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FORM 10-Q/A

(Amendment No. 1)

TELKONET, INC.

Utah	87-0627421
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
10200 Innovation Dr, Suite 310, Milwaukee, WI	53226
(Address of Principal Executive Offices)	(Zip Code)

    

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(Do not check if a smaller reporting company)

  

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date:  104,349,507 shares of Common Stock ($.001 par value) as of April 11, 2012.

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	Page
EXPLANATORY NOTE	2
PART I. FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets: March 31, 2011 (Unaudited) and December 31, 2010	3
Condensed Consolidated Statements of Operations (Unaudited): Three Months Ended March 31, 2011 and 2010	4
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited): Year ended December 31, 2010	5
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited): January 1, 2011 through March 31, 2011	5
Condensed Consolidated Statements of Cash Flows (Unaudited): Three Months Ended March 31, 2011 and 2010	7
Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 4. Controls and Procedures	35
PART II. OTHER INFORMATION	36
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	37
Item 6. Exhibits	37

   

EXPLANATORY NOTE

 

This Quarterly Report on Form 10-Q/A for the three months ended March 31, 2011, amends and restates the unaudited condensed consolidated balance sheet of Telkonet, Inc. (the “Company”) as of March 31, 2011, the unaudited condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010, the unaudited condensed consolidated statement of stockholders’ equity for the year ended December 31, 2010, the unaudited condensed consolidated statement of stockholders’ equity for the period from January 1, 2011 through March 31, 2011 and the unaudited condensed consolidated statement of cash flows for the three months ended March 31, 2011 and 2010.  The comparative condensed consolidated balance sheet as of December 31, 2010 has also been restated.

 

The Company’s management has recommended, and its Audit Committee has concluded, that the Company’s audited consolidated financial statements for the year ended December 31, 2010 as well as the unaudited interim condensed consolidated financial statements for 2011 and 2010 included in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2011, June 30, 2011 and September 30, 2011 needed to be restated as a result of certain adjustments and therefore could no longer be relied upon.

 

As is detailed in Note B of the notes to condensed consolidated financial statements in this Form 10-Q/A, the above referenced restatements are the result of corrections that management has determined are necessary as of December 31, 2010 and 2009 and for all periods previously reported for the three months ended March 31, 2011 for the following items:

  

·	The Company had understated accrued sales tax, penalties, interest and related expenses.

  

·	Incorrect application of Accounting Standards Codification (ASC) 450, Accounting for Contingencies, resulted in an understatement of accrued warranty and related expenses.

  

·	Incorrect application of ASC 840, Accounting for Leases, resulted in an understatement of deferred lease liability and related rent expense.

  

·	Errors related to improper recording of depreciation expense and related understatement of accumulated depreciation.

  

·	Errors related to improper recording of various accrued liabilities and expenses, as well as other current liabilities resulting in a net understatement of such liabilities and related expenses.

  

·	Additionally, certain reclassifications have been made to previously reported unaudited condensed consolidated financial statements.

  

This Form 10-Q/A should be read in conjunction with our Form 10Q/As for the periods ending June 30, 2011 and September 30, 2011 and our filings made with the SEC subsequent to the filing of the original Form 10-Q. The following items have been amended (and conforming changes have been made where indicated as restated) as a result of the restatement:

   

Part I – Item 1 – Financial Statements

Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The restated consolidated financial statements as of December 31, 2010 and for the year ended December 31, 2010 will be included in our 2011 Form 10-K for the year ended December 31, 2011.  The restatements of the other quarterly and year-to-date periods for 2010 and 2011 will be included in our Form 10-Q/As for the quarters ended June 30, 2011 and September 30, 2011.

   

    

