---

---

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 Drive, Suite 300, 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 practicable date: 104,349,507 shares of Common Stock ($.001 par value) as of April 11, 2012.

---

---

	Page
EXPLANATORY NOTE	2
PART I. FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets: June 30, 2011(Unaudited) and December 31, 2010	3
Condensed Consolidated Statements of Operations (Unaudited): Three And Six Months Ended June 30, 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 June 30, 2011	6
Condensed Consolidated Statements of Cash Flows (Unaudited): Six Months Ended June 30, 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 2. Unregistered Sales of Equity Securities	37
Item 6. Exhibits	37

   

EXPLANATORY NOTE

 

This Quarterly Report on Form 10-Q/A for the six months ended June 30, 2011 amends and restates the unaudited condensed consolidated balance sheet of Telkonet, Inc. (the “Company”) as of June 30, 2011, the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 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 June 30, 2011 and the unaudited condensed consolidated statement of cash flows for the six months ended June 30, 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 each of the three and six month periods ended June 30, 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/A’s for the periods ending March 31, 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 have been or will be included in our Form 10-Q/A’s for the quarters ended March 31, 2011 and September 30, 2011.

   

 

		(Unaudited) June 30, 2011 (As Restated)				December 31, 2010 (As Restated)
ASSETS
Current assets:
Cash and cash equivalents		$	882,484			$	136,030
Accounts receivable, net			1,245,055				799,185
Inventories			595,968				599,402
Prepaid expenses			231,237				163,327
Total current assets			2,954,744				1,697,944
Property and equipment, net			29,343				43,329
Other assets:
Deferred financing costs, net			-				56,732
Goodwill			11,670,446				11,670,446
Intangible assets, net			1,862,817				1,983,657
Deposits			34,238				34,238
Total other assets			13,567,501				13,745,073
Total Assets		$	16,551,588			$	15,486,346
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,871,198			$	2,402,950
Accrued liabilities and expenses			1,953,816				1,890,951
Note payable – current			85,768				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			70,065				151,035
Total current liabilities			3,980,847				6,608,682
Long-term liabilities:
Derivative liability – long term			-				1,282,077
Deferred lease liability			98,218				82,802
Note payable – long term			928,322				252,464
Total long-term liabilities			1,026,540				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 June 30, 2011 and December 31, 2010.			968,701				890,475
Series B, 538 shares issued and 533 shares outstanding at June 30, 2011, 267 shares issued and outstanding at December 31, 2010			1,363,222				653,371
Total redeemable preferred stock			2,331,923				1,543,846
Commitments and contingencies			-				-
Stockholders’ Equity
Common stock, par value $.001 per share; 190,000,000 shares authorized; 102,037,171 and 101,258,725 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively			102,039				101,261
Additional paid-in-capital			124,449,103				122,057,171
Accumulated deficit			(115,338,864)				(116,441,957)
Total stockholders’ equity			9,212,278				5,716,475
Total Liabilities and Stockholders’ Equity		$	16,551,588			$	15,486,346

   

 

   

		For The Three Months Ended June 30,								For The Six Months Ended June 30,
		2011 (As Restated)				2010 (As Restated)				2011 (As Restated)				2010 (As Restated)
Revenues, net:
Product		$	1,776,888			$	1,970,286			$	3,127,960			$	3,536,737
Recurring			1,151,048				1,122,371				2,282,675				2,073,029
Total Revenue			2,927,936				3,092,657				5,410,635				5,609,766
Cost of Sales:
Product			1,017,894				938,305				1,726,164				1,789,482
Recurring			291,247				321,190				555,116				620,301
Total Cost of Sales			1,309,141				1,259,495				2,281,280				2,409,783
Gross Profit			1,618,795				1,833,162				3,129,355				3,199,983
Operating Expenses:
Research and development			182,625				293,579				391,234				588,196
Selling, general and administrative			1,166,812				1,416,947				2,294,645				3,108,674
Depreciation and amortization			68,818				95,207				130,346				193,034
Total Operating Expenses			1,418,255				1,805,733				2,816,225				3,889,904
Income (Loss) from Operations			200,540				27,429				313,130				(689,921)
Other Income (Expenses):
Interest expense, net			(23,740)				(165,265)				(213,974)				(341,921)
Gain on derivative liability			-				541,326				172,476				696,793
Gain on sale of product line			-				-				829,296				-
Gain (loss) on disposal of property and equipment			-				(100,744)				2,165				(100,744)
Total Other Income (Expense)			(23,740)				275,317				789,963				254,128
Income (Loss) Before Provision for Income Taxes			176,800				302,746				1,103,093				(435,793)
Provision for Income Taxes			-				-				-				-
Net Income (Loss)			176,800				302,746				1,103,093				(435,793)
Accretion of preferred dividends and discount			(170,800)				(39,347)				(313,867)				(78,460)
Net income (loss) attributable to common stockholders		$	6,000			$	263,399			$	789,226			$	(514,253)
Net income  per common share:
Income per common share– basic		$	0.00			$	0.00			$	0.01			$	0.00
Income per common share - diluted		$	0.00			$	0.00			$	0.01			$	0.00
Weighted Average Common Shares Outstanding – basic			102,878,097				96,916,357				101,556,654				96,714,804
Weighted Average Common Shares Outstanding - diluted			104,404,580				97,140,595				103,083,137				96,714,804

