UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
fiscal year ended December 31, 2009
Commission
file number: 001-31972
TELKONET,
INC.
(Exact
name of registrant as specified in its charter)
Utah
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87-0627421
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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10200 Innovation Drive
Suite 300, Milwaukee, Wisconsin
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53226
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(414)
223-0473
(Registrant’s
Telephone Number, Including Area Code)
Securities
Registered pursuant to section 12(b) of the Act:
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Name
of each exchange on which registered
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Common
Stock, $0.001 par value
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None
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Securities
Registered pursuant to section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(b) of the Act. o Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 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. x Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). o Yes x No
Check if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained in this form, and no disclosure will be contained, to the best of
Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) o Yes x No
Aggregate
market value of the voting stock held by non-affiliates (based upon the closing
sale price of $0.12 per share on the Over the Counter Bulletin Board) of the
registrant as of June 30, 2009: $11,289,512.
Number of
outstanding shares of the registrant’s par value $0.001 common stock as of March
30, 2010: 96,673,771.
TELKONET,
INC.
FORM
10-K
INDEX
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Page
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Part
I
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Item
1.
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Description
of Business
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3
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Item
1A.
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Risk
Factors
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9
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Item
2.
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Properties
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20
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Item
3.
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Legal
Proceedings
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20
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Item
4.
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Reserved
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20
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Part
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and
Registrant’s Purchases of Securities
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20
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Item
6.
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Selected
Financial Data
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21
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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21
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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30
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Item
8.
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Financial
Statements and Supplementary Data
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30
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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30
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Item
9A(T).
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Controls
and Procedures
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30
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Item
9B.
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Other
Information
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31
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Part
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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31
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Item
11.
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Executive
Compensation
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33
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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35
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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37
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Item
14.
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Principal
Accounting Fees and Services
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37
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Part
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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38
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PART
I
ITEM
1. DESCRIPTION OF BUSINESS.
Some
of the statements contained in this Annual Report on Form 10-K discuss future
expectations, contain projections of results of operations or financial
condition or state other “forward-looking” information. Those statements include
statements regarding the intent, belief or current expectations of Telkonet,
Inc. (“we,” “us,” “our” or the “Company”) and our management
team. Any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and actual results may
differ materially from those projected in the forward-looking statements. These
risks and uncertainties include but are not limited to those risks and
uncertainties set forth in Item 1A of this report. In light of the
significant risks and uncertainties inherent in the forward-looking statements
included in this report, the inclusion of such statements should not be regarded
as a representation by us or any other person that our objectives and plans will
be achieved.
GENERAL
Business
Telkonet,
Inc., formed in 1999 and incorporated under the laws of the state of Utah,
develops, manufactures and sells proprietary energy efficiency and smart grid
networking technology. Our SmartEnergy and Series 5 SmartGrid
networking technologies enable us to develop innovative clean technology
products and have helped position us as a leading clean technology
provider.
Our
Telkonet SmartEnergy and Networked Telkonet SmartEnergy energy efficiency
products incorporate our patented Recovery Time technology, allowing for the
continuous monitoring of climate conditions to automatically adjust a room’s
temperature accounting for the presence or absence of an
occupant. Our SmartEnergy products save energy while at the same time
ensuring occupant comfort and extending equipment life
expectancy. This technology is particularly attractive to our
customers in the hospitality industry, as well as the education, healthcare and
government/military markets, who are continually seeking ways to reduce costs
without impacting building occupant comfort. By reducing energy usage
automatically when a space is unoccupied, our customers can realize significant
cost savings without diminishing occupant comfort. This technology
may also be integrated with property management systems and automation systems
and used in load shedding initiatives providing management companies and
utilities enhanced opportunity for cost savings and control. Our
energy management systems are lowering heating, ventilation and air
conditioning, or HVAC, costs in over 180,000 rooms and qualify for numerous
state and federal energy efficiency and rebate programs.
Our
Series 5 SmartGrid networking technology allows commercial and consumer users to
connect computers to a communications network using the existing low voltage
building electrical grid. The Telkonet Series 5
SmartGrid networking technology uses powerline communications, or PLC,
technology to transform a site’s existing internal electrical infrastructure
into a communications backbone. Operating at 200 Mbps, our PLC
platform offers a secure alternative in grid communications, transforming a
traditional electrical distribution system into a “smart grid” that delivers
electricity in a manner that can save energy, reduce cost and increase
reliability.
We
leverage our relationships with utilities to market our Telkonet Series 5
SmartGrid networking technology for network control beyond the commercial and
consumer space. We believe the Telkonet Series 5 SmartGrid networking
technology provides a compelling solution for substation automation, power
generation, renewable facilities, manufacturing, and research environments, by
providing a rapidly-deployable, low cost alternative to cable or
fiber. By leveraging the existing low voltage electrical wiring
within a facility to transport data, our PLC solutions enable our customers to
deploy sensing and control systems to locations without the need for new network
wiring, and without the security risks inherent with wireless
systems.
Our
EthoStream Hospitality Network is now one of the largest hospitality HSIA
service providers in the United States, with a customer base of more than 2,300
properties representing approximately 200,000 hotel rooms. This
network provides us with the opportunity to market our energy efficiency
solutions. It also provides a marketing opportunity for our more
traditional HSIA offerings, including the Telkonet Series 5 PLC platform.
The Series 5 system offers a fast and cost effective way to deliver commercial
high-speed broadband access using a building’s existing electrical
infrastructure to convert virtually every electrical outlet into a high-speed
data port without the installation of additional wiring or major disruption of
business activity. The EthoStream Hospitality Network is backed by a 24/7
U.S.-based in-house support center that uses integrated, web-based centralized
management tools enabling proactive customer support.
We employ
direct and indirect sales channels in all areas of our business. With
a growing value-added reseller network, we continue to broaden our reach
throughout the industry. Utilizing key integrators and strategic OEM
partners, we have been able to market and sell our products in each of our
targeted markets.
Our
direct sales efforts target the hospitality, utility, education, commercial and
government/military markets. Taking advantage of legislation,
including the Energy Independence and Security Act of 2007, or EISA, and the
Energy Policy Act of 2005, we have focused our sales efforts in areas with
available public funding and incentives, such as rebate programs offered by
utilities to the hospitality industry. Through both our proprietary
platform and technology and partnerships with energy efficiency providers, we
intend to position our company as a leading provider of energy management
solutions.
Products
We
believe our energy efficiency product offering, with our patented Recovery Time
technology, delivers significant benefits over competing products,
including:
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Maximum
energy savings by evaluating each room’s environmental conditions,
including room location, window placement, humidity, weather conditions,
and operating efficiency of heating, ventilation and air conditioning, or
HVAC, equipment,
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Longer
life and reduced maintenance of HVAC units through effective equipment
monitoring,
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Increased
occupant comfort,
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Speed
and ease of installation, and
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Wide
range of HVAC system compatibility.
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Based on
these product features and capabilities, we have been awarded contracts in the
hospitality utility, military and educational industries. We believe
that our partnerships with utility rebate programs provide us with a significant
advantage over our competitors in the commercial occupancy-based energy
management market.
Our
SmartEnergy platform has been developed to maximize energy efficiency and
savings. The technology allows users to decrease heating and cooling
expenses, and extend equipment life without diminishing occupant
comfort. By providing Internet-based remote control over in-room
energy management, SmartEnergy decreases the cost to operate an enterprise-wide
system by reducing the need for onsite engineering resources. In
addition, the SmartEnergy platform can be integrated with property management
systems and utility demand/response programs to recognize increased energy
efficiency.
Given the
population growth in the United States and the increasing demand for energy, we
believe additional energy-related infrastructure will be needed. We
believe the use of smart grid technologies is an affordable alternative to
building additional infrastructure because it leverages existing infrastructure,
allowing additional energy savings. While it will require investments
that are not typical for utilities, we believe the long-term savings resulting
from these investments will outweigh the costs.
We
believe we are well positioned to play a pivotal role in the development of the
smart grid. The introduction of an industrial low voltage PLC product
for use within the utility space has created a competitive alternative to
current networking options. We believe our Series 5 platform provides
a compelling solution for use in the substation, storage, renewable and
transmission and distribution environments because of its ability to utilize
existing electrical wiring within the environment.
Our
Series 5 PLC platform includes the following key features:
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Multiple
physical interfaces, including RS232, RS485 and Ethernet, enabling a wide
range of devices to be networked;
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Multiple
utility-centric protocols supported, including DNP3, Modbus and
IP;
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Granular
QOS support over traditional communications;
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Ability
to withstand extended temperature ranges and harsh outdoor
environments;
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Stringent
security features;
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Support
for both AC and DC applications;
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Significant
speed performance through the use of the Intellon AV chipset;
and
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Flexible
connection technology that avoids interruption of service through
inductive coupling.
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Our
EthoStream Hospitality Network continues to enhance our position in the HSIA
space. We have established customer and vendor relationships with key
participants in the hospitality industry, including Wyndham Hospitality,
AmericInns, Carlson Hospitality, Intercontinental Hotels Group, Marcus
Hospitality, Destination Hotels and Resorts, and Worldmark by Wyndham (formerly
Trendwest Resorts).
Our
EthoStream Gateway Servers provide industry-leading HSIA technology to the
hospitality industry, with advanced features based on in-house product design
and development, including the following:
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Dual
ISP bandwidth aggregation for faster overall speed;
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ISP
redundancy to eliminate network downtime;
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Enhanced
quality of service; and
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Real-time
meeting room scheduling.
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We
maintain a U.S.-based customer support center that operates 24 hours a day,
seven days a week, and employs a dedicated, in-house support team that uses
integrated, web-based centralized management tools enabling proactive
support. We believe our customer service offerings, along with
established relationships through our vendor agreements with some of the largest
hospitality franchises, distinguish us from our competitors in the hospitality
HSIA industry.
We
believe that growth of the EthoStream Hospitality Network will be derived from
two key areas:
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New
customer growth within the full-service hospitality market and through
additional preferred vendor agreements with franchisors;
and
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Ongoing
sales to current customers through integration of additional in-room
technologies such as lighting, telephony, media centers and energy
management products.
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Industry
Outlook
The
National Institute of Standards and Technology, or NIST, an agency of the U.S.
Department of Commerce, has been chartered under EISA to identify and evaluate
existing standards, measurement methods, technologies and other support toward
SmartGrid adoption. The agency will also be preparing a report to
Congress recommending areas where standards need to be developed. We
believe these initiatives validate the need for our platform and
technology.
The
hospitality industry is our largest customer base with more than 2,300
properties representing approximately 200,000 hotel rooms. Through
its continued expansion, the EthoStream Hospitality Network is attracting
additional customers in the full service segment of the market. This
audience provides us with significant access to potential SmartEnergy
customers. We continue to expand our operations in this market,
providing energy management services to greater than 180,000 units overall to
date.
Our most
rapidly emerging market is the educational industry. In July 2008 we
entered into an agreement with New York University under which New York
University uses our networked SmartEnergy products to centrally manage energy
consumption in its dormitories. We worked with the University to use
existing building infrastructure to remotely manage and track energy
consumption. As of February 10, 2010, our products were installed in
more than 2,200 rooms across five buildings. Our program with New
York University has enabled us to demonstrate the cost savings that can be
realized through the use of our products in dormitories.
The
educational industry represents more than 2.7 million housing units according
to the U.S. Department of Education, National Center for Education
Statistics, Integrated Postsecondary Education Data System
(IPEDS). We believe that our SmartEnergy platform is an important
tool for participants in the educational industry seeking to
control student-related energy costs. We have focused our
sales efforts on members of the educational industry who are seeking to expand
their energy efficiency initiatives.
The
government and military market segments have also seen significant growth in
energy conservation and renewables development. This movement is
attributed to programs including the American Recovery and Reinvestment Act, or
ARRA, and the Energy Independence and Security Act. Our SmartEnergy
platform has been successfully incorporated into the energy management
initiatives in military housing and deployments. We have recognized
success through both our value-added reseller network and direct sales and
continue to target available public funding for energy initiatives within these
industries.
Healthcare
is an additional emerging market for energy management. We have been
working closely with operators and developers to integrate our SmartEnergy
energy management initiatives into efficiency opportunities supported by state
and federal energy programs. Offering a commercial environment
similar to the hospitality or educational housing markets, the increasing growth
of the elderly and assisted living markets presents attractive potential for
energy management. This market is expected to grow rapidly over the
next several years due to its energy saving potential.
We
believe that the utility industry is one of the fastest developing market
segments in the United States. With more than $4.5 billion being
released to the industry through the American Reinvestment and Recovery Act of
2009 for SmartGrid
development and $414 million in investment through 2009, the utility industry
has become a growing percentage of our revenue, both through direct sales to
utilities and partnerships with energy service companies executing state and
local energy efficiency programs.
We
continue to strengthen our focus on our targeted market segments in order to
expand market share and take advantage of existing incentives for energy
management. We expect continued expansion in the space and
specifically in commercial segments due to increasing state and federal programs
promoting energy efficiency.
Competition
We
currently compete primarily within commercial and industrial markets, including
hospitality, education, healthcare and government and
military. Within each market, we offer savings through our
occupancy-based energy efficiency products. Our products offer
significant competitive benefits when compared with alternative offerings
including Building Automation or Building Management Systems, or BAS or BMS,
static temperature occupancy-based systems and high-efficiency HVAC
systems.
We
participate in a relatively small competitive field in the hospitality industry,
with the majority of the energy management sales handled by fewer than seven
manufacturers. The key competitors in the market segment are Onity,
Inc. Inncom International Inc. and Control4, with each offering comparable
products to our standalone and networked SmartEnergy
products. Telkonet SmartEnergy’s key differentiators in the
hospitality segment include:
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Recovery
Time technology;
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Networked
SmartEnergy platform;
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Integration
with property management systems.
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The
educational space is a relatively new market for occupancy-based
controls. We have introduced our SmartEnergy system for use within
student dormitories, which traditionally have been an environment for BAS or BMS
systems. Since the dormitory environment is very similar to the
hospitality market, we believe we can offer similarly scaled energy
savings. Since the market is still in its infancy, very few
comparable offerings have entered the market but competitors within the
hospitality segment are beginning to respond. Our SmartEnergy
platform provides a significant advantage within the educational industry
through:
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Reduced
cost as compared to BMS/BAS systems;
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Ease
of installation relative to traditional wired systems;
and
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Range
of product compatibility.
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The
healthcare and government/military markets are very similar in scope when
relating to energy management systems. A key differentiator in these
environments is the specific implementation that is being
considered. Each market utilizes BAS/BMS for wide scale energy
efficiency initiatives. When specifically addressing housing
environments including elderly care and assisted living environments and
military dormitories or barracks, Telkonet’s SmartEnergy platform is able to
provide increased energy savings and efficiency. Competitors
operating in the BAS/BMS space include Johnson Controls, Siemens, Trane and
others.
Telkonet’s
Series 5 SmartGrid networking products are targeted largely at the utility
industry with a particular emphasis on the substation
environment. Competitors in this space are providers of traditional
wired connectivity including fiber, coax and Cat5 and Cat6 and wireless
technologies, including cellular and wifi. Some of the specific products used
within this space include RuggedCom, AT&T and Radius.
Telkonet’s
EthoStream Hospitality Network competes with a wide variety of companies in the
hospitality industry ranging from media companies to traditional HSIA solution
providers. Although this industry is very widespread, according to
publicly available data, only a few providers offer HSIA services to greater
than 1000 individual hospitality properties. Those competitors
include Guest-tek, Lodgenet, iBahn and Superclick. Telkonet’s
competitive advantage in the space includes its end-to-end approach to its
service platform as well as its industry-leading hospitality HSIA gateway and
web-based control center.
Raw
Materials
While we
are dependent, in certain situations, on a limited number of vendors to provide
certain raw materials and components, we have not experienced significant
problems or issues purchasing any essential materials, parts or
components. We obtain the majority of our raw materials from the
following suppliers: Arrow Electronics, Avnet Electronics Marketing, Digi-Key
Corporation, Intellon Corporation, and Versa Technology. In addition,
Chesapeake Manufacturing, a U.S. based company, provides substantially all the
manufacturing and assembly requirements for the Telkonet iWire System™ and
Series 5 products, and ATR Manufacturing, a Chinese company, provides
substantially all the manufacturing requirements for the Telkonet SmartEnergy
products.
Customers
We are
neither limited to, nor reliant upon, a single or narrowly segmented consumer
base from which we derive our revenues. Our current primary focus is in
the hospitality, commercial, education, utility, healthcare and
government/military markets and expanding into the consumer market.
For the
year ended December 31, 2009, we had no revenues from major
customers. Revenues from two major customers approximated
$6,375,000, or 39%, of total revenues for the year ending December 31,
2008. Continual recurring revenue distributed across a network
of greater than 2,300 customers approximated $4,000,000 for the year ended
December 31, 2009.
Intellectual
Property
We
acquired certain intellectual property in the SSI acquisition, including, but
not limited to, Patent No: 5,395,042, titled “Apparatus and Method for automatic
climate control,” and Patent No. D569,279, titled “Thermostat.” Patent No:
5,395,042 was issued by the United States Patent and Trademark Office (USPTO) in
March 1995. This invention calculates and records the amount of time
needed for the thermostat to return the room temperature to the occupant’s set
point once a person re-enters the room. Patent No. D569,279 issued by the
USPTO in May 2008 was granted on the ornamental design of a thermostat
device.
We have
also applied for patents that cover the unique technology integrated into the
Telkonet iWire System™ and Series 5 product suite. We also continue
to identify, design and develop enhancements to our core technologies that will
provide additional functionality, diversification of application and
desirability for current and future users of the Telkonet iWire System™ and
Series 5 product suite.
In
December 2003, we received approval from the USPTO for our “Method and Apparatus
for Providing Telephonic Communication Services” Patent No.:
6,668,058. This invention covers the utilization of an electrical
power grid, for a concentration of electrical power consumers, and use of
existing consumer power lines to provide for a worldwide voice and data
telephony exchange.