		(Unaudited) March 31, 2011 (As Restated)				December 31, 2010 (As Restated)
ASSETS
Current assets:
Cash and cash equivalents		$	203,052			$	136,030
Accounts receivable, net			682,882				799,185
Inventories			356,228				599,402
Prepaid expenses			185,143				163,327
Total current assets			1,427,305				1,697,944
Property and equipment, net			37,741				43,329
Other assets:
Deferred financing costs, net			-				56,732
Goodwill			11,670,446				11,670,446
Intangible assets, net			1,923,237				1,983,657
Deposits			34,238				34,238
Total other assets			13,627,921				13,745,073
Total Assets		$	15,092,967			$	15,486,346
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,015,249			$	2,402,950
Accrued liabilities and expenses			1,915,211				1,890,951
Note payable – current			97,784				47,536
Note payable – related party			-				25,114
Convertible debentures, net of debt discounts of $134,625			-				1,471,398
Derivative liability – current			-				619,698
Other current liabilities			86,587				151,035
Total current liabilities			4,114,831				6,608,682
Long-term liabilities:
Derivative liability – long term			570,569				1,282,077
Deferred lease liability			89,312				82,802
Note payable – long term			940,418				252,464
Total long-term liabilities			1,600,299				1,617,343
Redeemable preferred stock:
Redeemable preferred stock, 15,000,000 shares authorized; par value $.001 per share;     Series A, 215 shares issued and outstanding at March  31, 2011 and         December 31, 2010			929,588				890,475
Series B, 267 shares issued and outstanding at March 31, 2011 and         December 31, 2010			719,157				653,371
Total redeemable preferred stock			1,648,745				1,543,846
Commitments and contingencies			-				-
Stockholders’ Equity
Common stock, par value $.001 per share; 190,000,000 shares authorized; 101,469,581 and 101,258,725  shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively			101,472				101,261
Additional paid-in-capital			123,143,285				122,057,171
Accumulated deficit			(115,515,665)				(116,441,957)
Total stockholders’ equity			7,729,092				5,716,475
Total Liabilities and Stockholders’ Equity		$	15,092,967			$	15,486,346

  

  

		For The Three Months Ended March 31,
		2011 (As Restated)				2010 (As Restated)
Revenues, net:
Product		$	1,351,072			$	1,566,451
Recurring			1,131,627				950,658
Total Revenue			2,482,699				2,517,109
Cost of Sales:
Product			708,270				851,177
Recurring			263,869				299,111
Total Cost of Sales			972,139				1,150,288
Gross Profit			1,510,560				1,366,821
Operating Expenses:
Research and development			208,609				294,617
Selling, general and administrative			1,127,834				1,691,727
Depreciation and amortization			61,528				97,827
Total Operating Expense			1,397,971				2,084,171
Income (Loss) from Operations			112,589				(717,350	)
Other Income (Expenses):
Interest expense, net			(190,234	)			(176,656	)
Gain on derivative liability			172,476				155,467
Gain on disposal of property and equipment			2,165				-
Gain on sale of product line			829,296				-
Total Other Income (Expense)			813,703				(21,189	)
Income (Loss) Before Provision for Income Taxes			926,292				(738,539	)
Provision for Income Taxes			-				-
Net Income (Loss)			926,292				(738,539	)
Accretion of preferred dividends and discount			(104,899)				(39,113)
Net income (loss) attributable to common stockholders		$	821,393			$	(777,652	)
Net income (loss) per common share:
Income (loss) per common share – basic		$	0.01			$	(0.01	)
Income (loss) per common share – diluted		$	0.01			$	(0.01	)
Weighted Average Common Shares Outstanding – basic			101,363,617				96,600,438
Weighted Average Common Shares Outstanding – diluted			101,868,176				96,600,438

   

   

   

		Common Shares				Common Stock Amount				Additional Paid in Capital				Accumulated Deficit				Total Stockholders’ Equity
Balance at January 1, 2011, as restated			101,258,725			$	101,261			$	122,057,171			$	(116,441,957	)		$	5,716,475
Shares issued to directors and management at approximately $0.115 per share			210,856				211				24,289				-				24,500
Stock-based compensation expense related to employee stock options			-				-				7,994				-				7,994
Retirement of derivative liability related to warrant obligation			-				-				1,158,730				-				1,158,730
Accretion of redeemable preferred stock discount			-				-				(57,339	)			-				(57,339	)
Accretion of redeemable preferred stock dividend			-				-				(47,560	)			-				(47,560	)
Net income, as restated															926,292				926,292
Balance at March 31, 2011, as restated			101,469,581			$	101,472			$	123,143,285			$	(115,515,665	)		$	7,729,092

    

