NOTE G - REDEEMABLE PREFERRED STOCK |
9 Months Ended |
|---|---|
Sep. 30, 2011 | |
| Equity Method Investments Disclosure [Text Block] |
NOTE G –
REDEEMABLE PREFERRED STOCK
Series
A
The
Company has designated 215 shares of preferred stock as
Series A Preferred Stock (“Series A”). Each share
of Series A shall be convertible, at the option of the holder
thereof, at any time, into shares of our common stock at an
initial conversion price of $0.363 per share. In
the event of a change of control (as defined in the purchase
agreement with respect to the Series A), or at the
holder’s option, on November 19, 2014 and for a period
of 180 days thereafter, provided that at least fifty percent
(50%) of the shares of Series A issued on the Series A
Original Issue Date remain outstanding as of November 19,
2014, and the holders of at least a majority of the then
outstanding shares of Series A provide written notice
requesting redemption of all shares of Series A, we are
required to redeem the Series A for the purchase price plus
any accrued but unpaid dividends. The Series A accrues
dividends at an annual rate of 8% of the original purchase
price, and, except as described above, shall be payable only
when, as, and if declared by our Board of Directors.
On
November 16, 2009, the Company sold 215 shares of Series A
with attached warrants to purchase an aggregate of 1,628,800
shares of the Company’s common stock at $0.33 per
share. The Series A shares were sold at a price
per share of $5,000 and each Series A share is
convertible into approximately 13,774 shares of common stock
at a conversion price of $0.363 per share. The Company
received $1,075,000 from the sale of the Series A
shares. Since the Series A may ultimately be
redeemable at the option of the holder, the carrying value of
the preferred stock, net of discount and accumulated
dividends, has been classified as Commitments and
Contingencies on the balance sheet at September 30, 2011 and
December 31, 2010.
In
accordance with ASC 470 Topic “Debt”, a
portion of the proceeds were allocated to the warrants based
on their relative fair value, which totaled $287,106
using the Black-Scholes option pricing model. Further, the
Company attributed a beneficial conversion feature
of $70,922 to the Series A preferred shares based
upon the difference between the effective conversion price of
those shares and the closing price of the Company’s
common stock on the date of issuance. The assumptions used in
the Black-Scholes model are as
follows: (1) dividend yield of 0%;
(2) expected volatility of 123%, (3) weighted
average risk-free interest rate of 2.2%,
(4) expected life of 5 years, and (5) estimated
fair value of Telkonet common stock of $0.24 per share. The
expected term of the warrants represents the estimated period
of time until exercise and is based on historical experience
of similar awards and giving consideration to the contractual
terms. The amounts attributable to the warrants and
beneficial conversion feature, aggregating $358,028, have
been recorded as a discount and deducted from the face value
of the preferred stock. Since the preferred stock is
classified as temporary equity, the discount will be
amortized over the period from issuance to November 19, 2014
(the initial redemption date) as a charge to additional
paid-in capital (since there is a deficit in retained
earnings).
The
charge to additional paid in capital for amortization of
Series A discount and costs for the period ended September
30, 2011 was $53,703.
For
the nine months ended September 30, 2011 we have accrued
dividends in the amount of $62,256 and cumulative accrued
dividends as of September 30, 2011 are $158,188. The accrued
dividends have been charged to additional paid-in capital
(since there is a deficit in retained earnings) and the net
unpaid accrued dividends have been added to the carrying
value of the Series A shares.
Series
B
The
Company has designated 567 shares of preferred stock as
Series B Preferred Stock (“Series B”). Each share
of Series B shall be convertible, at the option of the holder
thereof, at any time, into shares of our common stock at an
initial conversion price of $0.13 per share. In
the event of a change of control (as defined in the purchase
agreement with respect to the Series B), or at the
holder’s option, on November 19, 2014 and for a period
of 180 days thereafter, provided that at least fifty percent
(50%) of the shares of Series B issued on the Series B
Original Issue Date remain outstanding as of November 19,
2014, and the holders of at least a majority of the then
outstanding shares of Series B provide written notice
requesting redemption of all shares of Series B, we are
required to redeem the Series B for the purchase price plus
any accrued but unpaid dividends. The Series B accrues
dividends at an annual rate of 8% of the original purchase
price, and, except as described above, shall be payable only
when, as, and if declared by our Board of Directors.