In
December 2005, the USPTO issued Patent No: 6,975,212 titled “Method and
Apparatus for Attaching Power Line Communications to Customer
Premises”. The patent covers the method and apparatus for modifying a
three-phase power distribution network in a building in order to provide data
communications by using a PLC signal to an electrical central location point of
the power distribution system. Telkonet’s Coupler technology enables
the conversion of electrical outlets into high-speed data ports without costly
installation, additional wiring, or significant disruption of business
activity. The Coupler is an integral component of the Telkonet iWire
System™ and Series 5 product suites.
In August
2006, the USPTO issued Patent No: 7,091,831, titled “Method and Apparatus for
Attaching Power Line Communications to Customer Premises.” The
patented technology incorporates a safety disconnect circuit breaker into the
Telkonet Coupler, creating a single streamlined unit. In doing so, installation
of the Telkonet iWire System™ is faster, more efficient, and more
economical than with separate disconnect switches, delivering optimal signal
quality. The Telkonet Integrated Coupler Breaker patent covers the
unique technique used for interfacing and coupling its communication devices
onto the three-phase electrical systems that are predominant in commercial
buildings.
In
January 2007, the USPTO issued Patent No: 7,170,395 titled “Methods and
Apparatus for Attaching Power Line Communications to Customer Premises” for
Delta phase power distribution system applications, which are prevalent in the
maritime industry, shipboard systems, along with that of heavy industrial plants
and facilities.
In
addition, we currently have multiple patent applications under examination, and
intend to file additional patent applications that we deem to be economically
beneficial.
There can
be no assurance that any of our current or future patent applications will be
granted, or, if granted, that such patents will provide necessary protection for
our technology or our product offerings, or be of commercial benefit to
us.
Government
Regulation
We are
subject to regulation in the United States by the Federal Communications
Commission, or FCC. FCC rules permit the operation of unlicensed
digital devices that radiate radio frequency emissions if the manufacturer
complies with certain equipment authorization procedures, technical
requirements, marketing restrictions and product labeling
requirements.
In
January 2003, we received FCC approval to market the Telkonet iWire
System product suite. FCC rules permit the operation of unlicensed digital
devices that radiate radio frequency emissions if the manufacturer complies with
certain equipment authorization procedures, technical requirements, marketing
restrictions and product labeling requirements. An independent,
FCC-certified testing lab has verified our Gateway complies with the FCC
technical requirements for Class A digital devices. No further
testing of this device is required and the device may be manufactured and
marketed for commercial use.
In
March 2005, we received final certification of our Telkonet iWire
System product suite from European Union, or EU, authorities, which
certification was required before we could sell and permanently install the
Telkonet iWire System in EU countries. As a result of the certification, the
Telkonet iWire System™ that will be sold and installed in EU countries will
bear the Conformite Europeen (CE) mark, a symbol that demonstrates that the
product has met the EU’s regulatory standards and is approved for sale within
the EU.
In
June 2005, we received the National Institute of Standards and
Technology Federal Information Processing Standard, or FIPS, 140-2
validation for the Gateway. In July 2005, we received FIPS 140-2
validation for the eXtender and iBridge. The U.S. federal government
requires, as a condition to purchasing certain information processing
applications, that such applications receive FIPS 140-2
validation. U.S. federal agencies use FIPS 140-2 compliant products
for the protection of sensitive information. As a result of the
foregoing validations, as of July 2005, all of our powerline carrier
products have satisfied all governmental requirements for security certification
and are eligible for purchase by the U.S. federal government. In
addition to the foregoing, Canadian provincial authorities use FIPS 140-2
compliant products for the protection of sensitive designate
information. The Communications-Electronics Security Group, or
CESG, also has stated that FIPS 140-2 compliant products meet its security
criteria for use in data traffic categorized as “Private.” CESG is
part of the United Kingdom’s National Technical Authority for Information
Assurance, which is a government agency responsible for validating the security
of information processing applications for the government of the United Kingdom,
financial institutions, healthcare organizations, and international governments,
among others.
Future
products designed by us will require testing for compliance with FCC and CE
compliance. Moreover, if in the future, the FCC or EU changes its
technical requirements, further testing and/or modifications may be necessary in
order to achieve compliance.
Research
& Development
During
the year ended December 31, 2009 and 2008, we spent $1,080,148 and $2,036,129
respectively, on research and development activities. In 2009 and
2008, research and development activities were largely focused on the
development of Telkonet’s SmartEnergy technology, first integrating mesh
networking technologies for remote access and control over the product as well
as a comprehensive web-based platform for control, monitoring and
management. The primary focus for development within the EthoStream
Hospitality Network was related to features required by full-service hospitality
customers including enhanced Dual-WAN support, idle user checking for increased
property cross-marketing, and integration with external systems to allow
payment, authentication, or quality of service differentiation among customers.
Advancements in our Series 5 product line include the introduction of a low-cost
CPE device to expand the potential customer base, advancements in coupling
technology that allow customers to install Series 5 without disconnecting power
and development of a new DIN-rail style mounting bracket to ease installation in
utility substations.
Other
Information
Employees
As of
March 1, 2010, we had 93 full-time employees. We intend to hire
additional personnel to meet future operating requirements, when and if our
financial resources permit. We anticipate that we may need to hire additional
staff in the areas of customer support, field services, engineering, sales and
marketing, and administration.
Environmental
Matters
We do not
anticipate any material effect on our capital expenditures, earnings or
competitive position due to compliance with government regulations involving
environmental matters.
ITEM
1A. RISK FACTORS.
Our
results of operations, financial condition and cash flows can be adversely
affected by various risks. These risks include, but are not limited to, the
principal factors listed below and the other matters set forth in this annual
report on Form 10-K. You should carefully consider all of these
risks.
Risks
Relating to the Ownership of Our Common Stock
The
market price of our common stock has been and may continue to be
volatile.
The
trading price of our common stock has been and may continue to be highly
volatile and could be subject to wide fluctuations in response to various
factors. Some of the factors that may cause the market price of our
common stock to fluctuate include:
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fluctuations
in our quarterly financial and operating results or the quarterly
financial results of companies perceived to be similar to
us;
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changes
in estimates of our financial results or recommendations by securities
analysts;
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changes
in general economic, industry and market
conditions;
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failure
of any of our products to achieve or maintain market
acceptance;
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changes
in market valuations of similar
companies;
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failure
of our products to operate as
advertised
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success
of competitive products;
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changes
in our capital structure, such as future issuances of securities or the
incurrence of additional debt;
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announcements
by us or our competitors of significant products, contracts, acquisitions
or strategic alliances;
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regulatory
developments in the United States, foreign countries or
both;
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litigation
involving our company, our general industry or
both;
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additions
or departures of key personnel; and
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investors’
general perception of us.
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In
addition, if the market for technology stocks or the stock market in
general experiences a loss of investor confidence, the trading price of our
common stock could decline for reasons unrelated to our business, financial
condition or results of operations. If any of the foregoing occurs,
it could cause our stock price to fall and may expose us to class action
lawsuits that, even if unsuccessful, could be costly to defend and a distraction
to management.
If
securities or industry analysts do not continue to publish research or publish
inaccurate or unfavorable research about our business, our stock price and
trading volume could decline.
The
trading market for our common stock depends in part on the research and reports
that securities or industry analysts publish about us or our
business. We do not control these analysts. If one or more
of the analysts who covers us downgrades our stock or publishes inaccurate or
unfavorable research about our business, our stock price would likely
decline. If one or more of these analysts ceases coverage of our
company or fails to publish reports on us regularly, demand for our stock could
decrease, which could cause our stock price and trading volume to
decline.
Anti-takeover
provisions in our charter documents and Utah law could discourage delay or
prevent a change of control of our company and may affect the trading price of
our common stock.
We are a
Utah corporation and the anti-takeover provisions of the Utah Control Shares
Acquisition Act may discourage, delay or prevent a change of control by limiting
the voting rights of control shares acquired in a control share
acquisition. In addition, our Amended and Restated Articles of
Incorporation and bylaws may discourage, delay or prevent a change in our
management or control over us that shareholders may consider
favorable. Among other things, our Amended and Restated Articles of
Incorporation and bylaws:
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authorize
the issuance of “blank check” preferred stock that could be issued by our
board of directors to thwart a takeover
attempt;
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provide
that vacancies on our board of directors, including newly created
directorships, may be filled only by a majority vote of directors then in
office, except a vacancy occurring by reason of the removal of a director
without cause shall be filled by vote of the shareholders;
and
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limit
who may call special meetings of
shareholders.
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These
provisions could have the effect of delaying or preventing a change of control,
whether or not it is desired by, or beneficial to, our
shareholders.
We
do not currently intend to pay dividends on our common stock and, consequently,
the ability to achieve a return on an investment in our common stock will depend
on appreciation in the price of our common stock.
We do not
expect to pay cash dividends on our common stock. Any future dividend
payments are within the absolute discretion of our board of directors and will
depend on, among other things, our results of operations, working capital
requirements, capital expenditure requirements, financial condition, contractual
restrictions, business opportunities, anticipated cash needs, provisions of
applicable law and other factors that our board of directors may deem
relevant. We may not generate sufficient cash from operations in the
future to pay dividends on our common stock.
Our
common stock was delisted from NYSE Amex LLC and is currently listed for trading
on the Over-the-counter Bulletin Board.
Prior to
November 13, 2009, our common stock was listed for trading on NYSE Amex LLC, or
the Exchange, under the symbol “TKO.” On May 18, 2009, we received a
letter from the Exchange notifying us that we were out of compliance with the
Exchange’s continued listing standards due to the impairment of our existing
financial condition. In the opinion of the Exchange, our historical
losses in relation to our overall operations and existing financial resources
caused our financial condition to become so impaired that it appeared
questionable as to whether we would be able to continue operations and/or meet
our obligations as they mature. On June 25, 2009, we submitted a plan
to the Exchange advising of the actions we had taken, and planned to take, that
would bring us into compliance with the applicable listing standards within the
six month cure period. On August 27, 2009, we were notified of the
Exchange’s intention to delist our common stock because our plan did not
reasonably demonstrate the ability to regain compliance with the continued
listing standards of the Exchange. On November 3, 2009, we received notice
from the Exchange informing us that the Hearing Panel had confirmed the Staff’s
recommendation that our common stock be delisted from the
Exchange. After considering the costs to us of compliance with the
continued listing requirements of the Exchange and other factors, we determined
that it was not in the best interests of our company and our shareholders to
appeal the delisting of our common stock from the Exchange and approved the
voluntary delisting of the securities. The Exchange suspended trading
in our common stock effective at the open of business on November 13, 2009, at
which time our common stock began trading on the Over-the-Counter market’s Pink
Sheets under the symbol “TKOI.PK.” On December 7, 2009, we received
FINRA approval for trading on the OTC Bulletin Board. Our common
stock began trading on the OTC Bulletin Board on December 8, 2009 under the
symbol “TKOI.” The delisting of our common stock from the Exchange
may have had a negative impact on the market’s perception of our company and
could also adversely affect our stock price, trading volume, and ability to
effect financing and strategic transactions, such as private placements or
public offerings of our securities and acquisitions of complementary businesses
through shares of our common stock. In addition, our stockholders’
ability to trade or obtain quotations on our shares may be more limited than
they otherwise would be if our common stock were listed on the Exchange because
of lower trading volumes and transaction delays on the OTC Bulletin
Board.
Our common stock
may be subject to “Penny Stock” restrictions.
If the
price of our common stock remains at less than $5 per share, we will be subject
to so-called penny stock rules which could decrease our stock’s market
liquidity. The Securities and Exchange Commission has adopted
regulations which define a “penny stock” to include any equity security that has
a market price of less than $5 per share or an exercise price of less than $5
per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require the delivery to and
execution by the retail customer of a written declaration of suitability
relating to the penny stock, which must include disclosure of the commissions
payable to both the broker/dealer and the registered representative and current
quotations for the securities. Finally, the broker/dealer must send
monthly statements disclosing recent price information for the penny stocks held
in the account and information on the limited market in penny
stocks. Those requirements could adversely affect the market
liquidity of such stock. There can be no assurance that the price of
our common stock will rise above $5 per share so as to avoid these
regulations.
We
have a large number of shares of common stock underlying outstanding debentures
and warrants that may become available for future sale, and the sale of these
shares may result in dilution.
As of
March 30, 2010, we had 96,673,771 shares of common stock issued and
outstanding. In addition, as of that date, YA Global held secured
convertible debentures in an aggregate principal amount of $1,606,023, which we
refer to as the Debentures, under which the principal and accrued interest may
be converted into an estimated 10,706,820 shares of common stock at current
market prices, and outstanding warrants to purchase up to 4,621,212 shares of
common stock. The number of shares of common stock issuable upon
conversion of the Debentures may increase if the market price of our common
stock declines. The number of shares of common stock issuable by us to YA Global
pursuant to the terms of the Debentures, all other debentures and the warrants
issued to holders of the Debentures cannot exceed an aggregate of 19.99% of the
total issued and outstanding shares (calculated in accordance with applicable
principal market rules and regulations) of our common stock (subject to
appropriate adjustment for stock splits, stock dividends, or other similar
recapitalizations affecting the common stock), unless we first obtain
shareholder approval. We refer to this limitation as the Exchange
Cap. The Exchange Cap is applicable for conversion of the Debentures
and exercises of the warrants, in the aggregate, and we are not obligated to
issue any shares of common stock upon conversion of the Debentures or exercise
of the warrants in excess of the Exchange Cap unless and until we first obtain
shareholder approval to exceed the Exchange Cap. On May 28, 2009, our
shareholders voted against a proposal to remove the Exchange Cap, which would
have allowed YA Global to potentially acquire in excess of 19.99% of the
outstanding shares of our common stock. If our shareholders later
approve the removal of the Exchange Cap, all of the shares, including all of the
shares issuable upon conversion of the Debentures and upon exercise of our
warrants, may be sold without restriction. The sale of these shares
may adversely affect the market price of our common stock.
The
continuously adjustable conversion price feature of our outstanding debentures
held by YA Global may encourage investors to make short sales in our common
stock, which could have a negative effect on the price of our common
stock.
Due to
the Exchange Cap, we are not currently under an obligation to issue shares of
common stock to YA Global upon conversion of the Debentures. If,
however, our shareholders approve the removal of the Exchange Cap, the
Debentures would be convertible into shares of our common stock at a 10%
discount to the ten day volume weighted average trading price of the common
stock prior to the conversion. The significant downward pressure on
the price of the common stock as YA Global converts and sells material amounts
of common stock could encourage short sales by investors. This could
place further downward pressure on the price of our common stock. YA
Global could sell common stock into the market in anticipation of covering the
short sale by converting its securities, which could cause further downward
pressure on the stock price. In addition, not only the sale of shares
issued upon conversion or exercise of outstanding convertible debt, warrants and
options, but also the mere perception that these sales could occur, may
adversely affect the market price of our common stock.
The
issuance of additional shares of common stock upon conversion of the Debentures
and the exercise of outstanding warrants may cause immediate and substantial
dilution to our existing shareholders.
Due to
the Exchange Cap, we are not currently under an obligation to issue shares of
common stock to YA Global upon conversion of the Debentures. If,
however, our shareholders approve the removal of the Exchange Cap, this may
result in substantial dilution to the interests of other shareholders because YA
Global may ultimately convert the full outstanding amount under the Debentures
into shares of common stock, exercise the warrants in full and sell the shares
of common stock issued upon such conversion and exercise. Although YA
Global may not convert its Debentures and/or exercise its warrants if such
conversion or exercise would cause it to own more than 4.99% of our outstanding
common stock, this restriction does not prevent YA Global from converting and/or
exercising some of its holdings and then converting the rest of its
holdings. In this way, YA Global could sell more than 4.99% of our
outstanding common stock while never holding more than this limit. If
the Exchange Cap is removed, there is no upper limit on the number of shares
that may be issued which will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common
stock.
Further
issuances of equity securities may be dilutive to current
stockholders.
Although
the funds that were raised in our debenture offerings, the note offerings and
the private placement are being used for general working capital purposes, it is
likely that we will be required to seek additional capital in the future. This
capital funding could involve one or more types of equity securities, including
convertible debt, common or convertible preferred stock and warrants to acquire
common or preferred stock. Such equity securities could be issued at or below
the then-prevailing market price for our common stock. Any issuance of
additional shares of our common stock will be dilutive to existing stockholders
and could adversely affect the market price of our common stock.
The
exercise of options and warrants outstanding and available for issuance may
adversely affect the market price of our common stock.
As of
December 31, 2009, we had outstanding employee options to purchase a total of
6,120,883 shares of common stock at exercise prices ranging from $1.00 to $5.99
per share, with a weighted average exercise price of $1.56. As of December 31,
2009, we had outstanding non-employee options to purchase a total of 740,000
shares of common stock at an exercise price of $1.00 per share. As of December
31, 2009, we had warrants outstanding to purchase a total of 12,158,941 shares
of common stock at exercise prices ranging from $0.33 to $4.17 per share, with a
weighted average exercise price of $1.60. The exercise of outstanding options
and warrants and the sale in the public market of the shares purchased upon such
exercise will be dilutive to existing stockholders and could adversely affect
the market price of our common stock.
Risks
Related to Our Business
The
industry within which we operate is intensely competitive and rapidly
evolving.
We
operate in a highly competitive, quickly changing environment, and our future
success will depend on our ability to develop and introduce new products and
product enhancements that achieve broad market acceptance in the markets within
which we compete. We will also need to respond effectively to new
product announcements by our competitors by quickly introducing competitive
products.
Delays in
product development and introduction could result in:
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loss
of or delay in revenue and loss of market
share;
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negative
publicity and damage to our reputation and the reputation of our product
offerings; and
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decline
in the average selling price of our
products.
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Government
regulation of our products could impair our ability to sell such products in
certain markets.
The rules
of the Federal Communications Commission, or FCC, permit the operation of
unlicensed digital devices that radiate radio frequency emissions if the
manufacturer complies with certain equipment authorization procedures, technical
requirements, marketing restrictions and product labeling
requirements. Differing technical requirements apply to “Class A”
devices intended for use in commercial settings, and “Class B” devices intended
for residential use to which more stringent standards apply. An
independent, FCC-certified testing lab has verified that our iWire System product suite complies
with the FCC technical requirements for Class A and Class B digital
devices. No further testing of these devices is required, and the
devices may be manufactured and marketed for commercial and residential
use. Additional devices designed by us for commercial and residential
use will be subject to the FCC rules for unlicensed digital
devices. Moreover, if in the future, the FCC changes its technical
requirements for unlicensed digital devices, further testing and/or
modifications of devices may be necessary. Failure to comply with any
FCC technical requirements could impair our ability to sell our products in
certain markets and could have a negative impact on our business and results of
operations.
