adjusted upon the completion of an independent appraisal.
 
4. Pro Forma Adjustments
 
The following pro forma adjustments are included in the unaudited pro forma condensed combined financial statements:
 
(1) Reflects the $11,906,097 acquisition of Ethostream, LLC by Telkonet, Inc. comprised of $2,000,000 cash and 3,459,609 shares of common stock and accrued acquisition costs.
 
(2) Reflects the annualized amortization expense of the Ethostream subscriber list based upon a ten year amortization.


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