Exhibit 99.1
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”) and MSTI Holdings, Inc. (“MSTI”) after giving effect to the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.  The pro forma balance sheet was prepared as if the transaction occurred on December 31, 2008 and the statements of operations were prepared as if the loss of control event, using the cost method of accounting, had occurred on the first day of the 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 the loss of control event occurred on the first day of the period 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, 2008.
 


1
 
TELKONET, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2008

 
Historical
      
Pro Forma
  
     
MSTI
  
Combined
            
 
Telkonet
  
Holdings, Inc.
  
Total
  
Adjustments
    
Combined
  
                       
ASSETS
                      
Current Assets:
                      
Cash and cash equivalents
$
168,492
  
$
113,497
  
$
281,989
  
$
(113,497
)
   (1)
$
168,492
  
Accounts Receivable, net
  
836,336
    
188,573
    
1,024,909
    
(188,573
)
   (1)  
836,336
  
Inventory
  
1,733,940
    
-
    
1,733,940
    
-
      
1,733,940
  
Due from MSTI (intercompany)
  
2,181,793
    
(2,181,793
)
  
-
    
2,181,793
     (1)  
-
  
                     
(2,181,793
)
   (2)      
Other current assets
  
230,539
    
174,389
    
404,928
    
(174,389
) 
   (1)  
230,539
  
Total current assets
  
5,151,100
    
(1,705,334
) 
  
3,445,766
    
(476,459
)
    
2,969,307
  
                                 
Property and equipment, net
  
403,593
    
3,340,932
    
3,744,525
    
(3,340,932
) 
   (1)  
403,593
  
                                 
Other Assets:
                                
Marketable securities
  
397,403
    
-
    
397,403
    
-
      
397,403
  
Deferred financing costs, net
  
432,136
    
-
    
432,136
    
-
      
432,136
  
Investment in MSTI
  
9,617,822
    
(9,617,822
) 
  
-
    
9,617,822
     (1)  
-
  
                     
(9,617,822
)
   (3)      
Goodwill and other intangible assets
  
15,137,469
    
3,184,834
    
18,322,303
    
(3,184,834
)
   (1)  
15,137,469
  
Other long term assets
  
98,807
    
67,403
    
166,210
    
(67,403
) 
   (1)  
98,807
  
Total other assets
  
25,683,637
    
(6,365,585
) 
  
19,318,052
    
(3,252,237
) 
    
16,065,815
  
                                 
TOTAL ASSETS
$
31,238,330
  
$
(4,729,987
) 
$
26,508,343
  
$
(7,069,628
) 
  
$
19,438,715
  
                           
LIABILITIES AND STOCKHOLDERS’ EQUITY
                    
Current Liabilities:
                                
Accounts payable and accrued liabilities
$
4,557,257
  
$
5,770,998
  
$
10,328,255
  
$
(5,770,998
)
   (1)
$
4,557,257
  
Line of credit
  
574,005
    
-
    
574,005
    
-
      
574,005
  
Capital lease payable – current
  
4,714
    
199,702
    
204,416
    
(199,702
)
   (1)  
4,714
  
Related party advances
  
-
    
285,784
    
285,784
    
(285,784
)
   (1)  
-
  
Convertible debentures of subsidiary - current
  
-
    
7,010,503
    
7,010,503
    
(7,010,503
)
   (1)  
-
  
Other current liabilities
  
273,319
    
183,375
    
456,694
    
(183,375
) 
   (1)  
273,319
  
Total current liabilities
  
5,409,295
    
13,450,362
    
18,859,657
    
(13,450,362
) 
    
5,409,295
  
                                 
Long Term Liabilities:
                                
Convertible debentures, net of discounts
  
1,311,065
    
-
    
1,311,065
    
-
      
1,311,065
  
Derivative liability
  
2,573,126
    
-
    
2,573,126
    
-
      
2,573,126
  
Other long term debt
  
50,791
    
-
    
50,791
    
-
      
50,791
  
Total long term liabilities
  
3,934,982
    
-
    
3,934,982
    
-
      
3,934,982
  
                                 
Commitments and Contingencies
  
-
    
-
    
-
    
-
      
-
  
                                 
Minority Interest
  
-
    
262,795
    
262,795
    
(262,795
)
   (1)  
-
  
                                 
Stockholders’ Equity :
                                
Preferred stock, par value $0.001
  
-
    
-
    
-
    
-
      
-
  
Common stock, par value $0.001
  
87,526
    
-
    
87,526
    
-
      
87,526
  
Additional paid-in capital
  
118,197,450
    
-
    
118,197,450
    
-
      
118,197,450
  
(Accumulated deficit) retained earnings
  
(96,358,173
)
  
(18,443,144
) 
  
(114,801,317
)
  
18,443,144
     (1)  
(108,157,788
)
                     
(2,181,793
)
   (2)      
                     
(9,617,822
)
   (3)      
Comprehensive loss
  
(32,750
)
  
-
    
(32,750
)
  
-
      
(32,750
)
Stockholders’ equity
  
21,894,053
    
(18,443,144
) 
  
3,450,909
    
6,643,529
      
10,094,438
  
                                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
31,238,330
  
$
(4,729,987
) 
$
26,508,343
  
$
(7,069,628
) 
  
$
19,438,715
  


 
2
 
TELKONET, INC.
FOR THE YEAR ENDED DECEMBER 31, 2008
 
 
Historical
      
Pro Forma
  
     
MSTI
  
Combined
              
 
Telkonet
  
Holdings, Inc.
  