Products
sold by our competitors could become more popular than our products or render
our products obsolete.
The
market for our products and services is highly competitive. Some of
our competitors have longer operating histories, greater name recognition and
substantially greater financial, technical, sales, marketing and other
resources. These competitors may, among other things, undertake more
extensive marketing campaigns, adopt more aggressive pricing policies, obtain
more favorable pricing from suppliers and manufacturers and exert more influence
on the sales channel than we can. As a result, we may not be able to
compete successfully with these competitors, and these competitors may develop
or market technologies and products that are more widely accepted than those
being developed by us or that would render our products obsolete or
noncompetitive. We anticipate that competitors will also intensify
their efforts to penetrate our target markets. These competitors may
have more advanced technology, more extensive distribution channels, stronger
brand names, bigger promotional budgets and larger customer bases than we
do. These companies could devote more capital resources to develop,
manufacture and market competing products than we could. If any of
these companies are successful in competing against us, our sales could decline,
our margins could be negatively impacted, and we could lose market share, any of
which could seriously harm our business, results of operations, and
prospects.
We
may not be able to obtain patents, which could have a material adverse effect on
our business.
Our
ability to compete effectively in the powerline technology industry will depend
on our success in acquiring suitable patent protection. We currently
have several patents pending. We also intend to file additional
patent applications that we deem to be economically beneficial. If we
are not successful in obtaining patents, we will have limited protection against
those who might copy our technology. As a result, the failure to
obtain patents could negatively impact our business, results of operations, and
prospects.
Infringement
by third parties on our proprietary technology and development of substantially
equivalent proprietary technology by our competitors could negatively impact our
business.
Our
success depends partly on our ability to maintain patent and trade secret
protection, to obtain future patents and licenses and to operate without
infringing on the proprietary rights of third parties. There can be
no assurance that the measures we have taken to protect our intellectual
property rights, including intellectual property rights of third parties
integrated into our Telkonet iWire System product suite and Telkonet SmartEnergy
products, will prevent misappropriation or circumvention. In
addition, there can be no assurance that any patent application, when filed,
will result in an issued patent, or that our existing patents, or any patents
that may be issued in the future, will provide us with significant protection
against competitors. Moreover, there can be no assurance that any
patents issued to, or licensed by, us will not be infringed upon or circumvented
by others. Infringement by third parties on our proprietary
technology could negatively impact our business. Moreover, litigation
to establish the validity of patents, to assert infringement claims against
others, and to defend against patent infringement claims can be expensive and
time-consuming, even if the outcome is in our favor. We also rely to
a lesser extent on unpatented proprietary technology, and no assurance can be
given that others will not independently develop substantially equivalent
proprietary information, techniques or processes or that we can meaningfully
protect our rights to such unpatented proprietary technology. If our
competitors develop substantially equivalent technology, and we are unable to
enforce any intellectual property rights with respect to such technology in a
cost-effective manner or at all, our business and operations would suffer
significant harm.
We
may incur substantial damages due to litigation.
We cannot
be certain that our products do not and will not infringe issued patents or
other intellectual property rights of others. We are currently a defendant in an
action in which it is alleged that we have infringed the intellectual property
rights of another party. If it were determined that our products
infringe the intellectual property rights of another, we could be required to
pay substantial damages or be enjoined from licensing or using the infringing
products or technology. Additionally, if it were determined that our products
infringe the intellectual property rights of others, we would need to obtain
licenses from these parties or substantially re-engineer our products in order
to avoid infringement. We might not be able to obtain the necessary licenses on
acceptable terms or at all, or to re-engineer our products successfully. Any of
the foregoing could cause us to incur significant costs and prevent us from
selling our products.
We are
also currently defending an action alleging that we are in breach of an
obligation to make severance and other payments to a former
executive. If it is determined that we are in breach of any such
obligation, we could be required to pay substantial damages to our former
executive.
We
depend on a small team of senior management, and it may have difficulty
attracting and retaining additional personnel.
Our
future success will depend in large part upon the continued services and
performance of senior management and other key personnel. If we lose
the services of any member of our senior management team, our overall operations
could be materially and adversely affected. In addition, our future
success will depend on our ability to identify, attract, hire, train, retain and
motivate other highly skilled technical, managerial, marketing, purchasing and
customer service personnel when they are needed. Competition for
these individuals is intense. We cannot ensure that we will be able
to successfully attract, integrate or retain sufficiently qualified personnel
when the need arises. Any failure to attract and retain the necessary
technical, managerial, marketing, purchasing and customer service personnel
could have a negative effect on our financial condition and results of
operations. On December 21, 2009, we announced a restructuring which
includes the relocation of our offices from Germantown, Maryland to Milwaukee,
Wisconsin, consolidating our business operations into a single
location. Also as part of the corporate restructuring, we announced
that our Chief Financial Officer, Rick Leimbach, will be leaving our company to
pursue other opportunities in the near future, although a departure date has yet
to be established. Until his departure date, Mr. Leimbach will
continue to perform the duties and responsibilities customary and consistent
with his position and will assist us in our transition. If we are
unable to satisfactorily replace Mr. Leimbach upon his departure, our overall
operations could be materially and adversely affected.
Any
acquisitions we make could result in difficulties in successfully managing our
business and consequently harm our financial condition.
We may
seek to expand by acquiring complementary businesses in our current or ancillary
markets. We cannot accurately predict the timing, size and success of
our acquisition efforts and the associated capital commitments that might be
required. We expect to face competition for acquisition candidates,
which may limit the number of acquisition opportunities available to us and may
lead to higher acquisition prices. There can be no assurance that we
will be able to identify, acquire or profitably manage additional businesses or
successfully integrate acquired businesses, if any, without substantial costs,
delays or other operational or financial difficulties. In addition, acquisitions
involve a number of other risks, including:
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failure
of the acquired businesses to achieve expected
results;
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diversion
of management’s attention and resources to
acquisitions;
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failure
to retain key customers or personnel of the acquired
businesses;
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disappointing
quality or functionality of acquired equipment and people:
and
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risks
associated with unanticipated events, liabilities or
contingencies.
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Client
dissatisfaction or performance problems at a single acquired business could
negatively affect our reputation. The inability to acquire businesses
on reasonable terms or successfully integrate and manage acquired companies, or
the occurrence of performance problems at acquired companies, could result in
dilution, unfavorable accounting treatment or one-time charges and difficulties
in successfully managing our business.
Our
inability to obtain capital, use internally generated cash or debt, or use
shares of our common stock to finance future acquisitions could impair the
growth and expansion of our business.
Reliance
on internally generated cash or debt to finance our operations or complete
acquisitions could substantially limit our operational and financial
flexibility. The extent to which we will be able or willing to use
shares of our common stock to consummate acquisitions will depend on the market
value of our common stock which will vary, and our liquidity. Using
shares of our common stock for this purpose also may result in significant
dilution to our then existing stockholders. To the extent that we are
unable to use our common stock to make future acquisitions, our ability to grow
through acquisitions may be limited by the extent to which we are able to raise
capital through debt or additional equity financings. No assurance
can be given that we will be able to obtain the necessary capital to finance any
acquisitions or our other cash needs. If we are unable to obtain
additional capital on acceptable terms, we may be required to reduce the scope
of any expansion or redirect resources committed to internal
purposes. In addition to requiring funding for acquisitions, we may
need additional funds to implement our internal growth and operating strategies
or to finance other aspects of our operations. Our failure to: (i)
obtain additional capital on acceptable terms; (ii) use internally generated
cash or debt to complete acquisitions because it significantly limits our
operational or financial flexibility; or (iii) use shares of our common stock to
make future acquisitions, may hinder our ability to actively pursue any
acquisitions.
The
restrictive covenants contained in the Securities Purchase Agreement pursuant to
which the convertible debentures were sold contain restrictions that could limit
our financing options.
The
Securities Purchase Agreement pursuant to which the convertible debentures were
sold contains limitations on our ability to engage in certain financing
activities without the prior consent of the holders of the convertible
debentures. As a result of these restrictions, we may be unable to
obtain the financing necessary to fund working capital, operating losses,
capital expenditures or acquisitions. The failure to obtain such financing
could have a material adverse effect on our business and results of
operations.
Potential
fluctuations in operating results could have a negative effect on the price of
our common stock.
Our
operating results may fluctuate significantly in the future as a result of a
variety of factors, most of which are outside our control,
including:
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the
level of use of the Internet;
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the
demand for high-tech goods;
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the
amount and timing of capital expenditures and other costs relating to the
expansion of our operations;
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price
competition or pricing changes in the
industry;
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technical
difficulties or system downtime;
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economic
conditions specific to the internet and communications industry;
and
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general
economic conditions.
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Our
quarterly results may also be significantly impacted by certain accounting
treatment of acquisitions, financing transactions or other matters. Such
accounting treatment could have a material impact on our results of operations
and have a negative impact on the price of our common stock.
We
rely on a small number of customers and cannot be certain they will consistently
purchase our products in the future.
No customer
accounted for more than 10% of our revenues for the year ended December 31,
2009. Two customers accounted for 39% of our revenues for the year
ended December 31, 2008. No other customer accounted for more than
10% of our revenues during those periods. In the future, a small
number of customers may continue to represent a significant portion of our total
revenues in any given period. We cannot be certain that such customers will
consistently purchase our products at any particular rate over any subsequent
period. A loss of any of these customers could adversely affect our
financial performance.
We
rely on a limited number of third party suppliers. If these companies fail to
perform or experience delays, shortages, or increased demand for their products
or services, we may face shortages, increased costs, and may be required to
suspend deployment of our products and services.
We depend
on a limited number of third party suppliers to provide the components and the
equipment required to deliver our solutions. If these providers fail
to perform their obligations under our agreements with them or we are unable to
renew these agreements, we may be forced to suspend the sale and deployment of
our products and services and enrollment of new customers, which would have an
adverse effect on our business, prospects, financial condition and operating
results.
Our
management and operational systems might be inadequate to handle our potential
growth.
We may
experience growth that could place a significant strain upon our management and
operational systems and resources. Failure to manage our growth
effectively could have a material adverse effect upon our business, results of
operations and financial condition. Our ability to compete
effectively and to manage future growth will require us to continue to improve
our operational systems, organization and financial and management controls,
reporting systems and procedures. We may fail to make these
improvements effectively. Additionally, our efforts to make these
improvements may divert the focus of our personnel. We must integrate
our key executives into a cohesive management team to expand our
business. If new hires perform poorly, or if we are unsuccessful in
hiring, training and integrating these new employees, or if we are not
successful in retaining our existing employees, our business may be
harmed. To manage the growth we will need to increase our operational
and financial systems, procedures and controls. Our current and
planned personnel, systems, procedures and controls may not be adequate to
support our future operations. We may not be able to effectively
manage such growth, and failure to do so could have a material adverse effect on
our business, financial condition and results of operations.
We
are exposed to risks relating to evaluations of controls required by Section 404
of the Sarbanes-Oxley Act of 2002.
We are
required to comply with Section 404 of the Sarbanes-Oxley Act of
2002. We concluded that, as of December 31, 2009, there were material
weaknesses in our internal control over financial reporting relating to the lack
of segregation of duties and the need for a stronger internal control
environment, attributable to the small size of our accounting staff and
continued integration of our 2007 acquisitions of Smart Systems International
and EthoStream LLC. We retained additional personnel and worked to
remediate these deficiencies during fiscal 2009. Notwithstanding
those efforts we continue to have material weaknesses in our internal control
over financial reporting. A material weakness is a control
deficiency, or a combination of control deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of annual or interim financial statements would not be prevented or
detected. Until this deficiency in our internal control over
financial reporting is remediated, there is reasonable possibility that a
material misstatement to our annual or interim consolidated financial statements
could occur and not be prevented or detected by our internal controls in a
timely manner.
We
may be affected if the United States participates in wars or military or other
action or by international terrorism.
Involvement
in a war or other military action or acts of terrorism may cause significant
disruption to commerce throughout the world. To the extent that such
disruptions result in (i) delays or cancellations of customer orders, (ii) a
general decrease in consumer spending on information technology, (iii) our
inability to effectively market and distribute our services or products or (iv)
our inability to access capital markets, our business and results of operations
could be materially and adversely affected. We are unable to predict
whether the involvement in a war or other military action will result in any
long-term commercial disruptions or if such involvement or responses will have
any long-term material adverse effect on our business, results of operations, or
financial condition.
Our
exposure to the credit risk of our customers and suppliers may adversely affect
our financial results.
We sell
our products to customers that have in the past, and may in the future,
experience financial difficulties, particularly in light of the recent global
economic downturn. If our customers experience financial difficulties, we could
have difficulty recovering amounts owed to us from these customers. While we
perform credit evaluations and adjust credit limits based upon each customer’s
payment history and credit worthiness, such programs may not be effective in
reducing our exposure to credit risk. We evaluate the collectability of accounts
receivable, and based on this evaluation make adjustments to the allowance for
doubtful accounts for expected losses. Actual bad debt write-offs may differ
from our estimates, which may have a material adverse effect on our financial
condition, operating results and cash flows.
Our
suppliers may also experience financial difficulties, which could result in our
having difficulty sourcing the materials and components we use in producing our
products and providing our services. If we encounter such difficulties, we may
not be able to produce our products for our customers in a timely fashion which
could have an adverse effect on our results of operations, financial condition
and cash flows.
The
recent deterioration of the economy and credit markets may adversely affect our
future results of operations.
Our
operations and performance depend to some degree on general economic conditions
and their impact on our customers’ finances and purchase
decisions. As a result of recent economic events, potential customers
may elect to defer purchases of capital equipment items, such as the products we
manufacture and supply. Additionally, the credit markets and the
financial services industry have been experiencing a period of upheaval
characterized by the bankruptcy, failure, collapse or sale of various financial
institutions and an unprecedented level of intervention from the United States
government. While the ultimate outcome of these events cannot be predicted, it
may have a material adverse effect on our customers’ ability to fund their
operations thus adversely impacting their ability to purchase our products or to
pay for our products on a timely basis, if at all. These and other
economic factors could have a material adverse effect on demand for our
products, the collection of payments for our products and on our financial
condition and operating results.
We
may not be able to obtain to obtain payment and performance bonds, which could
have a material adverse effect on our business.
Our
ability to deploy our SmartEnergy platform into the energy management
initiatives in military housing and deployments may rely on our ability to
obtain payment and performance bonds which may be an essential element to work
orders for the installation of our products and services. If we are
unable to obtain payment and performance bonds in a timely fashion as required
by an applicable work order, we may not be entitled to payment under the work
order until such bonds have been provided or until such a requirement is
expressly waived. And any delays due to a failure to furnish bonds
may not entitle us to a price increase for the work or an extension of time to
complete the work and may entitle the other party to terminate our work order
without liability and to indemnify such party from damages suffered as a result
of our failure to deliver the bonds and the termination of the work order. As a
result, the failure to obtain bonds where required could negatively impact our
business, results of operations, and prospects.
Risks
Relating to Our Financial Results and Need for Financing
Our
independent auditors have expressed substantial doubt about our ability to
continue as a going concern, which may hinder our ability to obtain future
financing.
In its
report dated March 31, 2010, our independent auditors stated that our financial
statements for the year ended December 31, 2009 were prepared assuming that we
would continue as a going concern, and that they have substantial doubt about
our ability to continue as a going concern. Our auditors’ doubts are
based on our net losses and deficits in cash flows from
operations. We continue to experience net operating
losses. Our ability to continue as a going concern is subject to our
ability to generate a profit and/or obtain necessary funding from outside
sources, including by the sale of our securities, or obtaining loans from
financial institutions, where possible. Our continued net operating
losses and our auditors’ doubts increase the difficulty of our meeting such
goals. If we are not successful in raising sufficient additional
capital, we may not be able to continue as a going concern and our stockholders
may lose their entire investment.
We
have a limited number of shares of common stock available for future issuance
which could adversely affect our ability to raise capital or consummate
acquisitions.
We are
currently authorized to issue 155,000,000 shares of common stock under our
Articles of Incorporation. As of March 31, 2010, we have outstanding
96,673,771 shares of common stock, or approximately 122,293,353 shares of common
stock after giving effect to the assumed exercise of all outstanding warrants
and options and assumed conversion of preferred stock. Due to the
limited number of authorized shares available for issuance and because of the
significant competition for acquisitions, we may not able to consummate an
acquisition until we increase the number of shares we are authorized to
issue. To facilitate the possibility and flexibility of raising
additional capital or the completion of potential acquisitions, we would need to
seek shareholder approval to increase the number of our authorized shares of
common stock. We can provide no assurance that we will succeed in
amending our Articles of Incorporation to increase the number of shares of
common stock we are authorized to issue. If we are not successful in
raising sufficient additional capital, we may not be able to continue as a going
concern and our shareholders may lose their entire investment.
We
have a history of operating losses and an accumulated deficit and expect to
continue to incur losses for the foreseeable future.
Since
inception through December 31, 2009, we have incurred cumulative losses of
$113,741,481 and have never generated enough funds through operations to support
our business. Because of the numerous risks and uncertainties
associated with our technology, the industry in which we operate, and other
factors, we are unable to predict the extent of any future losses or when we
will become profitable, if ever. If we are unable to generate
sufficient revenues from our operations to meet our working capital requirements
for the next twelve months, we expect to finance our future cash needs through
public or private equity offerings, debt financings and interest income earned
on our cash balances. We cannot be certain that additional funding
will be available on acceptable terms, or at all.
Our
ability to use our net operating loss carryforwards may be subject to limitation
which could result in increased future tax liability for us.
Generally,
a change of more than 50% in the ownership of a company’s stock, by value, over
a three-year period constitutes an ownership change for U.S. federal income tax
purposes. An ownership change may limit a company’s ability to use its net
operating loss carryforwards attributable to the period prior to such change.