  

 

 

   

 

		For the Six Months Ended June 30,
		2011 (As Restated)				2010 (As Restated)
Cash Flows from Operating Activities:
Net income (loss)		$	1,103,093			$	(435,793	)
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				254,120
Gain on sale of product line			(829,296	)			-
Gain on derivative liability			(172,476	)			(696,793	)
(Gain) loss on disposal of property and equipment			(2,165	)			100,744
Stock based compensation expense			96,488				88,181
Depreciation			9,506				72,194
Amortization			120,840				120,840
Provision for doubtful accounts			(56,620	)			31,879
Increase / decrease in:
Accounts receivable, trade and other			(389,250	)			(762,451	)
Inventories			(117,270	)			219,051
Prepaid expenses			(67,910	)			(187,713	)
Other current liabilities			(80,970	)			42,212
Accounts payable, accrued liabilities & expenses, net			(468,887	)			1,019,019
Deferred lease liability			15,416				21,494
Net Cash Used In Operating Activities			(648,144	)			(113,016	)
Cash Flows From Investing Activities:
Proceeds on 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			-				(288,417	)
Proceeds from issuance of note payable			700,000				-
Payments on note payable			(35,910	)			-
Payments on note payable – related party			(25,114	)			-
Proceeds from issuance of redeemable preferred stock			1,355,000				-
Repayment of convertible debentures			(1,606,023	)			-
Net Cash Provided By (Used In) Financing Activities			387,953				(288,417	)
Net increase (decrease) in cash and cash equivalents			746,454				(401,433	)
Cash and cash equivalents at the beginning of the period			136,030				503,870
Cash and cash equivalents at the end of the period		$	882,484			$	102,437

   

 

		For the Six Months Ended June 30,
		2011 (As Restated)				2010 (As Restated)
Supplemental Disclosures of Cash Flow Information:
Cash transactions:
Cash paid during the period for interest expense		$	177,639			$	177,564
Non-cash transactions:
Issuance of common stock as consideration for  accounts payable		$	-			$	62,957
Issuance of note payable in conjunction with warrant cancellation			50,000				-
Beneficial conversion feature of redeemable convertible preferred stock			427,895				-
Value of warrants issued with redeemable convertible preferred stock			427,895				-
Accretion of discount on redeemable preferred stock			193,797				35,802
Accretion of dividend on redeemable preferred stock			120,070				42,658
Retirement of derivative liability related to warrant obligation			1,729,299				-
Conversion of preferred stock to common stock			25,000				-

   

   

  

     

  

   

   

  

 

  

    

		2011
		For the Three Months Ended (Unaudited)				For the Six Months Ended (Unaudited)
Increase in sales tax, related penalties and interest		$	(43,118	)		$	(79,679	)
Incorrect application of ASC 840, Accounting for Leases, resulted in an overstatement of deferred lease liability			89,312				82,802
Decrease in depreciation expense related to recording depreciation expense in improper periods			17,417				34,834
Increase in expense related to improper recording of various accrued liabilities			-				(30,531	)
Total increase in net income for the stated period		$	63,611			$	7,426

  

  

		2010
		For the Three Months Ended (Unaudited)				For the Six Months Ended (Unaudited)
Increase in sales tax, related penalties and interest		$	(47,312	)		$	(85,820	)
Incorrect application of ASC 840, Accounting for Leases, resulted in an understatement of deferred lease liability			(10,747	)			(21,494	)
Increase in depreciation expense related to recording depreciation expense in improper periods			(17,417	)			(34,834	)
Increase in expense related to improper recording of various accrued liabilities			(105,344	)			(105,344	)
Total decrease in net income and increase in net loss, respectively for the stated period		$	(180,820	)		$	(247,492	)