		For the Three Months Ended March 31,
		2011 (As Restated)				2010 (As Restated)
Cash Flows from Operating Activities:
Net income (loss)		$	926,292			$	(738,539	)
Adjustments to reconcile net income (loss) from operations to cash (used in) provided by operating activities:
Amortization of debt discounts and financing costs			191,357				140,110
Gain on sale of product line			(829,296	)			-
Gain on derivative liability			(172,476	)			(155,467	)
Gain on disposal of property and equipment			(2,165)				-
Stock based compensation expense			32,494				64,780
Depreciation			1,108				37,407
Amortization			60,420				60,420
Provision for doubtful accounts			29,808				-
Increase / decrease in:
Accounts receivable, trade and other			86,495				(455,706	)
Inventories			122,470				(1,595	)
Prepaid expenses			(21,816	)			(33,646)
Other current liabilities			(64,448	)			40,636
Accounts payable, accrued expenses, net			(363,441	)			527,344
Deferred lease liability			6,510				10,747
Net Cash (Used In) Provided by Operating Activities			3,312				(503,509	)
Cash Flows From Investing Activities:
Proceeds from disposal of property and equipment			6,645				-
Proceeds from sale of product line			1,000,000				-
Net Cash Provided by Investing Activities			1,006,645				-
Cash Flows From Financing Activities:
Repayment on line of credit			-				(82,500	)
Proceeds from issuance of notes payable			700,000				-
Payments on note payable			(11,798	)			-
Payments on note payable-related party			(25,114	)			-
Repayment of convertible debentures			(1,606,023	)			-
Bank overdraft			-				135,023
Net Cash Provided By (Used In) Financing Activities			(942,935)				52,523
Net increase (decrease) in cash and cash equivalents			67,022				(450,986	)
Cash and cash equivalents at the beginning of the period			136,030				503,870
Cash and cash equivalents at the end of the period		$	203,052			$	52,884

   

		For the Three months Ended March 31,
		2011 (As Restated)				2010 (As Restated)
Supplemental Disclosures of Cash Flow Information:
Cash transactions:
Cash paid during the period for interest expense		$	174,667			$	98,232
Non-cash investing and financing activities:
Accretion of discount on redeemable preferred stock		$	57,339			$	17,901
Accretion of dividend on redeemable preferred stock			47,560				21,212
Issuance of note payable in conjunction with warrant cancellation			50,000				-

   

   

   

 

   

   

   

 

   

   

     

  

 

   

  

       

		2011
		For the Three Months Ended (Unaudited)
Increase in sales tax, penalties and interest		$	(36,562	)
Incorrect application of ASC 840, Accounting for Leases, Resulted in an understatement of deferred lease liability			(6,510	)
Decrease in depreciation expense related to recording depreciation expense in improper periods			17,417
Increase in expense related to improper recording of various accrued liabilities			(30,531	)
Total decrease in net income for the stated period		$	(56,186	)

    

 

		2010
		For the Three Months Ended (Unaudited)
Increase in sales tax, penalties and interest		$	(38,509	)
Incorrect application of ASC 840, Accounting for Leases, resulted in an understatement of deferred lease liability			(10,747	)
Increase in depreciation expense related to recording depreciation expense in improper periods			(17,417	)
Total increase in net loss for the stated period		$	(66,673	)

   

   

  

   

		Effect on Condensed Consolidated Balance Sheets as of
		March 31, 2011 (Unaudited)												December 31, 2010
		As Previously Reported				As Restated				Effect of Correction				As Previously Reported				As Restated				Effect of Correction
Assets:
Current assets:
Prepaid expenses		$	219,381			$	185,143			$	(34,238	)		$	197,565			$	163,327			$	(34,238	)
Total current assets			1,461,543				1,427,305				(34,238	)			1,732,182				1,697,944				(34,238	)
Property and equipment, net			89,992				37,741				(52,251	)			112,997				43,329				(69,668	)
Other assets:
Deposits			-				34,238				34,238				-				34,238				34,238
Total other assets			13,593,683				13,627,921				34,238				13,710,835				13,745,073				34,238
Total  assets			15,145,218				15,092,967				(52,251	)			15,556,014				15,486,346				(69,668	)
Current liabilities:
Accrued liabilities and expenses			1,115,040				1,915,211				800,171				1,157,873				1,890,951				733,078
Other current liabilities			105,585				86,587				(18,998	)			170,033				151,035				(18,998	)
Total current liabilities			3,333,658				4,114,831				781,173				5,894,602				6,608,682				714,080
Long-term liabilities:
Deferred lease liability			-				89,312				89,312				-				82,802				82,802
Total long-term liabilities			1,510,987				1,600,299				89,312				1,534,541				1,617,343				82,802
Stockholders' equity:
Additional paid-in-capital			123,081,230				123,143,285				62,055				121,995,117				122,057,171				62,054
Accumulated deficit			(114,530,874	)			(115,515,665	)			(984,791	)			(115,513,353	)			(116,441,957	)			(928,604	)
Total stockholders’ equity		$	8,651,828			$	7,729,092			$	(922,736	)		$	6,583,025			$	5,716,475			$	(866,550	)