The number of shares of our common stock that we issue in the proposed rights
offering described in our registration statement on Form S-1 (File No.
333-164899) may be sufficient, taking into account prior or future shifts in our
ownership over a three-year period, to cause us to undergo an ownership change.
As a result, if we earn net taxable income, our ability to use our pre-change
net operating loss carryforwards to offset U.S. federal taxable income may
become subject to limitations, which could result in increased future tax
liability for us.
Our
business activities might require additional financing that might not be
obtainable on acceptable terms, if at all, which could have a material adverse
effect on our financial condition, liquidity and our ability to operate going
forward.
On
February 12, 2010, we filed a registration statement on Form S-1 in order to
conduct a planned rights offering. In the rights offering, we will
distribute at no charge to holders of our common stock, other than those who
hold shares of our common stock solely as participants in the Telkonet, Inc.
401(k) plan, and to the holders of our Series A convertible redeemable preferred
stock, transferable subscription rights as set forth in the Form
S-1.
We
believe that the anticipated net proceeds from this offering and cash flow from
operations will be sufficient to meet our working capital, capital expenditure
and other cash needs indefinitely. However, if we do not meet our business plan
targets, we might need to raise additional capital from public or private equity
or debt sources in order to finance future growth, including the expansion of
service within existing markets and to new markets, which can be capital
intensive, as well as unanticipated working capital needs and capital
expenditure requirements.
The
actual amount of capital required to fund our operations and development may
vary materially from our estimates. If our operations fail to generate the cash
that we expect, we may have to seek additional capital to fund our business. If
we are required to obtain additional funding in the future, we may have to sell
assets, seek debt financing or obtain additional equity capital. In addition,
any indebtedness we incur in the future could subject us to restrictive
covenants limiting our flexibility in planning for, or reacting to changes in,
our business. If we do not comply with such covenants, our lenders could
accelerate repayment of our debt or restrict our access to further borrowings.
If we raise funds by selling more stock, your ownership in us will be diluted,
and we may grant future investors rights superior to those of the common stock
that you are purchasing. If we are unable to obtain additional capital when
needed, we may have to delay, modify or abandon some of our expansion plans.
This could slow our growth, negatively affect our ability to compete in our
industry and adversely affect our financial condition.
We
require shareholder approval to increase the number of our authorized shares of
common stock.
In order
to conduct the rights offering, we require shareholder approval to increase the
number of our authorized shares of common stock. We can provide no
assurance that we will succeed in obtaining shareholder approval to increase the
number of shares of common stock we are authorized to issue. If we
are not successful in obtaining shareholder approval, we will not have a
sufficient number of shares necessary to the completion of the rights
offering.
A
significant portion of our total assets consists of goodwill, which is subject
to a periodic impairment analysis, and a significant impairment determination in
any future period could have an adverse effect on our results of operations even
without a significant loss of revenue or increase in cash expenses attributable
to such period.
We have
goodwill totaling approximately $11.7 million at December 31, 2009 resulting
from recent and past acquisitions. We evaluate this goodwill for
impairment based on the fair value of the operating business units to which this
goodwill relates at least once a year. This estimated fair value
could change if we are unable to achieve operating results at the levels that
have been forecasted, the market valuation of those business units decreases
based on transactions involving similar companies, or there is a permanent,
negative change in the market demand for the services offered by the business
units. These changes could result in an impairment of the existing
goodwill balance that could require a material non-cash charge to our results of
operations.
Our
failure to comply with restrictive covenants under our revolving credit
facilities and other debt instruments could trigger prepayment
obligations.
Our
failure to comply with the restrictive covenants under our revolving credit
facilities and other debt instruments could result in an event of default,
which, if not cured or waived, could result in us being required to repay these
borrowings before their due date. If we are forced to refinance these
borrowings on less favorable terms, our results of operations and financial
condition could be adversely affected by increased costs and rates.
If we fail to remain current on our
reporting requirements, we could be removed from the OTC Bulletin Board, which
would limit the ability of broker-dealers to sell our securities and the ability
of stockholders to sell their securities in the secondary
market.
Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, or the Exchange
Act, and must be current in their reports under Section 13 of the Exchange Act
in order to maintain price quotation privileges on the OTC Bulletin
Board. If we fail to remain current on our reporting requirements, we
could be removed from the OTC Bulletin Board. As a result, the market
liquidity for our securities could be severely adversely affected by limiting
the ability of broker-dealers to sell our securities and the ability of
stockholders to sell their securities in the secondary market.
We
have substantial debt, and our debt agreements contain certain events of default
and are secured by all of our assets.
As of
December 31, 2009, our indebtedness totaled approximately $2.3 million,
excluding advances on our factoring lines of approximately
$643,000. As a result, we incur significant interest
expense. We had $1.6 million of outstanding term debt that
matures in May 2011, approximately $387,000 of our outstanding revolver debt
that matures in September 2010, and a $300,000 loan that matures in December
2016.
Our debt
agreements contain certain events of default, including, among other things,
failure to pay, violation of covenants, and certain other expressly enumerated
events. Additionally, we have granted to YA Global and Thermo Credit
a first priority security interest in substantially all of our assets, while the
State of Wisconsin holds a subordinated interest in our assets.
The
degree to which we are leveraged could have important consequences, including
the following:
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our
ability to obtain additional financing in the future for operations,
capital expenditures, potential acquisitions, and other purposes may be
limited, or financing may not be available on terms favorable to us or at
all;
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a
substantial portion of our cash flows from operations must be used to pay
our interest expense and repay our debt, which reduces the funds that
would otherwise be available to us for our operations and future business
opportunities; and
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our
ability to continue operations at the current level could be negatively
affected if we cannot refinance our obligations before their due
date.
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A default
under any of our debt agreements could result in acceleration of debt payments
and permit the lender to foreclose on our assets. We cannot assure
you that we will be able to maintain compliance with these
covenants. Failure to maintain compliance could have a material
adverse impact on our financial position, results of operations and cash
flow.
The terms
of our outstanding
Debentures put significant restrictions on our ability to:
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pay
cash dividends to our stockholders;
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incur
additional indebtedness;
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permit
liens on assets or conduct sales of assets;
and
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engage
in transactions with affiliates.
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These
significant restrictions could have negative consequences, such as:
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we
may be unable to obtain additional financing to fund working capital,
operating losses, capital expenditures or acquisitions on terms acceptable
to us, or at all;
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we
may be unable to refinance our indebtedness on terms acceptable to us, or
at all; and
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we
may be more vulnerable to economic downturns, which would limit our
ability to withstand competitive
pressures.
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Moreover,
any additional debt financing pursued by us may contain terms that include more
restrictive covenants, require repayment on an accelerated schedule or impose
other obligations that limit the ability to grow our business, acquire needed
assets, or take other actions we might otherwise consider appropriate or
desirable.
We
require a waiver under our line of credit facility, without which we will be in
default of our line of credit facility.
In
September 2008, we entered into a two-year line of credit facility with a third
party financial institution. Among other things, we agreed with the
lender that (i) for each monthly period subsequent to March 31, 2009, we will
maintain a ratio of cash flow to scheduled principal payments plus all accrued
interest and related fee on funded debt of not less than 1.00 to 1.00 as of the
end of each fiscal quarter (which we refer to as the minimum cash flow to debt
service ratio) and (ii) we will maintain a tangible net worth of not
less than $14,400,000 as of the last day of each fiscal quarter (which we refer
to as the tangible net worth requirement). On March 24, 2010, we
received a notice of waiver of the minimum cash flow to debt service ratio and
the tangible net worth requirement under the line of credit
facility. The waivers are effective for the quarter ended December
31, 2009 and for a period of ninety (90) days thereafter. We have no
assurance that we will be granted a further extension. In the event
we are unable to obtain an extension of the waiver we will be in default of the
minimum cash flow to debt service ratio and the tangible net worth
requirement. A default could result in acceleration of debt payments
and permit the lender to foreclose on our assets.
ITEM
2. PROPERTIES.
We lease
12,000 square feet of commercial office space, storage and manufacturing in
Milwaukee, Wisconsin as our corporate headquarters for a monthly rental of
$17,289. The Milwaukee lease expires in February
2019. In connection with our restructuring, we are in the
process of relocating our personnel from Germantown, Maryland to
Milwaukee.
We also
presently lease 16,400 square feet of commercial office space in Germantown,
Maryland for a monthly rental of $18,327. This lease expires in
December 2015. As a result of our relocation to Milwaukee, we are actively
looking to sublease all or a portion of the Germantown space for the balance of
the lease term.
ITEM
3. LEGAL PROCEEDINGS.
Linksmart
Wireless Technology, LLC v. T-Mobile USA, Inc., et al,
On July
1, 2008, Linksmart Wireless Technology, LLC, or Linksmart, filed a civil lawsuit
in the Eastern District of Texas against EthoStream, LLC, our wholly-owned
subsidiary and 22 other defendants (Linksmart Wireless Technology, LLC
v. T-Mobile USA, Inc., et al, U.S. District Court, for the Eastern
District of Texas, Marshall Division, No.2:08-cv-00264-TJW-CE). This
lawsuit alleges that the defendants’ services infringe a wireless network
security patent held by Linksmart. Linksmart seeks a permanent injunction
enjoining the defendants from infringing, inducing the infringement of, or
contributing to the infringement of its patent, an award of damages and
attorney’s fees.
On August
1, 2008, we timely filed an answer to the complaint denying the allegations. On
February 27, 2009, the United States Patent Office ("USPTO") granted a
reexamination request. Based upon four highly relevant and material
prior art references that had not been considered by the USPTO in its initial
examination, it found a “substantial new question of patentability” affecting
all claims of the patent allegedly infringed upon. There is a
possibility that the claims of the patent will be cancelled or narrowed during
the reexamination which may result in the narrowing or elimination of some and
possibly all of the issues in the pending litigation. The case is
currently in discovery. A mandatory mediation will likely be held in
April or May, 2010.
Defendant
Ramada Worldwide, Inc. provided us with notice of the suit and demanded that we
defend and indemnify it pursuant to a vendor direct supplier agreement between
EthoStream and WWC Supplier Services, Inc., a Ramada affiliate (wherein we
agreed to indemnify, defend and hold Ramada harmless from and against claims of
infringement). After a review of that agreement, it was determined
that Ethostream owes the duty to defend and indemnify and it has assumed
Ramada’s defense. An answer on Ramada’s behalf was filed in U.S.
District Court, for the Eastern District of Texas, Marshall Division on
September 19, 2008. The matter is currently pending in that court.
Ronald Pickett v. Telkonet,
Inc.
On April
29, 2009, Ronald Pickett, our former chief executive officer, filed a lawsuit
against us (Ronald Pickett v.
Telkonet, Inc.), in the Circuit Court for Montgomery County, Maryland,
Case No. 312683V, alleging that he is owed $258,053 in unpaid severance
compensation and benefits and $63,000 in unpaid business and travel expenses and
seeking an award of treble damages on the severance claim alleging that the
claimed benefits constitute “wages” under the Maryland Wage Payment and
Collection Act. On August 31, 2009, we filed a motion to
dismiss the action for failure to state a claim. However, the court
rejected our arguments, finding that Mr. Pickett had satisfied the minimum
pleading requirements. The parties have completed all written
discovery and all depositions of the parties have been completed excluding the
deposition of Thomas Lynch which the parties are attempting to
reschedule. A pretrial hearing was held on March 26, 2010 in the
Circuit Court, at which time the case was set for trial for May 4 – May 6,
2010.
ITEM
4. RESERVED.
None.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our
common stock is currently quoted on the OTC Bulletin Board under the symbol
“TKOI.” From November 13, 2009 to December 7, 2009, our common stock
was listed for trading on the pink sheets, a centralized quotation service
maintained by Pink OTC Markets Inc., under the symbol
“TKOI.PK.” Between January 1, 2008 and November 12, 2009, our common
stock was listed for trading on the NYSE AMEX LLC under the ticker symbol
“TKO.”
The
following table sets forth (1) the high and low bid prices for our common stock
for the fourth quarter of 2009 and (2) the high and low sales prices for our
common stock for all other periods indicated below. The price
information represents inter-dealer prices without retail mark-ups, mark-downs
or commissions, and may not necessarily represent actual
transactions.
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Year
Ended December 31, 2009
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Year
Ended December 31, 2008
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Record
Holders
As of
March 30, 2010, we had 243 shareholders of record and 96,673,771 shares of our
common stock issued and outstanding.
Dividend
Policy
The
Company has never paid dividends on its common stock and does not anticipate
paying dividends in the foreseeable future.
Unregistered
Sales of Equity Securities and Use of Proceeds
None.
ITEM
6. SELECTED FINANCIAL DATA
This item
is not applicable.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the accompanying financial
statements and related notes thereto.
Overview
Telkonet,
Inc. was formed in 1999 and is incorporated under the laws of the state of
Utah. We develop, manufacture and sell proprietary energy efficiency
and smart grid networking technology products and platforms that have helped
position us as a leading clean technology provider.
We began
as a developer of powerline communications, or PLC, technology. Our
proprietary, patented PLC products utilize a building’s internal electrical
wiring to form a data communications network, turning power outlets into data
ports while leaving the electrical functionality unaffected. In 2003,
we launched our PlugPlusInternet suite of products, designed to maximize the use
of the existing electrical wiring in commercial buildings, such as hotels,
schools, multi-dwelling units, government and military buildings and office
buildings. Our PlugPlusInternet products provided high-speed Internet access
throughout a building, utilizing the electrical wiring already in place,
converting virtually every electrical outlet into a high-speed data network. The
PlugPlusInternet product suite was comprised of the PlugPlus Gateway, the
PlugPlus Coupler and the PlugPlus Modem, which together built an Internet
delivery system throughout an entire building. We received our first
order for our PlugPlusInternet products in October 2003.
In March
2007, we completed two strategic acquisitions. On March 15, 2007, we
completed the acquisition of EthoStream, LLC, or EthoStream, a leading
high-speed wireless Internet access, or HSIA, solutions and technology provider
targeting the hospitality industry with a customer base then consisting of
approximately 1,800 hotel and timeshare properties representing in excess of
180,000 guest rooms. We acquired 100% of the outstanding membership
units of EthoStream for a purchase price of $11,756,097, which was comprised of
$2.0 million in cash and 3,459,609 shares of our common stock. The
entire stock portion of the purchase price was deposited into escrow upon
closing 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.
Our
EthoStream Hospitality Network is now one of the largest hospitality HSIA
service providers in the United States, with a customer base of approximately
2,300 properties representing over 200,000 hotel rooms. This
network has created a ready opportunity for us to market our energy
efficiency solutions. It also provides a marketing opportunity for our
more traditional HSIA offerings, including the Telkonet iWire System. The
iWire System offers a fast and cost effective way to deliver commercial
high-speed broadband access using a building’s existing electrical
infrastructure to convert virtually every electrical outlet into a high-speed
data port without the installation of additional wiring or major disruption of
business activity. The EthoStream Hospitality Network represents a
significant portion of our hospitality growth and market share. The
EthoStream Hospitality Network is backed by a 24/7 U.S.-based in-house support
center that uses integrated, web-based centralized management tools enabling
proactive customer support.
While we
continue to grow the EthoStream Hospitality Network, through our March 9, 2007
acquisition of Smart Systems International, or SSI, a leading manufacturer of
in-room energy management systems for the hospitality industry with over 60,000
product installs as of the acquisition date, and the continued development of
our PLC products, we have evolved into a “clean technology” company that
develops, manufactures and sells proprietary energy efficiency and smart grid
networking technology. We acquired substantially all of the assets of
SSI for cash and shares of our common stock having an aggregate value of
$6,875,000. The purchase price was comprised of $875,000 in cash and
2,227,273 shares of our common stock. Of the stock issued in the
transaction, 1,090,909 shares were held in an escrow account for a period of one
year following the closing from which certain potential indemnification
obligations under the purchase agreement could be satisfied. The
aggregate number of shares held in escrow was subject to adjustment upward or
downward depending upon the trading price of our common stock during the one
year period following the closing date. On March 12, 2008, we
released these shares from escrow, and on June 12, 2008 we issued an additional
1,882,225 shares pursuant to the adjustment provisions of the SSI asset purchase
agreement.
Our
Telkonet SmartEnergy, or TSE, and Networked Telkonet SmartEnergy, or NTSE,
energy efficiency products incorporate our patented Recovery Time technology,
allowing for the continuous monitoring of climate conditions to automatically
adjust a room’s temperature accounting for the presence or absence of an
occupant. Our SmartEnergy products save energy while at the same time
ensuring occupant comfort. This technology is particularly attractive
to our customers in the hospitality area, as well as the education, healthcare
and government/military markets, who are continually seeking ways to reduce
costs without impacting building occupant comfort. By reducing energy
usage automatically when a space is unoccupied, our customers are able to
realize a significant cost savings without diminishing occupant
comfort. The hospitality, education, healthcare and
government/military markets represent a significant audience for the
occupancy-based energy management controls offered by the SmartEnergy
platform and provide a large footprint for utility-based consumption
management. This platform may also be integrated with property management
systems, automation systems and load shedding initiatives to increase the
savings recognized. Working directly with management companies and
utilities allows us to offer enhanced opportunities to our customers for savings
and control. Our energy management systems are dynamically lowering
HVAC costs in over 180,000 rooms and are an integral part of the numerous state
and federal energy efficiency and rebate programs.
Our smart
grid networking technology, including the Telkonet iWire System and the 200 Mbps
Telkonet Series 5 PLC products, use PLC technology to quickly, economically and
non-disruptively transform a site’s existing internal electrical infrastructure
into an internet protocol, or IP, network backbone. Our PLC systems
offer the hard-wired security and reliability of a CAT-5 cabled network, but
without the cost, physical disturbance and business disruption of wiring CAT-5
or the security issues inherent to wireless systems.