On
August 4, 2010, the Company sold 267 shares of Series B with
attached warrants to purchase an aggregate of 10,269,219
shares of the Company’s common stock at $0.13 per
share. The Series B shares were sold at a price
per share of $5,000 and each Series B share is
convertible into approximately 38,461 shares of common stock
at a conversion price of $0.13 per share. The Company
received $1,335,000 from the sale of the Series B
shares. Since the Series B shares may ultimately
be redeemable at the
option
of the holder, the carrying value of the Series B shares, net
of discount and accumulated dividends, has been classified as
temporary equity on the balance sheet at September 30, 2011
and December 31, 2010.
In
accordance with ASC 470 Topic “Debt”, a
portion of the proceeds were allocated to the warrants based
on their relative fair value, which totaled $394,350
using the Black-Scholes option pricing model. Further, the
Company attributed a beneficial conversion feature
of $394,350 to the Series B shares based upon the
difference between the effective conversion price of those
shares and the closing price of the Company’s common
stock on the date of issuance. The assumptions used in the
Black-Scholes model are as
follows: (1) dividend yield of 0%;
(2) expected volatility of 123%, (3) weighted
average risk-free interest rate of 1.76%,
(4) expected life of 5 years, and (5) estimated
fair value of Telkonet common stock of $0.109 per share. The
expected term of the warrants represents the estimated period
of time until exercise and is based on historical experience
of similar awards and giving consideration to the contractual
terms. The amounts attributable to the warrants and
beneficial conversion feature, aggregating $788,700, have
been recorded as a discount and deducted from the face value
of the Series B shares. Since the Series B is classified as
temporary equity, the discount will be amortized over the
period from issuance to November 19, 2014 (the initial
redemption date) as a charge to additional paid-in capital
(since there is a deficit in retained earnings).
On
April 8, 2011, the Company sold 271 additional shares of
Series B with attached warrants to purchase an aggregate of
10,423,067 shares of the Company’s common stock at
$0.13 per share. The Series B shares were sold at
a price per share of $5,000 and each Series B share is
convertible into approximately 38,461 shares of common stock
at a conversion price of $0.13 per share. The Company
received $1,355,000 from the sale of the Series B
shares. Since the Series B shares may ultimately
be redeemable at the option of the holder, the carrying value
of the Series B shares, net of discount and accumulated
dividends, has been classified as temporary equity on the
balance sheet at September 30, 2011.
In
accordance with ASC 470 Topic “Debt”, a
portion of the proceeds were allocated to the warrants based
on their relative fair value, which totaled $427,895
using the Black-Scholes option pricing model. Further, the
Company attributed a beneficial conversion feature
of $427,895 to the Series B shares based upon the
difference between the effective conversion price of those
shares and the closing price of the Company’s common
stock on the date of issuance. The assumptions used in the
Black-Scholes model are as
follows: (1) dividend yield of 0%;
(2) expected volatility of 129%, (3) weighted
average risk-free interest rate of 0.26%,
(4) expected life of 5 years, and (5) estimated
fair value of Telkonet common stock of $0.12 per share. The
expected term of the warrants represents the estimated period
of time until exercise and is based on historical experience
of similar awards and giving consideration to the contractual
terms. The amounts attributable to the warrants and
beneficial conversion feature, aggregating $855,790, have
been recorded as a discount and deducted from the face value
of the Series B shares. Since the Series B is classified as
temporary equity, the discount will be amortized over the
period from issuance to November 19, 2014 (the initial
redemption date) as a charge to additional paid-in capital
(since there is a deficit in retained earnings).
The
charge to additional paid in capital for amortization of
Series B discount and costs for the period ended September
30, 2011 was $263,205.
For
the nine months ended September 30, 2011, we have accrued
dividends for Series B in the amount of $129,027 and
cumulative accrued dividends as of September 30, 2011 are
$172,064. The accrued dividends have been charged to
additional paid-in capital (since there is a deficit in
retained earnings) and the net unpaid accrued dividends been
added to the carrying value of the preferred stock.
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