Total
  
Adjustments
      
Combined
  
                         
Total Revenue
$
16,559,001
  
$
3,971,958
  
$
20,530,959
  
$
(3,971,958
)
(1)
  
$
16,559,001
  
                                   
Cost of Sales
  
9,786,136
    
4,037,487
    
13,823,623
    
(4,037,487
)
(1)
    
9,786,136
  
                                   
Gross Profit
  
6,772,865
    
(65,529
)
  
6,707,336
    
65,529
  
(1)
    
6,772,865
  
                                   
Costs and Expenses:
                                  
Research and Development
  
2,036,129
    
-
    
2,036,129
    
-
        
2,036,129
  
Selling, General and Administrative
  
9,252,381
    
3,686,576
    
12,938,957
    
(3,686,576
)
(1)
    
9,252,381
  
Impairment of Goodwill and Long-Lived Assets
  
2,380,000
    
1,582,033
    
3,962,033
    
(1,582,033
)
(1)
    
2,380,000
  
Stock Based Compensation
  
699,639
    
923,857
    
1,623,496
    
923,857
  
(1)
    
699,639
  
Depreciation and Amortization
  
391,023
    
591,925
    
982,948
    
(591,925
) 
(1)
    
391,023
  
Total Operating Expense
  
14,759,172
    
6,784,391
    
21,543,563
    
 (6,784,391
) 
      
14,759,172
  
                                   
Income (Loss) from Operations
  
(7,986,307
)
  
(6,849,920
)
  
(14,836,227
)
  
6,849,920
        
(7,986,307
)
                                   
Other Income (Expenses):
                                  
Financing Expenses, net
  
(2,814,795
)
  
(5,992,855
)
  
(8,807,650
)
  
5,992,855
  
(1)
    
(2,814,795
)
(Loss) on Derivative Liability
  
(1,174,121
)
  
-
    
(1,174,121
)
  
-
        
(1,174,121
)
(Loss) on Sale of Investments
  
(6,500
)
  
-
    
(6,500
)
  
-
        
(6,500
)
Impairment of Investment in Marketable Securities
  
(4,098,514
)
  
-
    
(4,098,514
)
  
-
        
(4,098,514
)
Total Other Income (Expenses)
  
(8,093,930
)
  
(5,992,855
)
  
(14,086,785
)
  
5,992,855
        
(8,093,930)
  
                                   
Income (Loss) Before Minority Interest and Provision for Income Taxes
  
(16,080,237
)
  
(12,842,775
)
  
(28,923,012
)
  
12,842,775
        
(16,080,237
)
                                   
Minority Interest
  
-
    
4,937,473
    
4,937,473
    
(4,937,473
)
(1)
    
-
  
Provision for Income Taxes
  
-
    
-
    
-
    
-
        
-
  
Net (Loss)
$
(16,080,237
 )
$
(7,905,302
) 
$
(23,985,539
) 
$
(7,905,302
) 
    
$
(16,080,237
 )
                                   
Loss per common share
$
(0.20
)
      
$
(0.30
)
          
$
(0.20
)
Weighted average shares outstanding
  
79,153,788
          
79,153,788
              
79,153,788
  
 
3

 
TELKONET, INC.
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 MSTI Holdings, Inc. (“MSTI”) and Telkonet at December 31, 2008. The unaudited pro forma condensed combined balance sheet reflects our deconsolidation of the operations of MSTI from Telkonet. The proforma balance sheet was prepared as if the loss of control event, using the cost method of accounting, occurred on December 31, 2008 and the statements of operations were prepared as if the event had occurred on the first day of the 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. MSTI Holdings, Inc. – Loss of Control
 
As previously reported, on February 26, 2009, the Company executed and completed a Stock Purchase Agreement with William Davis pursuant to which the Company sold, and Mr. Davis purchased, 2,800,000 shares of MSTI Holdings, Inc. (“MSTI”) common stock (the “MSTI Shares”) beneficially owned by the Company for an aggregate purchase price of $10,000.  In connection with the sale of the MSTI Shares to Mr. Davis, the Company entered into a Partial Release of Lien with YA Global Investments, L.P. (“YA Global”), pursuant to which, in consideration of YA Global’s agreement to release its lien and security interest on the MSTI Shares, the Company paid a commitment fee to YA Global comprised of 157,000 shares of MSTI common stock.   As a result of the transactions described above, the Company now beneficially owns 15,543,000 shares of MSTI common stock, which represents 49% of the issued and outstanding shares of MSTI common stock.  

The Company has historically consolidated its investment in MSTI as a consolidated majority owned subsidiary.  On April 22, 2009, Warren V. Musser and Thomas C. Lynch submitted their resignations as directors of MSTI.  As a result of these resignations and the decrease in beneficial ownership resulting from the transactions described above, the Company is no longer required to consolidate MSTI as a majority owned subsidiary and the Company’s investment in MSTI will now be accounted for under the cost method.

3. Pro Forma Adjustments
 
The following pro forma adjustments are included in the unaudited pro forma condensed combined financial statements:
 
(1)  Reflects the deconsolidation of MSTI Holdings, Inc from Telkonet's financial statements on a pro forma basis as of December 31, 2008.
 
(2)  A reserve was taken against the intercompany loans owed to Telkonet due to uncertainty of collectibility
 
(3)  Reflects the reduction in the carrying value of investment in MSTI based on accumulated losses by MSTI incurred since acquisition


4