The
development of an industrial PLC product for use within the utility space has
introduced a competitive alternative to traditional local area network, or LAN,
solutions. By capitalizing on the shortcomings of previously available
offerings, we have gained traction and opened a new market
opportunity. Our Series 5 SmartGrid networking technology provides a
compelling solution for power substation automation, power generation, renewable
facilities, manufacturing, and research environments by providing a
rapidly-deployed, low cost alternative to structured cable, wireless and
fiber. Operating at 200 Mbps, our PLC platform offers a secure new
competitive alternative in grid communications, enabling LAN infrastructure for
power substation command and control, monitoring and grid management,
transforming a traditional power management system into a “smart grid” that
delivers electricity in a manner that can save energy, reduce cost and increase
reliability. By leveraging the existing electrical wiring within a
facility to transport data, our PLC solutions enable facilities to deploy
sensing and control systems to locations without the need for new network
wiring, and without the security risks associated with wireless
systems.
We employ
direct and indirect sales channels in all areas of our business. With a
growing value-added reseller network, we continue to broaden our reach
throughout the industry. Utilizing key integrators and strategic OEM
partners, we have been able to recognize significant success in each of our
targeted markets. With an increasing share of our business originating
outside of the hospitality industry, we have proven the versatility of our
technology and the savings that can be derived through the use of our
products.
Discontinued
Operations
On
January 31, 2006, we acquired a 90% interest in Microwave Satellite
Technologies, Inc. from Frank Matarazzo, its sole stockholder, in exchange for
$1.8 million in cash and 1.6 million unregistered shares of our common stock,
for an aggregate purchase price of $9,000,000. The cash portion of
the purchase price was paid in two installments, $900,000 at closing and
$900,000 in February 2007. The stock portion is payable from shares
held in escrow, 400,000 shares of which were paid at closing and the remaining
1,200,000 reserve shares, which shall be issued based on the achievement of
3,300 video and data subscribers over a three year period from the closing
(later extended to July 2009 pursuant to a May 2008 agreement between the
parties). The escrow agreement terminated on July 31,
2009. As of August 14, 2009, we had issued 800,000 of the reserve
shares.
On April
22, 2009, we completed the deconsolidation of our subsidiary, MSTI Holdings,
Inc., or MSTI. To effect the deconsolidation of MSTI, we were
required to reduce our ownership percentage and board membership in
MSTI. On February 26, 2009, we executed a Stock Purchase Agreement
pursuant to which we sold 2.8 million shares of MSTI common stock and as a
result of this transaction, we reduced our beneficial ownership in MSTI from 58%
to 49% of the issued and outstanding shares of MSTI common stock. On
April 22, 2009, Warren V. Musser and Thomas C. Lynch, members of our Board of
Directors, submitted their resignations as directors of MSTI. Because
of these resignations we no longer control a majority of MSTI’s board of
directors. As a result of the deconsolidation, the financial
statements and accompanying footnotes included in this prospectus include
disclosures of the results of operations of MSTI, for all periods presented, as
discontinued operations.
Loss
on Long-Term Investments
Geeks
on Call America, Inc.
On
October 19, 2007, we completed the acquisition of approximately 30% of the
issued and outstanding shares of common stock of Geeks on Call America, Inc., or
GOCA, a provider of on-site computer services. Under the terms of the
stock purchase agreement, we acquired approximately 1,160,043 shares of GOCA
common stock from several GOCA stockholders in exchange for 2,940,200 shares of
our common stock for total consideration valued at approximately $4.5
million. The number of shares issued in connection with this transaction
was determined using a per share price equal to the average closing price of our
common stock on the American Stock Exchange (AMEX) during the ten trading days
immediately preceding the closing date. The number of shares was subject
to adjustment on the date we filed a registration statement for the shares
issued in this transaction, which occurred on April 25, 2008. The increase
or decrease to the number of shares issued was determined using a per share
price equal to the average closing price of our common stock on the AMEX during
the ten trading days immediately preceding the date the registration statement
was filed. We accounted for this investment under the cost method, as
we do not have the ability to exercise significant influence over operating and
financial policies of GOCA. On April 30, 2008, we issued an
additional 3,046,425 shares of our common stock to the sellers of GOCA to
satisfy the adjustment provision.
On
February 8, 2008, Geeks on Call Acquisition Corp., a newly formed, wholly-owned
subsidiary of Geeks On Call Holdings, Inc., (formerly Lightview, Inc.) merged
with GOCA. As a result of the merger, our common stock in GOCA was
exchanged for shares of common stock of Geeks on Call Holdings Inc., or Geeks
Holdings. Immediately following the merger, Geeks Holdings completed
a private placement of its common stock for aggregate gross proceeds of
$3,000,000. As a result of this transaction, our 30% interest in
GOCA became an 18% interest in Geeks Holdings. We have
determined that our investment in Geeks Holdings is impaired because we believe
that the fair market value of Geeks Holdings has permanently declined.
Accordingly, we wrote-off $4,098,514 during the year ended December 31
2008. The remaining value of this investment amounted to $367,653 as of
December 31, 2008. Management has determined that the entire investment in
GOCA is impaired and the remaining value of $367,653 was written off during the
year ended December 31, 2009.
Multiband
Corporation
On
October 30, 2007, in lieu of a payment of $75,000, we accepted 30,000 shares of
common stock of Multiband Corporation, a Minnesota-based communication services
provider to multiple dwelling units. We classify these securities as
available for sale, and they are carried at fair market value. During
the year ended December 31, 2008, we recorded a loss of $6,500 on the sale of
5,000 shares of our investment in Multiband. In addition, we recorded
an unrealized loss of $32,750 due to a temporary decline in value of these
securities. The remaining value of this investment amounted to
$29,750 as of December 31, 2008. We sold our remaining investment in
Multiband and recorded a loss of $29,371 in January 2009.
Private
Placement
On
November 19, 2009 we completed a private offering of our securities in which we
sold 215 shares of our Series A convertible redeemable preferred stock, par
value $0.001 per share, at $5,000 per share, and warrants to purchase an
aggregate of 1,628,800 shares of our common stock at an exercise price of $0.33
per share, the volume-weighted average price of a share of our common stock for
the 30-day period immediately preceding November 12, 2009, and received
gross proceeds of $1,075,000. Each share of Series A convertible
redeemable preferred stock is convertible into approximately 13,774 shares of
our common stock at a conversion price of $0.363 per share, 110% of the
volume-weighted average price of our common stock for the 30-day period
immediately preceding November 12, 2009. Except as specifically
provided or as otherwise required by law, the Series A convertible redeemable
preferred stock will vote together with the common stock shares on an
as-if-converted basis and not as a separate class.
We are
utilizing the net proceeds from the sale of the Series A convertible redeemable
preferred stock shares and the warrants for general working capital needs and to
repay certain outstanding indebtedness, and to pay expenses of the offering as
well as other general corporate capital purposes.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. On an ongoing basis, we evaluate
significant estimates used in preparing our financial statements including those
related to revenue recognition, guarantees and product warranties, stock based
compensation and business combinations. We base our estimates on
historical experience, underlying run rates and various other assumptions that
we believe to be reasonable, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual
results could differ from these estimates. The following are critical judgments,
assumptions, and estimates used in the preparation of the consolidated financial
statements.
Revenue
Recognition
For
revenue from product sales, we recognize revenue in accordance with FASB’s
Accounting Standards Codification, or ASC, 605-10, and ASC Topic 13 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 management’s 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. We defer any revenue for which
the product has not been delivered or is subject to refund until such time that
we and the customer jointly determine that the product has been delivered or no
refund will be required. 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.
For
equipment under lease, revenue is recognized over the lease term for operating
lease and rental contracts. All of our leases are accounted for as
operating leases. At the inception of the lease, no lease revenue is
recognized and the leased equipment and installation costs are capitalized and
appear on the balance sheet as “Equipment Under Operating
Leases.” The capitalized cost of this equipment is depreciated from
two to three years, on a straight-line basis down to our original estimate of
the projected value of the equipment at the end of the scheduled lease
term. Monthly lease payments are recognized as rental
income.
Revenue
from sales-type leases for our EthoStream Hospitality Network products is
recognized at the time of lessee acceptance, which follows
installation. We recognize revenue from sales-type leases at the net
present value of future lease payments. Revenue from operating leases
is recognized ratably over the lease period.
Fair
Value of Financial Instruments
In
January 2008, we adopted the provisions under FASB for Fair Value Measurements,
which define fair value for accounting purposes, establishes a framework for
measuring fair value and expands disclosure requirements regarding fair value
measurements. Our adoption of these provisions did not have a
material impact on our consolidated financial statements. Fair value
is defined as an exit price, which is the price that would be received upon sale
of an asset or paid upon transfer of a liability in an orderly transaction
between market participants at the measurement date. The degree of
judgment utilized in measuring the fair value of assets and liabilities
generally correlates to the level of pricing observability. Financial
assets and liabilities with readily available, actively quoted prices or for
which fair value can be measured from actively quoted prices in active markets
generally have more pricing observability and require less judgment in measuring
fair value. Conversely, financial assets and liabilities that are
rarely traded or not quoted have less price observability and are generally
measured at fair value using valuation models that require more
judgment. These valuation techniques involve some level of management
estimation and judgment, the degree of which is dependent on the price
transparency of the asset, liability or market and the nature of the asset or
liability. We have categorized our financial assets and liabilities
measured at fair value into a three-level hierarchy in accordance with these
provisions.
Stock
Based Compensation
We
account for our stock based awards in accordance with ASC 718 (formerly SFAS
123(R) “Share-Based
Payment”), which requires a fair value measurement and recognition of
compensation expense for all share-based payment awards made to our employees
and directors, including employee stock options and restricted stock
awards.
We
estimate the fair value of stock options granted using the Black-Scholes
valuation model. This model requires us to make estimates and assumptions
including, among other things, estimates regarding the length of time an
employee will retain vested stock options before exercising them, the estimated
volatility of our common stock price and the number of options that will be
forfeited prior to vesting. The fair value is then amortized on a straight-line
basis over the requisite service periods of the awards, which is generally the
vesting period. Changes in these estimates and assumptions can materially affect
the determination of the fair value of stock-based compensation and
consequently, the related amount recognized in our consolidated statements of
operations.
Goodwill
and Other Intangibles
Goodwill
represents the excess of the cost of businesses acquired over fair value or net
identifiable assets at the date of acquisition. Goodwill is subject
to a periodic impairment assessment by applying a fair value test based upon a
two-step method. The first step of the process compares the fair
value of the reporting unit with the carrying value of the reporting unit,
including any goodwill. We utilize a discounted cash flow valuation
methodology to determine the fair value of the reporting unit. If the
fair value of the reporting unit exceeds the carrying amount of the reporting
unit, goodwill is deemed not to be impaired in which case the second step in the
process is unnecessary. If the carrying amount exceeds fair value, we
perform the second step to measure the amount of impairment loss. Any
impairment loss is measured by comparing the implied fair value of goodwill with
the carrying amount of goodwill at the reporting unit, with the excess of the
carrying amount over the fair value recognized as an impairment
loss.
Long-Lived
Assets
We review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable in
accordance with ASC 360-10 (formerly Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets). Recoverability is measured by comparison of the
carrying amount to the future net cash flows which the assets are expected to
generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the projected discounted future cash flows arising
from the asset using a discount rate determined by management to be commensurate
with the risk inherent to our current business model.
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended December 31,
2008
Revenues
The table
below outlines our product versus recurring revenues for comparable
periods:
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Ended December 31,
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2009
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2008
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Variance
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Product
revenue
Product
revenue principally arises from the sale and installation of SmartGrid and
broadband networking equipment, including SmartEnergy technology, Telkonet
Series 5 and Telkonet iWire products. We market and sell to the
hospitality, education, healthcare and government/military
markets. The Telkonet Series 5 and the Telkonet iWire products
consist of the Telkonet Gateways, Telkonet Extenders, the patented Telkonet
Coupler, and Telkonet iBridges. The SmartEnergy product suite
consists of thermostats, sensors, controllers, wireless networking products and
a control platform.
For the
year ended December 31, 2009, product revenue decreased by 50% when compared to
the prior year. Product revenue in 2009 includes approximately $4.2
million attributed to the sale and installation of energy management products,
and approximately $1.9 million for the sale and installation of HSIA
products. Since our sales of energy management and HSIA products are
primarily concentrated in the hospitality market, we have been significantly
impacted by the current economic downturn, as industry capital expenditures were
reduced and/or eliminated. We expect to see sales growth in 2010 from
the addition and/or renewal of incentive based programs for energy efficiency,
government stimulus funding through the American Reinvestment and Recovery Act
of 2009, and energy savings initiatives in the commercial market.
Recurring
Revenue
Recurring
revenue includes approximately 2,300 hotels in our broadband network
portfolio. We currently support over 200,000 HSIA rooms, with over
2.1 million monthly users. For the year ended December 31, 2009,
recurring revenue increased by 14% when compared to the prior
year. The increase of recurring revenue was primarily attributed to
new HSIA customers added in 2009.
Cost of
Sales
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ended December 31,
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2009
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2008
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Product
Costs
Product
costs include equipment and installation labor related to the sale of
SmartEnergy technology, Telkonet Series 5 and the Telkonet iWire
products. For the year ended December 31, 2009, our product costs
decreased by 52% when compared to the prior year primarily attributed to lower
sales levels than in 2008. Product costs also decreased as a
percentage of sales, reflecting increased efficiencies in our installation
process and our reduced reliance on third party contract services.
Recurring
Costs
For the
year ended December 31, 2009 recurring costs decreased by 22% when compared to
the prior year. This increase was primarily due to the increased
labor efficiencies in our call support center. As the economy
recovers, and we continued to add new HSIA customers to our portfolio, we may
need to hire additional support center staff which may affect our recurring
product costs and margins.
Gross
Profit
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ended December 31,
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2009
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2008
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Product
Gross Profit
The gross
profit on product revenue for the year ended December 31, 2009 decreased by 35%
compared to the prior year period as a result of decreased product sales and
installations on energy management and HSIA sales.
Recurring
Gross Profit
Our gross
profit associated with recurring revenue increased by 46% for the year ended
December 31, 2009. The increase was a combination of additional
recurring revenue and a reduction of our support labor costs.
Operating
Expenses
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Year
ended December 31,
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2009
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2008
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Variance
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During
the year ended December 31, 2009 operating expenses decreased by 35% when
compared to the prior year. Operating expenses were reduced across
the board in 2009 to meet the demands of the difficult economy and we continued
to see the effects of the restructuring efforts that began in 2008 during which
we significantly reduced research and development and administrative
costs.
Research and
Development
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Year
ended December 31,
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2009
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2008
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Variance
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Our
research and development costs related to both present and future products are
expensed in the period incurred. Total expenses for research and
development decreased for the year ended December 31, 2009 primarily attributed
to the reduction in staffing in the Germantown office. Current
research and development costs are associated with the continued development of
Telkonet Series 5 products and next generation TSE and NTSE
products.
Selling, General and
Administrative Expenses
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ended December 31,
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2009
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2008
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Selling,
general and administrative expenses decreased for the year ended December 31,
2009 over the comparable prior year by 25%. This decrease was
primarily the result of reduced operating costs in response to lower
than anticipated sales levels, as well as restructuring and relocation efforts
which has resulted in lower in salary and related costs as well as reduced
travel costs, professional fees and rent and related costs, when compared to the
prior year.
Discontinued
Operations
We
had net income from discontinued operations of $6,296,851, or $0.07 per share,
for the year ended December 31, 2009, compared to net loss from discontinued
operations of $(7,905,302), or $(0.10) per share, for the year ended December
31, 2008. Net income from discontinued operations for the year ended
December 31, 2009 includes the gain on deconsolidation of $6,932,586, offset by
MSTI's net loss of $635,735 through the date of deconsolidation of April 22,
2009.
Liquidity
and Capital Resources
We have
financed our operations since inception primarily through private and public
offerings of our equity securities, the issuance of various debt instruments and
asset based lending.
Working
Capital
Our
working capital decreased by $1,345,503 during the year ended December 31, 2009
from a working capital deficit of $2,439,988 at December 31, 2008 to a working
capital deficit of $3,785,491 at December 31, 2009, excluding working capital
attributed to discontinued operations. The change in working capital
for the year ended December 31, 2009 is due to a combination of factors, of
which the significant factors include:
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Advances
to our former subsidiary of approximately
$305,000;
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A
Series A preferred stock private
placement for total proceeds of
$1,075,000;
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Net
repayments on our line of credit of approximately $187,000;
and
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Working
capital decreases related to our loss from continuing
operations.
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Business
Loan
On
September 11, 2009, we entered into a Loan Agreement to borrow an aggregate
principal amount of $300,000 from the Wisconsin Department of Commerce, or the
Department. The outstanding principal balance on the loan bears
interest at the annual rate of two percent (2.0%). Payment of
interest and principal is to be made in the following manner: (a)
payment of any and all interest that accrues from the date of disbursement
commences on January 1, 2010 and continues on the first day of each consecutive
month thereafter through and including December 31, 2010; (b) commencing on
January 1, 2011 and continuing on the first day of each consecutive month
thereafter through and including November 1, 2016, we are obligated to pay equal
monthly installments of $4,426 each; followed by a final installment on December
1, 2016 which will include all remaining principal, accrued interest and other
amounts owed by us to the Department under the Loan Agreement. We may
prepay amounts outstanding under the loan in whole or in part at any time
without penalty. The loan is secured by our assets and the proceeds
from this loan will be used for our working capital requirements. The
outstanding borrowing under the agreement at December 31, 2009 was
$300,000.
Line
of Credit
In
September 2008, we entered into a two-year line of credit facility with a third
party financial institution. The line of credit has an aggregate
principal amount of $1,000,000 and is secured by our inventory. The
outstanding principal balance bears interest at the greater of (i) the Wall
Street Journal Prime Rate plus nine percent (9%) per annum, adjusted on the date
of any change in such prime or base rate, or (ii) sixteen percent
(16%). Interest is payable monthly in arrears on the last day of each
month until maturity. We may prepay amounts outstanding under the
credit facility in whole or in part at any time. In the event of such
prepayment, the lender will be entitled to receive a prepayment fee of four
percent (4.0%) of the highest aggregate loan commitment amount if prepayment
occurs before the end of the first year and three percent (3.0%) if prepayment
occurs thereafter. The outstanding borrowing under the agreement at
December 31, 2009 was $387,000. The Company has incurred interest
expense of $131,538 related to the line of credit for the year ended December
31, 2009. The Prime Rate was 3.25% at December 31, 2009.
On March
24, 2010, the Company received a notice of waiver from Thermo Credit LLC on the
cash flow to debt service ratio and tangible net worth requirement, as such
terms are defined in items D(10)a and D(10)b of the line of credit
agreement. The waiver is in effect as of December 31, 2009 and for
the 90 day period thereafter.
Convertible
Debentures
On May
30, 2008, we entered into a Securities Purchase Agreement with YA Global
pursuant to which we agreed to issue and sell to YA Global up to $3,500,000 of
secured convertible debentures and warrants to purchase up to 2,500,000 shares
of our common stock. The sale of these debentures and warrants was
effectuated in three separate closings, the first of which occurred on May 30,
2008, and the remainder of which occurred in July 2008. At the May
30, 2008 closing, we sold debentures having an aggregate principal value of
$1,500,000 and warrants to purchase 2,100,000 shares of our common
stock. In July 2008, we sold the remaining debentures, with an
aggregate principal value of $2,000,000, and warrants to purchase 400,000 shares
of our common stock.
The
debentures accrue interest at a rate of 13% per annum and mature on May 29,
2011. We may redeem the debentures at any time, in whole or in part,
by paying a redemption premium equal to 15% of the principal amount of
debentures being redeemed, so long as an “Equity Conditions Failure” (as defined
in the debentures) is not occurring at the time of such
redemption. YA Global may also convert all or a portion of the
debentures at any time at a price equal to the lesser of (i) $0.58, or (ii)
ninety percent (90%) of the lowest volume weighted average price of our common
stock during the ten trading days immediately preceding the conversion
date. The warrants expire five years from the date of issuance and
entitle YA Global to purchase shares of our common stock at an exercise price
per share of $0.61.
On
February 20, 2009, we and YA Global entered into an Agreement of Clarification
pursuant to which we agreed with YA Global that interest accrued as of December
31, 2008, in the amount of $191,887 would be added to the principal amount
outstanding under the debentures and that each debenture be amended to reflect
the applicable increase in principal amount.
On May
12, 2009, YA Global met the Exchange Cap for the conversion of its debentures,
and thus could not receive additional shares of our common stock upon the
conversion of its debentures or exercise of its warrants. In the
Agreement of Clarification, we agreed to seek shareholder approval to remove the
Exchange Cap at our 2009 annual meeting of shareholders, which was held on May
28, 2009. On May 28, 2009, our shareholders voted against the proposal to remove
the Exchange Cap, which would have allowed YA Global to potentially acquire in
excess of 19.99% of the outstanding shares of our common stock.
In
November 2009, we issued warrants to YA Global Investments LP pursuant to
anti-dilution provisions in their existing warrant agreements that were
triggered by the completion of the Series A preferred stock private
placement. These warrants entitled the holders to purchase up to
2,121,212 shares of our common stock at a price per share of
$0.33. We have accounted for the warrants, valued at $510,151,
as financing expense using the Black-Scholes pricing model and the following
assumptions: contractual term of 5 years, an average risk-free interest rate of
2.2% a dividend yield of 0% and volatility of 123%.
Senior
Note Payable
On July
24, 2007, we entered into a Senior Note Purchase Agreement with GRQ Consultants,
Inc., or GRQ, pursuant to which we issued to GRQ a Senior Promissory Note in the
aggregate principal amount of $1,500,000. The note was due and
payable on the earlier to occur of (i) the closing of our next financing, or
(ii) January 28, 2008, and bore interest at a rate of six percent (6%) per
annum. We incurred approximately $25,000 in fees in connection with
this transaction. The net proceeds from the issuance of the Note were
used for general working capital needs. In connection with the
issuance of the Note, we also issued to GRQ warrants to purchase 359,712 shares
of common stock at $4.17 per share. These warrants expire five years
from the date of issuance. On February 8, 2008, this note was repaid
in full, including $49,750 in interest from the issuance date through the date
of repayment.
Proceeds
from the issuance of common stock
During
the year ended December 31, 2009, we received $71,526 from the exercise of
common stock purchase warrants issued to various investors.
Cash
flow analysis
Cash used
in continuing operations was $619,344 during the year ended December 31, 2009,
compared to cash used in continuing operations of $3,010,196 during the prior
year period. During the year ended December 31, 2010, our primary
capital needs will be for operating expenses, including funds to support our
business strategy, which primarily includes working capital necessary to fund
inventory purchases, and reducing our trade payables.
We
utilized cash for investing activities from continuing operations of $275,085
and $8,374 during the years ended December 31, 2009, and 2008,
respectively. In 2009, these activities involved intercompany loans
to MSTI of approximately $305,000, which was partially offset by the sale of our
remaining investment in Multiband for proceeds of $33,129. In 2008,
these expenditures were primarily due to the purchase of computer and related
equipment and the sale of marketable securities.
We had
cash from financing activities from continuing operations of $1,229,807 and
$3,519,450 during the years ended December 31, 2009 and 2008,
respectively. In November 2009, we completed a private placement of
our preferred stock for proceeds for $1.75 million and in September 2009 we
received a $300,000 business loan from the Wisconsin Department of Commerce, and
we received $71,526 from the exercise of stock purchase warrants by investors in
July and August 2008. These proceeds were partially offset by
$187,000 in repayments on our working capital line of credit used for inventory
purchases, and $25,000 for the payment of financing costs related to the
accounts receivable factoring program. During the year ended December
31, 2008, the financing activities involved the sale of 2.5 million shares of
common stock at $0.60 per share in a private placement for a total of
$1,500,000, in February 2008, the proceeds of which were used to repay the
outstanding principal amount on the GRQ Note. Additionally, we sold
debentures for gross proceeds of $3,500,000 in May 2008 and July 2008, and, in
May 2008, we received a $400,000 loan from a private investor, which was offset
by $462,511 in financing costs.
We have
reduced cash required for operations by reducing operating costs and reducing
staff levels. In addition, we are working to manage our current
liabilities while we continue to make changes in operations to improve our cash
flow and liquidity position.
Our
registered independent certified public accountants have stated in their report
dated March 31, 2010 that we have incurred operating losses in the past years,
and that we are dependent upon management’s ability to develop profitable
operations and/or obtain necessary funding from outside sources, including by
the sale of our securities, or obtaining loans from financial institutions,
where possible. These factors, among others, may raise substantial
doubt about our ability to continue as a going concern.
Management
expects that global economic conditions will continue to present a challenging
operating environment through 2010. To the extent permitted by
working capital resources, management intends to continue making targeted
investments in strategic operating and growth initiatives. Working
capital management will continue to be a high priority for 2010.
While we
have been able to manage our working capital needs with the current credit
facilities, additional financing is required in order to meet our current and
projected cash flow requirements from operations. We cannot predict
whether this new financing will be in the form of equity or debt. We
may not be able to obtain the necessary additional capital on a timely basis, on
acceptable terms, or at all. Additional investments are being sought, but we
cannot guarantee that we will be able to obtain such
investments. Financing transactions may include the issuance of
equity or debt securities, obtaining credit facilities, or other financing
mechanisms. However, the trading price of our common stock and the
downturn in the U.S. stock and debt markets could make it more difficult to
obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is
possible that we could incur unexpected costs and expenses, fail to collect
significant amounts owed to us, or experience unexpected cash requirements that
would force us to seek alternative financing. Further, if we issue
additional equity or debt securities, stockholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges
senior to those of existing holders of our common stock. If
additional financing is not available or is not available on acceptable terms,
we will have to curtail our operations.
Inflation
We do not
believe that inflation has had a material effect on our business, financial
condition or results of operations. If our costs were to become
subject to significant inflationary pressures, we may not be able to fully
offset such higher costs through price increases. Our inability or
failure to do so could adversely affect our business, financial condition and
results of operations.
Off-Balance
Sheet Arrangements
We do not
maintain off-balance sheet arrangements nor does it participate in any
non-exchange traded contracts requiring fair value accounting
treatment.
Acquisition
or Disposition of Property and Equipment
During
the year ended December 31, 2009, fixed assets purchases totaled approximately
$2,675, net of transfers and disposals. We do not anticipate the sale or
purchase of any significant property, plant or equipment during the next twelve
months, other than computer equipment and peripherals to be used in our
day-to-day operations.
We
presently lease 16,400 square feet of commercial office space in Germantown,
Maryland, but we are in the process of relocating our personnel to our new
corporate headquarters consisting of approximately 12,000 square feet of office
space in Milwaukee, Wisconsin, pursuant to a restructuring announced in December
2009. The Germantown lease expires in December 2015. We
are currently actively pursuing a sublease for all or a portion of this office
space for the remaining term of the lease.
In the
first quarter of 2010, we began the transfer of inventory and certain property
in conjunction with the relocation of our corporate headquarters. We
anticipate the sale or disposal of the certain furniture, fixtures and computer
equipment during the remainder of 2010.
New
Accounting Pronouncements
See Note
B of the Consolidated Financial Statements for a full description of new
accounting pronouncements, including the respective expected dates of adoption
and effects on results of operations and financial condition.
Disclosure
of Contractual Obligations
We currently have outstanding purchase
orders with the contract manufacturer for our Smart Energy products totaling
$771,000, of which approximately $408,000 represents amounts owed for future
shipments of Smart Energy products which we will need to fulfill existing
purchase orders with our customers. We are currently negotiating with
the manufacturer and our lenders to ensure the timely payment of these purchases
to prevent any delays in the delivery of these products to our customers which
could negatively impact our results of operations and financial
condition.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
This item
is not applicable.
ITEM
8. FINANCIAL STATEMENTS.
See the
Financial Statements and Notes thereto commencing on Page F-1.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A(T). CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
material information required to be disclosed in our periodic reports filed
under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded,
processed, summarized, and reported within the time periods specified in the
SEC’s rules and forms and to ensure that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer as appropriate, to allow timely decisions regarding required
disclosure. During the quarter ended December 31, 2009 we carried out an
evaluation, under the supervision and with the participation of our management,
including the principal executive officer and the principal financial officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rule 13(a)-15(e) under the 1934 Act. Based on
that evaluation and due to the lack of segregation of duties and failure to
implement accounting controls of acquired businesses, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were ineffective as of the end of the period covered by this
report.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over financial
reporting is designed to provide reasonable assurances regarding the reliability
of financial reporting and the preparation of the financial statements of the
Company in accordance with U.S. generally accepted accounting principles, or
GAAP. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree or compliance with the policies or procedures may
deteriorate.
With the
participation of our Chief Executive Officer, our management conducted an
evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2009 based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission ("COSO"). Based on our evaluation and the material
weaknesses described below, management concluded that the Company did not
maintain effective internal control over financial reporting as of
December 31, 2009 based on the COSO framework criteria. Management has
identified control deficiencies regarding the lack of segregation of duties and
the need for a stronger internal control environment. Management of the Company
believes that these material weaknesses are due to the small size of the
Company’s accounting staff and continued integration of the 2007 acquisitions of
Smart Systems International and EthoStream, LLC. The small size of the Company’s
accounting staff may prevent adequate controls in the future, such as
segregation of duties, due to the cost/benefit of such
remediation. We do expect to retain additional personnel to remediate
these control deficiencies in the future.
These
control deficiencies could result in a misstatement of account balances that
would result in a reasonable possibility that a material misstatement to our
financial statements may not be prevented or detected on a timely basis.
Accordingly, we have determined that these control deficiencies as described
above together constitute a material weakness.
In light
of this material weakness, we performed additional analyses and procedures in
order to conclude that our financial statements for the year ended
December 31, 2009 included in this Annual Report on Form 10-K were fairly
stated in accordance with US GAAP. Accordingly, management believes that despite
our material weaknesses, our financial statements for the year ended December
31, 2009 are fairly stated, in all material respects, in accordance with US
GAAP.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this Annual
Report on Form 10-K.
Changes
in Internal Controls
During
the fiscal quarter ended December 31, 2009, there have been no changes in our
internal control over financial reporting that have materially affected or are
reasonably likely to materially affect our internal controls over financial
reporting.
ITEM
9B. OTHER INFORMATION.
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
The
following table furnishes the information concerning the Company’s directors and
officers as of March 31, 2010. The directors of the Company are elected every
year and serve until their successors are duly elected and
qualified.
Name
|
|
Age
|
|
Position
|
|
|
|
|
President
and Chief Executive Officer and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman
of the Board (1)(2)
|
|
|
|
|
|
_____________________________
(1)
Member of the Audit Committee
(2)
Member of the Compensation Committee
Jason L.
Tienor has served as our President and Chief Executive Officer since
December 2007 and, from August 2007 until December 2007, he served as our Chief
Operating Officer. In November 2009, he was appointed by our Board of
Directors to fill the vacancy created by the resignation of Seth D. Blumenfeld
as a director. Mr. Tienor has also served as Chief Executive Officer
of EthoStream, LLC, our wholly-owned subsidiary, since March
2007. From 2002 until his employment with us, Mr. Tienor served as
Chief Executive Officer of EthoStream, LLC, the company that he co-founded. Mr.
Tienor received a bachelor of business administration in management information
systems and marketing from the University of Wisconsin – Oshkosh and a masters
of business administration with an emphasis on computer science from Marquette
University. We
believe Mr. Tienor’s qualifications to sit on our Board of Directors
include his experience as the founder of our wholly-owned subsidiary,
EthoStream, LLC, including the leadership he has provided to the Company, first
as Chief Operating Officer and then as President and Chief Executive
Officer.
Richard J.
Leimbach has
served as our Chief Financial Officer since December 2007 and, from June 2006
until December 2007, he served as the Vice President of Finance. He also served
as our Controller from January 2004 until June 2006. Mr. Leimbach is
a certified public accountant with over fifteen years of public accounting and
private industry experience. Prior to joining us, Mr. Leimbach was the
Controller with Ultrabridge, Inc., an applications solution provider. Mr.
Leimbach also served as Corporate Accounting Manager for Snyder Communications,
Inc., a global provider of integrated marketing solutions.
Jeffrey J.
Sobieski was named our Chief Operating Officer in June
2008. Prior to this appointment, Mr. Sobieski served as our Executive
Vice President, Energy Management since December 2007 and from March 2007 until
December 2007, he served as Chief Information Officer of EthoStream, LLC, our
wholly-owned subsidiary. From 2002 until his employment with us, Mr.
Sobieski served as Chief Information Officer of EthoStream, LLC, the company he
co-founded. Mr. Sobieski is also the co-founder of Interactive
Solutions, a consulting firm providing support to the Insurance and
Telecommunications Industries.
Anthony J.
Paoni has
served as a director since April 2007. Professor Paoni was elected Chairman of
the Board following Warren V. Musser’s resignation from that position in
November 2009. He has been a faculty member at Northwestern University’s Kellogg
School of Management since 1996. Previously, he spent 28 years in the
information technology industry with market leading organizations that provided
computer hardware, software and consulting services. For the first 15
years of his career, Professor Paoni managed sales and marketing organizations
and in the later stages of his career he moved into general management positions
starting with PANSOPHIC Systems Incorporated. This Lisle, Illinois
based firm was the world’s fifth largest international software company prior to
its acquisition by Computer Associates, Incorporated. Subsequently,
he became chief operating officer of Cross Access, a venture capital funded
software firm that provided industry-leading solutions to the heterogeneous
database connectivity market segment. In addition, he has been president of two
wholly-owned U.S. subsidiaries of Ricardo Consulting, a U.K.-based international
engineering consulting firm focused on computer based automotive powertrain
design. Prior to joining the Kellogg faculty, Professor Paoni was chief
executive officer of Eolas, an Internet software company with patent pending Web
technology that was one of the key technology drivers responsible for the rapid
adoption of the Internet platform. We
believe Mr. Paoni’s qualifications to sit on our Board of Directors include his
15 year career managing sales and marketing organizations followed by his 28
year career in information technology.
Warren V.
Musser has
served as a director since January 2003 and most recently served as Chairman of
the Board until his resignation from that position in November 2009. He has
taken over 50 companies public during his distinguished and successful career as
an entrepreneur. He is the founder and Chairman Emeritus of Safeguard
Scientifics, Inc. (a high-tech venture capital company, formerly Safeguard
Industries, Inc.). Since January 2003, Mr. Musser has been
the President and CEO of The Musser Group (a business consulting
firm). In addition, Mr. Musser is Chairman of InfoLogix, Inc. (a
provider of enterprise mobility solutions for the healthcare and commercial
industries), a Director of Internet Capital Group, Inc. (a
business-to-business venture capital company), NutriSystem, Inc. (a weight
management company) and Health Benefits Direct Corp. (a direct marketing/sales
company of health/life insurance). Mr. Musser serves on a variety of
civic, educational and charitable boards of directors, and serves
as Chairman of the Eastern Technology Council, Economics PA, and
Vice President of Development of Cradle of Liberty Council, Boy Scouts
of America. We
believe Mr. Musser’s qualifications to serve on our Board of Directors
include his expertise in the venture capital and private equity
arena.
Thomas C. Lynch
has served as a director since October 2003. Mr. Lynch is a
Managing Partner of Jones Lang LaSalle (prior to the merger between Jones Lang
LaSalle and The Staubach Company, Mr. Lynch served as Senior Vice President of
The Staubach Company, a real estate management and advisory services firm) in
the Washington, D.C. area. Mr. Lynch joined The Staubach Company
in November 2001 after six years as Senior Vice President at Safeguard
Scientifics, Inc. (NYSE: SFE) (a high-tech venture capital company). While at
Safeguard, he served nearly two years as President and Chief Operating Officer
at CompuCom Systems, a Safeguard subsidiary. After a 31-year career
of naval service, Mr. Lynch retired in the rank of Rear
Admiral. Mr. Lynch’s naval service included Chief, Navy
Legislative Affairs, command of the Eisenhower Battle Group during Operation
Desert Shield, Superintendent of the United States Naval Academy from 1991 to
1994 and Director of the Navy Staff in the Pentagon from 1994 to
1995. Mr. Lynch presently serves as a Director of Armed
Forces Benefit Association, Mikros Systems, Buckeye Insurance Company, PRWT
Services and Infologix systems. We
believe Mr. Lynch’s qualifications to sit on our Board of Directors include
his extensive executive leadership and management
experience.
Audit
Committee
The
Company maintains an Audit Committee of the Board of Directors. For the year
ended December 31, 2009, Messrs. Lynch and Paoni served on the Audit Committee.
The Company’s Board of Directors has determined that each of Messrs. Lynch and
Paoni is a “financial expert” as defined by Item 401 of Regulation S-K
promulgated under the Securities Act of 1933 and the Securities Exchange Act of
1934. The Company’s Board of Directors also has determined that each of Messrs.
Lynch and Paoni are “independent” as such term is defined in Rule 10A-3
promulgated under the Securities Exchange Act of 1934. The Board of Directors
has adopted an audit committee charter, which was ratified by the Company’s
stockholders at the 2004 Annual Meeting of Stockholders. The Audit
Committee held 6 meetings in 2009.
Compensation
Committee
The
Company maintains a Compensation Committee of the Board of Directors. For the
year ended December 31, 2009, Messrs. Lynch and Paoni served on the Compensation
Committee. The Compensation Committee held 2 meetings during 2009.
Code
of Ethics
The Board
has approved, and Telkonet has adopted, a Code of Ethics that applies to all
directors, officers and employees of Telkonet. A copy of the Company’s Code of
Ethics was filed as Exhibit 14 to the Company’s Annual Report on Form 10-KSB for
the year ended December 31, 2003 (filed with the Securities and Exchange
Commission on March 30, 2004). In addition, the Company will provide a copy of
its Code of Ethics free of charge upon request to any person submitting a
written request to the Company’s Chief Executive Officer.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and certain
of our officers to file reports of holdings and transactions in shares of
Telkonet common stock with the Securities and Exchange Commission. Based on our
records and other information, we believe that in 2009 our directors and our
officers who are subject to Section 16 met all applicable filing
requirements.
ITEM
11. EXECUTIVE COMPENSATION.
The
following table sets forth certain information with respect to compensation for
services in all capacities for the years ended December 31, 2009 and 2008
paid to our Chief Executive Officer (principal executive officer) and the two
other most highly compensated executive officers who were serving as such as of
December 31, 2009.
Name
and Principal Position
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
|
Option
Awards
($)(1)(2)
|
|
|
All
Other Compensation
($)(6)
|
|
|
Total
($)
|
|
|
|
|
$ |
200,770 |
(3) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
8,400 |
|
|
$ |
209,170 |
|
|
|
|
$ |
194,421 |
(3) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
7,431 |
|
|
$ |
201,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
190,731 |
(4) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
190,731 |
|
|
|
|
$ |
180,039 |
(4) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
180,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
190,731 |
(5) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
8,400 |
|
|
$ |
199,131 |
|
|
|
|
$ |
186,421 |
(5) |
|
$ |
0 |
|
|
$ |
31,180 |
|
|
$ |
7,431 |
|
|
$ |
225,032 |
|
_____________________________
(1)
|
Amounts
reflect the compensation cost associated with stock option grants,
calculated in accordance with FASB ASC Topic 718 and using a Black-Scholes
valuation method.
|
(2)
|
In
2008, the following assumptions were used to determine the fair value of
stock option awards granted: historical volatility of 74%, expected option
life of 5.0 years and a risk-free interest rate of
3.0%.
|
(3)
|
Includes
accrued and unpaid salary to Jason Tienor for the years ended December 31,
2008 and 2009 of $10,687 and $13,062,
respectively.
|
(4)
|
Includes
accrued and unpaid salary to Richard Leimbach for the years ended December
31, 2008 and 2009 of $9,744 and $24,868,
respectively.
|
(5)
|
Includes
accrued and unpaid salary to Jeffrey Sobieski for the years ended December
31, 2008 and 2009 of $10,175 and $11,628,
respectively.
|
(6)
|
Other
compensation represents monthly car allowance paid to certain Telkonet
executives.
|
Employment
Agreements
Jason L.
Tienor, President and Chief Executive Officer, is employed pursuant to an
employment agreement with us dated March 15, 2007. Mr. Tienor’s
employment agreement has a term of three years, which may be extended by mutual
agreement of the parties thereto, and provides, among other things, for an
annual base salary of $148,000 per year and bonuses and benefits based on our
internal policies and participation in our incentive and benefit
plans. Additional terms of the employment agreement are described
under "Potential Payments upon Termination or Change in Control"
below. On August 20, 2007, Mr. Tienor’s annual salary was increased
to $200,000. Notwithstanding
his employment agreement’s expiration, Mr. Tienor continues to be employed and
to perform services pursuant to the terms of his employment agreement pending
completion of a replacement agreement.
Jeffrey
J. Sobieski, Chief Operating Officer, is employed pursuant to an employment
agreement with us dated March 15, 2007. Mr. Sobieski’s employment
agreement has a term of three years, which may be extended by mutual agreement
of the parties thereto, and provides for a base salary of $148,000 per year and
bonuses and benefits based upon our internal policies and participation in our
incentive and benefit plans. Additional terms of the employment
agreement are described under "Potential Payments upon Termination or Change in
Control" below. On December 11, 2007, Mr. Sobieski’s salary was
increased to $190,000. Notwithstanding
his employment agreement’s expiration, Mr. Sobieski continues to be employed and
to perform services pursuant to the terms of his employment agreement pending
completion of a replacement agreement.
In
addition, to the foregoing, stock options are periodically granted to our
executive officers under our Amended and Restated Stock Option Plan, or the
Plan, at the discretion of the Compensation Committee of the Board of
Directors. Executives are eligible to receive stock option grants,
based upon individual performance and the performance of the company as a
whole.
Retirement,
Health and Welfare Benefits
We offer
a variety of health and welfare and retirement programs to all eligible
employees. Our executive officers listed in the Summary Compensation Table
above, or our Named Executive Officers, generally are eligible for the same
benefit programs on the same basis as the rest of the broad-based
employees. Our health and welfare programs include medical, dental,
vision, life, accidental death and disability, and short and long-term
disability insurance. In addition to the foregoing, our Named
Executive Officers are eligible to participate in our 401(k) Retirement Savings
Plan or the Telkonet 401(k). All of our employees are eligible to
participate in the Telkonet 401(k) upon the completion of six months of
employment, subject to minimum age requirements. Contributions by
employees under the Telkonet 401(k) are immediately vested and each employee is
eligible for distributions upon retirement, death or disability or termination
of employment. Depending upon the circumstances, these payments may
be made in installments or in a single lump sum.
Grant
of Plan Based Awards
No stock
options were granted in the fiscal year ended December 31, 2009.
Outstanding
Equity Awards at Fiscal Year-End Table
The
following table shows outstanding stock option awards classified as exercisable
and unexercisable as of December 31, 2009 for the Named Executive
Officers.
|
|
Option
Awards
|
Name
|
|
Number
of Securities Underlying Unexercised Options (#)
Exerciseable
|
|
|
Number
of Securities Underlying Unexercised Options (#)
Unexerciseable
|
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
|
|
|
Option
Exercise Price
($)
|
|
Option
Expiration
Date
|
|
|
|
50,000 |
|
|
|
50,000 |
(1) |
|
|
0 |
|
|
$ |
1.80 |
|
|
|
|
|
87,500 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(3 |
) |
|
|
|
|
20,000 |
|
|
|
30,000 |
(2) |
|
|
0 |
|
|
$ |
1.00 |
|
|
_____________________________
(1) Mr.
Tienor’s options were granted on August 10, 2007 and vest ratably on a quarterly
basis over a five year period.
(2) Mr.
Sobieski’s options were granted on February 19, 2008 and vest ratably on a
quarterly basis over a five year period.
(3) Includes
37,500 vested options exercisable at $2.59 per share, and 50,000 vested options
exercisable at $5.08 per share.
(4)
|
All
options granted in accordance with the Plan have an outstanding term equal
to the shorter of ten years, or the expiration of the Plan. The
Plan expires on April 24, 2012.
|
(5) This
table does not include disclosure of outstanding warrants held by any of our
Named Executive Officers.
Potential
Payments upon Termination
Each of
Mr. Tienor’s and Mr. Sobieski’s employment agreements obligate us to continue to
pay each executive’s base salary and provide continued participation in employee
benefit plans for the duration of the term of their employment agreements in the
event such executive is terminated without “cause” by us or if the executive
terminates his employment for “good reason.” “Cause” is defined as
the occurrence of any of the following: (i) theft, fraud, embezzlement, or any
other act of dishonesty by the executive; (ii) any material breach by the
executive of any provision of the employment agreement which breach is not cured
within a reasonable time (but not to exceed thirty (30) days after written
notification thereof to the executive by us); (iii) any habitual neglect of duty
or misconduct of the executive in discharging any of his duties and
responsibilities under the employment agreement after a written demand for
performance was delivered to the executive that specifically identified the
manner in which the board believed the executive had failed to discharge his
duties and responsibilities, and the executive failed to resume substantial
performance of such duties and responsibilities on a continuous basis
immediately following such demand; (iv) commission by the executive of a felony
or any offense involving moral turpitude; or (v) any default of the executive’s
obligations under the employment agreement, or any failure or refusal of the
executive to comply with our policies, rules and regulations generally
applicable to our employees, which default, failure or refusal is not cured
within a reasonable time (but not to exceed thirty (30) days) after written
notification thereof to the executive by us. If cause exists for
termination, the executive shall be entitled to no further compensation, except
for accrued leave and vacation and except as may be required by applicable
law. “Good reason” is defined as the occurrence of any of the
following: (i) any material adverse reduction in the scope of the executive’s
authority or responsibilities; (ii) any reduction in the amount of the
executive’s compensation or participation in any employee benefits; or (iii) the
executive’s principal place of employment is actually or constructively moved to
any office or other location 50 miles or more outside of Milwaukee,
Wisconsin.
In the
event we fail to renew the employment agreements upon expiration of the term,
then we shall continue to pay the executive's base salary and provide the
executive with continued participation in each employee benefit plan in which
the executive participated immediately prior to expiration of the term for a
period of three months following expiration of the term. Each of
Messrs. Tienor and Sobieski have agreed not to compete with us or solicit
any of our employees for a period of one year following expiration or earlier
termination of the employment agreements. Assuming Mr. Tienor’s and
Mr. Sobieski’s employment agreements were terminated as of December 31, 2009,
the total estimated compensation that would have been paid under these
agreements would be $78,188 in the aggregate.
Directors’
Compensation
We
reimburse non-management directors for costs and expenses in connection with
their attendance and participation at Board of Directors meetings and for other
travel expenses incurred on our behalf. We compensate each
non-management director at a rate of $4,000 per month, 10,000 vested stock
options per quarter and $1,000 for each committee meeting of the Board of
Directors such director attends.
In
addition to the non-management directors’ compensation plan described above, Mr.
Paoni is compensated in the amount of $4,000 per month for executive consulting
services.
Until his
resignation as Chairman of the Board of Directors in November 2009,
Mr. Musser was compensated $8,333 per month (consisting of monthly payments
in the amount of $4,000, which payments were consistent with the monthly
payments made to the other non-management directors, and $4,333 per month, which
payments were in lieu of the 10,000 vested stock options per quarter and $1,000
for each committee meeting that the other non-management directors
receive). Payments to Mr. Musser for Board services were made to
The Musser Group pursuant to a September 2003 consulting
agreement. Mr. Musser is the sole principal and owner of The Musser
Group. Mr. Musser currently serves on the Board of Directors
according to the terms of Telkonet’s non-management directors’ compensation
plan.
The
following table summarizes all compensation paid to our directors in the year
ended December 31, 2009.
Name
|
|
Fees
Earned or
Paid
in Cash
($)
(6)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards ($)(1)
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
|
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
|
|
$ |
48,000 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
52,000 |
(2) |
|
$ |
100,000 |
|
|
|
$ |
48,000 |
|
|
$ |
0 |
|
|
$ |
12,196 |
(3) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
60,196 |
|
|
|
$ |
48,000 |
|
|
$ |
0 |
|
|
$ |
12,196 |
(3) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
60,196 |
|
|
|
$ |
48,000 |
|
|
$ |
0 |
|
|
$ |
12,196 |
(3) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
60,196 |
|
|
|
$ |
48,000 |
|
|
$ |
0 |
|
|
$ |
12,196 |
(3) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
48,000 |
(7) |
|
$ |
108,196 |
|
_____________________________
(1)
|
Amounts
reflect the compensation cost associated with stock option grants,
calculated in accordance with FASB ASC Topic 718 (formerly SFAS 123R) and
using a Black-Scholes valuation
method.
|
(2)
|
Fees
for director services performed by Mr. Musser and paid to the Musser Group
pursuant to a September 2003 consulting
agreement.
|
(3)
|
Stock
options granted pursuant to the 2009 non-management director compensation
plan. The following assumptions were used to determine the fair
value of stock option awards: historical volatility of 81%, expected
option life of 5.0 years and a risk-free interest rate of
3.5%.
|
(4)
|
Dr.
Hall resigned from our Board of Directors on November 13,
2009.
|
(5)
|
Mr.
Blumenfeld resigned from our Board of Directors on November 16,
2009.
|
(6)
|
Compensation
earned by non-employee directors for services rendered during 2009 was
accrued and unpaid as of December 31,
2009.
|
(7)
|
Fees
for consulting services performed by Mr. Paoni in
2009.
|
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The
following table provides information concerning securities authorized for
issuance pursuant to equity compensation plans approved by the Company’s
stockholders and equity compensation plans not approved by the Company’s
stockholders as of December 31, 2009.
|
|
Number
of securities to be issued upon
exercise
of
outstanding options,
warrants
and rights
|
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
|
|
Number
of securities
remaining
available for
future
issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
6,120,883
|
|
|
$
|
1.50
|
|
|
|
4,173,329
|
|
Equity
compensation plans not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,120,883
|
|
|
$
|
1.50
|
|
|
|
4,173,329
|
|
The
following table sets forth, as of March 30, 2010, the number of shares of the
Company’s common stock beneficially owned by each director and executive officer
of the Company, by all directors and executive officers as a group, and by each
person known by the Company to own beneficially more than 5.0% of the Company’s
outstanding common stock.
|
|
Amount and Nature of Beneficial Ownership
|
|
Name and Address (1)
|
|
Number of Shares (2)
|
|
Percentage of Class
|
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
|
|
Jason
L. Tienor, President, Chief Executive Officer and
Director
|
|
|
|
|
(3)
|
|
|
|
|
Richard
J. Leimbach, Chief Financial Officer
20374
Seneca Meadows Parkway
Germantown,
MD 20876
|
|
|
|
|
(4)
|
|
|
|
|
Jeffrey
J. Sobieski, Chief Operating Officer
|
|
|
|
|
(5)
|
|
|
|
|
Anthony
J. Paoni, Chairman
|
|
|
|
|
(6)
|
|
|
|
|
Warren
V. Musser, Director
|
|
|
|
|
(7)
|
|
|
|
|
Thomas
C. Lynch, Director
|
|
|
|
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Directors and Executive Officers as a group (six
persons)
|
|
|
|
|
|
|
|
|
|
* |
Less
than one percent (1%). |
|
|
(1)
|
Unless
otherwise indicated, the address of each named holder is in care of
Telkonet, Inc., 10200 Innovation Drive, Suite 300, Milwaukee,
Wisconsin 53226.
|
(2)
|
According
to Securities and Exchange Commission rules, beneficial ownership includes
shares as to which the individual or entity has voting power or investment
power and any shares, which the individual or entity has the right to
acquire within 60 days of the date of this table through the exercise
of any stock option or other right.
|
(3)
|
Includes
701,803 shares of our common stock, options exercisable within 60 days to
purchase 50,000 shares of our common stock at $1.80 per share, and Series
A convertible redeemable preferred stock and warrants convertible into
85,400 shares of our common stock.
|
(4)
|
Includes
351,000 shares of our common stock, options exercisable within 60 days to
purchase 37,500 and 50,000 shares of our common stock at $2.59 and $5.08
per share, respectively, and Series A convertible redeemable preferred
stock and warrants convertible into 42,700 shares of our common
stock.
|
(5)
|
Includes
701,803 shares of our common stock, options exercisable within 60 days to
purchase 12,500 shares of our common stock at $1.00 per share, and Series
A convertible redeemable preferred stock and warrants convertible into
85,400 shares of our common stock.
|
(6)
|
Includes
options exercisable within 60 days to purchase 80,000 and 40,000 shares of
our common stock at $1.00 and $2.30 per share, and Series A convertible
redeemable preferred stock and warrants convertible into 106,750 shares of
our common stock.
|
(7)
|
Includes
options exercisable within 60 days to purchase 2,000,000 shares of our
common stock at $1.00 per share.
|
(8)
|
Includes
options exercisable within 60 days to purchase 80,000, 20,000, 70,000 and
80,000 shares of our common stock at $1.00, $2.00, $2.66 and $3.45 per
share, respectively.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Description
of Related Party Transactions
Several
of our officers and directors participated in our November 2009 private
placement of Series A convertible redeemable preferred stock and
warrants. On November 16, 2009, we entered into an Executive Officer
Reimbursement Agreement with each of Messrs. Tienor, Sobieski and Leimbach, our
Chief Executive Officer, Chief Operating Officer and Chief Financial Officer,
respectively, pursuant to which these executive officers participated in the
private placement by converting a portion of our outstanding indebtedness owed
to them into shares of Series A convertible redeemable preferred stock and
warrants to purchase shares of our common stock. Mr. Tienor converted
$20,000 of outstanding indebtedness into four shares of Series A
convertible redeemable preferred stock (convertible into 55,096 shares of common
stock) and warrants to purchase 30,304 shares of common stock; Mr. Leimbach
converted $10,000 of outstanding indebtedness into two shares of Series A
convertible redeemable preferred stock (convertible into 27,548 shares of common
stock) and warrants to purchase 15,152 shares of common stock; and Mr. Sobieski
converted $20,000 of outstanding indebtedness into four shares of Series A
convertible redeemable preferred stock (convertible into 55,096 shares of common
stock) and warrants to purchase 30,304 shares of common
stock. Anthony Paoni, Chairman of our Board of Directors, also
participated in the private placement, purchasing five shares of Series A
convertible redeemable preferred stock (convertible into 68,870 shares of common
stock) and warrants to purchase 37,880 shares of common stock, for an aggregate
purchase price of $25,000.
Anthony
Paoni, Chairman of the Company’s Board of Directors, participated in the private
placement of Series A Preferred Stock, purchasing five shares of Series A
convertible redeemable preferred stock (convertible into 68,870 shares of common
stock) and warrants to purchase 37,880 shares of common stock, for an aggregate
purchase price of $25,000.
Anthony
Paoni, Chairman, also is compensated $4,000 per month for executive
consulting services.
From time
to time the Company may receive advances from certain of its officers to meet
short term working capital needs. These advances may not have formal
repayment terms or arrangements. As of December 31, 2009, the Company
owed deferred salary payments to certain executive officers in the amount of
$13,062 to Jason L. Tienor, President and Chief Executive Officer, $24,868 to
Richard J. Leimbach, Chief Financial Officer, and $11,628 to Jeffrey J.
Sobieski, Chief Operating Officer.
Indemnification
Agreements
On March
30, 2010, the Company entered into Indemnification Agreements with directors
Anthony Paoni, Warren Musser and Thomas Lynch, and executives Jason Tienor,
President and Chief Executive Officer and Richard Leimbach, Chief Financial
Officer.
The
Indemnification Agreements provide that the Company will indemnify the Company's
officers and directors, to the fullest extent permitted by law, relating to,
resulting from or arising out of any threatened, pending or completed action,
suit or proceeding, or any inquiry or investigation by reason of the fact that
such officer or director (i) is or was a director, officer, employee or agent of
the Company or (ii) is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.. In addition, the
Indemnification Agreements provide that the Company will make an advance payment
of expenses to any officer or director who has entered into an Indemnification
Agreement, in order to cover a claim relating to any fact or occurrence arising
from or relating to events or occurrences specified in this paragraph, subject
to receipt of an undertaking by or on behalf of such officer or director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Company as authorized under this
Agreement,.
The
foregoing summary of the Indemnification Agreements is subject to, and qualified
in its entirety by, the Form of Indemnification Agreement, which is
included as Exhibit 10.12 to this Annual Report on Form 10-K.
Company’s
Policies on Related Party Transactions
Under the
Company’s policies and procedures, related-party transactions that must be
publicly disclosed under the federal securities laws require prior approval
of the Company’s independent directors without the participation of
any director who may have a direct or indirect interest in the transaction in
question. Related parties include directors, nominees for director, principal
shareholders, executive officers and members of their immediate families. For
these purposes, a “transaction” includes all financial transactions,
arrangements or relationships, ranging from extending credit to the provision of
goods and services for value and includes any transaction with a company in
which a director, executive officer immediate family member of a director or
executive officer, or principal shareholder (that is, any person who
beneficially owns five percent or more of any class of the Company’s voting
securities) has an interest by virtue of a 10-percent-or-greater equity
interest. The Company’s policies and procedures regarding related-party
transactions are not a part of a formal written policy, but rather, represent
the Company’s historical course of practice with respect to approval of
related-party transactions.
Director
Independence
The Board
of Directors has determined that Messrs. Lynch and Paoni are “independent” under
the listing standards of the NYSE AMEX. Each of Messrs. Lynch and
Paoni serve on, and are the only members of, the Company’s Audit Committee and
Compensation Committee. Although the Company does not maintain a
standing Nominating Committee, nominees for election as directors are considered
and nominated by a majority of the Company’s independent directors in accordance
with the NYSE AMEX listing standards. “Independence” for these purposes is
determined in accordance with Section 121(A) of the NYSE AMEX Rules and Rule
10A-3 under the Securities Exchange Act of 1934.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The
following table sets forth fees billed to the Company by our auditors during the
fiscal years ended December 31, 2009 and 2008.
|
|
December
31,
2009
|
|
|
December
31,
2008
|
|
1.
Audit Fees
|
|
$ |
185,413 |
|
|
$ |
309,755 |
|
2.
Audit Related Fees
|
|
|
24,250 |
|
|
|
46,262 |
|
3.
Tax Fees
|
|
|
-- |
|
|
|
-- |
|
4.
All Other Fees
|
|
|
-- |
|
|
|
-- |
|
Total
Fees
|
|
$ |
209,663 |
|
|
$ |
356,017 |
|
Audit
fees consist of fees billed for professional services rendered for the audit of
the Company’s consolidated financial statements and review of the interim
consolidated financial statements included in quarterly reports and services
that are normally provided by RBSM LLP in connection with statutory and
regulatory filings or engagements.
Audit-related
fees consists of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of the Company’s
consolidated financial statements, which are not reported under “Audit
Fees.”
Tax fees
consist of fees billed for professional services for tax compliance, tax advice
and tax planning. The tax fees relate to federal and state income tax reporting
requirements.
All other
fees consist of fees for products and services other than the services reported
above.
Prior to
the Company’s engagement of its independent auditor, such engagement is approved
by the Company’s audit committee. The services provided under this engagement
may include audit services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. Pursuant to the Company’s Audit
Committee Charter, the independent auditors and management are required to
report to the Company’s audit committee at least quarterly regarding the extent
of services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The audit
committee may also pre-approve particular services on a case-by-case basis. All
audit fees, audit-related fees, tax fees and other fees incurred by the Company
for the year ended December 31, 2009 were approved by the Company’s audit
committee.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) |
Documents
filed as part of this report. |
|
|
|
|
(1)
|
Financial
Statements. The following financial statements are included in
Part II, Item 8 of this Annual Report on Form
10-K:
|
|
|
|
|
|
Report
of RBSM LLP on Consolidated Financial Statements as of and for the periods
ended December 31, 2009 and December 31, 2008
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
|
|
|
|
|
Consolidated
Statements of Operations for the Years ended December 31, 2009 and
2008
|
|
|
|
|
|
Consolidated
Statements of Equity for the Years ended December 31, 2009 and
2008
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for Years ended December 31, 2009 and
2008
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
|
|
(2)
|
Financial
Statement Schedules.
|
|
|
|
|
|
Additional
Schedules are omitted as the required information is inapplicable or the
information is presented in the financial statements or related
notes.
|
|
|
|
|
(3) |
Exhibits
required to be filed by Item 601 of Regulation
S-K.
|
|
|
|
|
|
See
Exhibit Index located immediately following this
Item 15.
|
|
|
|
|
|
The
exhibits filed herewith are attached hereto (except as noted) and those
indicated on the Exhibit Index which are not filed herewith were
previously filed with the Securities and Exchange Commission as
indicated.
|
EXHIBIT INDEX
The
following exhibits are included herein or incorporated by
reference:
Exhibit
Number
|
Description
Of Document
|
2.1
|
MST
Stock Purchase Agreement and Amendment (incorporated by reference to our
8-K filed on February 2, 2006)
|
2.2
|
Asset
Purchase Agreement by and between Telkonet, Inc. and Smart Systems
International, dated as of February 23, 2007 (incorporated by reference to
our Form 8-K filed on March 2, 2007)
|
2.3
|
Unit
Purchase Agreement by and among Telkonet, Inc., EthoStream, LLC and the
members of EthoStream, LLC dated as of March 15, 2007 (incorporated by
reference to our Form 8-K filed on March 16, 2007)
|
3.1
|
Articles
of Incorporation of the Registrant (incorporated by reference to our Form
8-K (No. 000-27305), filed on August 30, 2000 and our Form S-8 (No.
333-47986), filed on October 16, 2000)
|
3.2
|
Bylaws
of the Registrant (incorporated by reference to our Registration Statement
on Form S-1 (No. 333-108307), filed on August 28, 2003)
|
3.3
|
Amendment
to Articles of Incorporation (incorporated by reference to our Form 8-K
(No. 001-31972), filed November 18, 2009)
|
4.1
|
Form
of Series A Convertible Debenture (incorporated by reference to our Form
10-KSB (No. 000-27305), filed on March 31, 2003)
|
4.2
|
Form
of Series A Non-Detachable Warrant (incorporated by reference to our Form
10- KSB (No. 000-27305), filed on March 31, 2003)
|
4.3
|
Form
of Series B Convertible Debenture (incorporated by reference to our Form
10-KSB (No. 000-27305), filed on March 31, 2003)
|
4.4
|
Form
of Series B Non-Detachable Warrant (incorporated by reference to our Form
10-KSB (No. 000-27305), filed on March 31, 2003)
|
4.5
|
Form
of Senior Note (incorporated by reference to our Registration Statement on
Form S-1 (No. 333-108307), filed on August 28, 2003)
|
4.6
|
Form
of Non-Detachable Senior Note Warrant (incorporated by reference to our
Registration Statement on Form S-1 (No. 333-108307), filed on August 28,
2003)
|
4.7
|
Senior
Convertible Note by Telkonet, Inc. in favor of Portside Growth &
Opportunity Fund (incorporated by reference to our Form 8-K (No.
001-31972), filed on October 31, 2005)
|
4.8
|
Senior
Convertible Note by Telkonet, Inc. in favor of Kings Road Investments Ltd.
(incorporated by reference to our Form 8-K (No. 001-31972), filed on
October 31, 2005)
|
4.11
|
Warrant
to Purchase Common Stock by Telkonet, Inc. in favor of Portside Growth
& Opportunity Fund (incorporated by reference to our Form 8-K (No.
001-31972), filed on October 31, 2005)
|
4.12
|
Warrant
to Purchase Common Stock by Telkonet, Inc. in favor of Kings Road
Investments Ltd. (incorporated by reference to our Form 8-K (No.
001-31972), filed on October 31, 2005)
|
4.13
|
Form
of Warrant to Purchase Common Stock (incorporated by reference to our
Current Report on Form 8-K (No. 001-31972), filed on September 6,
2006)
|
4.14
|
Form
of Accelerated Payment Option Warrant to Purchase Common Stock
(incorporated by reference to our Registration Statement on Form S-3 (No.
333-137703), filed on September 29, 2006.
|
4.15
|
Form
of Warrant to Purchase Common Stock (incorporated by reference to our
Current Report on Form 8-K filed on February 5,
2007)
|
4.16
|
Senior
Note by Telkonet, Inc. in favor of GRQ Consultants, Inc. (incorporated by
reference to our Form 10-Q (No. 001-31972), filed November 9,
2007)
|
4.17
|
Warrant
to Purchase Common Stock by Telkonet, Inc in favor of GRQ Consultants,
Inc. (incorporated by reference to our Form 10-Q (No. 001-31972), filed
November 9, 2007)
|
4.18
|
Form
of Promissory Note (incorporated by reference to our Form 8-K (No.
001-31972) filed on May 12, 2008)
|
4.19
|
Form
of Warrant to Purchase Common Stock (incorporated by reference to our Form
8-K (No. 001-31972) filed on May 12, 2008)
|
4.20
|
Form
of Convertible Debenture (incorporated by reference to our Form 8-K (No.
001-31972) filed on June 5, 2008)
|
4.21
|
Form
of Warrant to Purchase Common Stock (incorporated by reference to our Form
8-K (No. 001-31972) filed on June 5,
2008)
|
10.1
|
Amended
and Restated Stock Option Plan (incorporated by reference to our
Registration Statement on Form S-8 (No. 333-161909), filed on September
14, 2009)
|
10.2
|
Securities
Purchase Agreement, dated February 1, 2007, by and among Telkonet, Inc.,
Enable Growth Partners LP, Enable Opportunity Partners LP, Pierce
Diversified Strategy Master Fund LLC, Ena, Hudson Bay Fund LP and Hudson
Bay Overseas Fund, Ltd. (incorporated by reference to our Current Report
on Form 8-K filed on February 5, 2007)
|
10.3
|
Registration
Rights Agreement, dated February 1, 2007, by and among Telkonet, Inc.,
Enable Growth Partners LP, Enable Opportunity Partners LP and Pierce
Diversified Strategy Master Fund LLC, Ena, Hudson Bay Fund LP and Hudson
Bay Overseas Fund, Ltd. (incorporated by reference to our Current Report
on Form 8-K filed on February 5, 2007)
|
10.4
|
Employment
Agreement by and between Telkonet, Inc. and Jason Tienor, dated as of
March 15, 2007 (incorporated by reference to our Form 10-K (No.
001-31972), filed March 16, 2007)
|
10.5
|
Employment
Agreement by and between Telkonet, Inc. and Jeff Sobieski, dated as of
March 15, 2007 (incorporated by reference to our Form 10-K (No.
001-31972), filed March 16, 2007)
|
10.6
|
Securities
Purchase Agreement, dated May 30, 2008, by and between Telkonet, Inc. and
YA Global Investments LP (incorporated by reference to our Current Report
on Form 8-K filed on June 5, 2008)
|
10.7
|
Registration
Rights Agreement, dated May 30, 2008, by and between Telkonet, Inc. and YA
Global Investments LP (incorporated by reference to our Current Report on
Form 8-K filed on June 5, 2008)
|
10.8
|
Security
Agreement, dated May 30, 2008, by and between Telkonet, Inc. and YA Global
Investments LP (incorporated by reference to our Current Report on Form
8-K filed on June 5, 2008)
|
10.9
|
Commercial
Business Loan Agreement, dated September 9, 2008, by and between Telkonet,
Inc. and Thermo Credit, LLC (incorporated by reference to our Form 8-K
filed on September 10, 2008)
|
10.10
|
Loan
Agreement, dated September 11, 2009, by and between Telkonet, Inc. and the
Wisconsin Department of Commerce (incorporated by reference to our Form
8-K (No. 001-31972) filed on September 17, 2009)
|
10.11
|
General
Business Security Agreement, dated September 11, 2009, by and between
Telkonet, Inc. and the Wisconsin Department of Commerce (incorporated by
reference to our Form 8-K (No. 001-31972) filed on September 17,
2009)
|
10.12 |
Form
of Director and Officer Indemnification Agreement |
14
|
Code
of Ethics (incorporated by reference to our Form 10-KSB (No. 001-31972),
filed on March 30, 2004).
|
21
|
Telkonet,
Inc. Subsidiaries (incorporated by reference to our Form 10-K (No.
001-31972) filed March 16, 2007)
|
23.1
|
Consent
of RBSM LLP , Independent Registered Certified Public Accounting Firm,
filed herewith
|
24
|
Power
of Attorney (incorporated by reference to our Registration Statement on
Form S-1 (No. 333-108307), filed on August 28, 2003)
|
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jason
Tienor
|
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Richard J.
Leimbach
|
32.1
|
Certification
of Jason L. Tienor pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2
|
Certification
of Richard J. Leimbach pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
TELKONET,
INC.
|
|
|
Dated:
March 31, 2010 |
/s/
Jason L. Tienor
|
|
Jason
L. Tienor
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name
|
|
Position
|
Date
|
/s/
Jason L. Tienor
|
|
Chief
Executive Officer and Director
|
March
31, 2010
|
Jason
Tienor
|
|
(principal
executive officer)
|
|
/s/
Richard J. Leimbach
|
|
Chief
Financial Officer
|
March
31, 2010
|
Richard
J. Leimbach
|
|
(principal
financial officer)
(principal
accounting officer)
|
|
/s/
Anthony J. Paoni
|
|
Chairman
of the Board
|
March
31, 2010
|
Anthony
J. Paoni
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Warren V. Musser
|
|
Director
|
March
31, 2010
|
Warren
V. Musser
|
|
|
|
|
|
|
|
/s/
Thomas C. Lynch
|
|
Director
|
March
31, 2010
|
Thomas
C. Lynch
|
|
|
|
SECURITIES
AND EXCHANGE COMMISSION
WAS
HINGTON, D.C. 20549
FINANCIAL
STATEMENTS AND SCHEDULES
DECEMBER
31, 2009 AND 2008
FORMING
A PART OF ANNUAL REPORT
PURSUANT
TO THE SECURITIES EXCHANGE ACT OF 1934
TELKONET,
INC.
TELKONET,
INC.
Index
to Financial Statements
Report
of Independent Registered Certified Public Accounting
Firm
|
|
|
|
Consolidated
Balance Sheets at December 31, 2009 and 2008
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income (Losses) for the
Years ended December 31, 2009 and 2008
|
|
|
|
Consolidated
Statements of Equity for the Years ended December 31, 2009 and
2008
|
|
|
|
Consolidated
Statements of Cash Flows for the Years ended December 31, 2009 and
2008
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
RBSM
LLP
CERTIFIED
PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT
REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
Board of
Directors
Telkonet,
Inc.
Milwaukee,
WI
We have
audited the accompanying consolidated balance sheets of Telkonet, Inc. and its
subsidiaries (the "Company") as of December 31, 2009 and 2008 and the related
consolidated statements of operations, equity, and cash flows for each of the
two years in the period ended December 31, 2009. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based upon our
audit.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Telkonet, Inc. and its
subsidiaries as of December 31, 2009 and 2008, and the results of its operations
and its cash flows for each of the two years in the period ended
December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in the Note A to the
accompanying financial statements, the Company has incurred significant
operating losses in current year and also in the past. These factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
|
/s/
RBSM LLP
|
|
Certified
Public Accountants
|
New York,
New York
March 31,
2010
TELKONET,
INC.
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2009 AND 2008
|
|
December
31,
2009
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
financing costs, net
|
|
|
|
|
|
|
|
|
Goodwill
and other intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
liabilities and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
current liabilities
|
|
|
|
|
|
|
|
|
Current
Liabilities from discontinued operations
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debentures, net of debt discounts of $457,560 and $825,585,
respectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
lease liability and other
|
|
|
|
|
|
|
|
|
Long-term
liabilities from discontinued operations
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
preferred stock, Series A; par value $.001 per share; 215 shares
authorized, 215 and 0 shares issued and outstanding at December 31, 2009
and 2008, respectively, net (Face value $1,075,000 and $0,
respectively)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, undesignated, par value $.001 per share; 14,999,785 shares
authorized; none issued and outstanding at December 31,2009 and 2008,
respectively
|
|
|
|
|
|
|
|
|
Common
stock, par value $.001 per share; 155,000,000 shares authorized;
96,563,771 and 87,525,495 shares issued and outstanding at
December 31, 2009 and 2008, respectively
|
|
|
|
|
|
|
|
|
Additional
paid-in-capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
comprehensive loss
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity attributable to Telkonet, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Equity
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements
TELKONET,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSSES)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative
|
|
|
|
|
|
|
|
|
Impairment
of Goodwill and Long Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|