Telkonet, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

NOTE B - RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE B - RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6 Months Ended

Jun. 30, 2011

Restatement to Prior Year Income [Table Text Block]

NOTE B – RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company accounts for the correction of errors in previously issued financial statements in accordance with the provisions of ASC Topic 250, Accounting Changes and Error Corrections. In accordance with the disclosure provisions of ASC 250, when financial statements are restated to correct an error, an entity is required to disclose that its previously issued financial statements have been restated along with a description of the nature of the error, the effect of the correction on each financial statement line item and any per share amount affected for each prior period presented, and the cumulative effect on the accumulated deficit in the respective balance sheets as of the beginning of the earliest period presented.

Of the details to follow, the most significant adjustment was related to the Company’s failure to assess, collect and remit sales tax in accordance with state and local sales and use tax regulations.

Throughout this Form 10-Q/A, all amounts presented from prior periods and prior period comparisons that have been corrected are labeled “As Restated” and reflect the balances and amounts on a restated basis. The specific line-item effect of the restatement on the Company’s previously issued condensed consolidated financial statements as of June 30, 2011 and 2010 and the Company’s previously issued consolidated financial statements as of December 31, 2010 and for the three and six months ended June 30, 2011 and 2010 as filed on Form 10-Q on August 8, 2011 are as follows:

The following is a summary of the restatements for the periods ended June 30:

	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	)

The net income (loss) per common share effect of each individual correction has not been reported individually due to the fact that there was no effect on the per share amounts.

	Effect on Condensed Consolidated Balance Sheets as of
	June 30, 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	$	265,475		$	231,237		$	(34,238	)	$	197,565		$	163,327		$	(34,238	)
Total current assets		2,988,982			2,954,744			(34,238	)		1,732,182			1,697,944			(34,238	)

Property and equipment, net		64,177			29,343			(34,834	)		112,997			43,329			(69,668	)

Other assets:
Deposits		-			34,238			34,238			-			34,238			34,238
Total other assets		13,533,263			13,567,501			34,238			13,710,835			13,745,073			34,238
Total assets		16,586,422			16,551,588			(34,834	)		15,556,014			15,486,346			(69,668	)

Current liabilities:
Accrued liabilities and expenses		1,110,529			1,953,816			843,287			1,157,873			1,890,951			733,078
Other current liabilities		89,063			70,065			(18,998	)		170,033			151,035			(18,998	)
Total current liabilities		3,156,558			3,980,847			824,289			5,894,602			6,608,682			714,080

Long-term liabilities:
Deferred lease liability		98,218			98,218			-			-			82,802			82,802
Total long-term liabilities		1,026,540			1,026,540			-			1,534,541			1,617,343			82,802

Stockholders' equity:
Additional paid-in-capital		124,387,048			124,449,103			62,055			121,995,117			122,057,171			62,054
Accumulated deficit		(114,417,686	)		(115,338,864	)		(921,178	)		(115,513,353	)		(116,441,951	)		(928,604	)
Total stockholders’ equity	$	10,071,401		$	9,212,278		$	(859,123	)	$	6,583,025		$	5,716,475		$	(866,550	)

	Effect on Condensed Consolidated Statements of Operations
	Three Months ended June 30, 2011 (Unaudited)									Three Months ended June 30, 2010 (Unaudited)
	As Previously Reported			As Restated			Effect of Correction			As Previously Reported			As Restated			Effect of Correction

Revenues, net
Recurring	$	1,151,048		$	1,151,048		$	-		$	1,213,115		$	1,122,371		$	(90,744	)
Total Revenue		2,927,936			2,927,936			-			3,183,401			3,092,657			(90,744	)

Cost of Sales
Product		1,017,894			1,017,894			-			1,012,124			938,305			(73,819	)
Recurring		291,247			291,247			-			326,062			321,190			(4,872	)
Total Cost of Sales		1,309,141			1,309,141			-			1,338,186			1,259,495			(78,691	)

Gross Profit		1,618,795			1,618,795			-			1,845,215			1,833,162			(12,053	)

Operating Expenses
Research and development		184,207			182,625			(1,582	)		264,049			293,579			29,530
Selling, general and administrative		1,224,178			1,166,812			(57,366	)		1,304,845			1,416,947			112,102
Depreciation and amortization		86,235			68,818			(17,417	)		77,790			95,207			17,417
Total Operating Expenses		1,494,620			1,418,255			(76,365	)		1,646,684			1,805,733			159,049

Income (Loss) from Operations		124,175			200,540			76,365			198,531			27,429			(171,102	)

Other Income (Expenses)
Interest expense, net		(10,986	)		(23,740	)		(12,754	)		(155,547	)		(165,265	)		(9,718	)
Total Other Income (Expense)		(10,986	)		(23,740	)		(12,754	)		285,035			275,317			(9,718	)

Income (Loss) Before Provision for Income Taxes		113,189			176,800			63,611			483,566			302,746			(180,820	)

Net Income (Loss)		113,189			176,800			63,611			483,566			302,746			(180,820	)
Net income (loss) attributable to common stockholders	$	(57,611	)	$	6,000		$	63,611		$	444,219		$	263,399		$	(180,820	)

Net income per common share:
Net income per common share – basic	$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00
Net income per common share – diluted	$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00
Weighted Average Common Shares Outstanding – basic		102,878,097			102,878,097			-			96,916,357			96,916,357			-
Weighted Average Common Shares Outstanding – diluted		104,404,580			104,404,580			-			97,140,595			97,140,595			-

The weighted average per share effect of these changes has not been reported individually due to the fact that there is no effect on the per share amounts.

	Effect on Condensed Consolidated Statements of Operations
	Six Months ended June 30, 2011 (Unaudited)									Six Months ended June 30, 2010 (Unaudited)
	As Previously Reported			As Restated			Effect of Correction			As Previously Reported			As Restated			Effect of Correction

Revenues, net
Recurring	$	2,282,675		$	2,282,675		$	-		$	2,230,704		$	2,073,029		$	(157,675	)
Total Revenue		5,410,635			5,410,635			-			5,767,441			5,609,766			(157,675	)

Cost of Sales
Product		1,726,164			1,726,164			-			1,911,907			1,789,482			(122,425	)
Recurring		555,116			555,116			-			631,907			620,301			(11,606	)
Total Cost of Sales		2,281,280			2,281,280			-			2,543,814			2,409,783			(134,031	)

Gross Profit		3,129,355			3,129,355						3,223,627			3,199,983			(23,644	)

Operating Expenses
Research and development		371,318			391,234			19,916			529,900			588,196			58,296
Selling, general and administrative		2,310,722			2,294,645			(16,077	)		2,995,584			3,108,674			113,090
Depreciation and amortization		165,180			130,346			(34,834	)		158,200			193,034			34,834
Total Operating Expenses		2,847,220			2,816,225			(30,995	)		3,683,684			3,889,904			206,220

Income (Loss) from Operations		282,135			313,130			30,995			(460,057	)		(689,921	)		(229,864	)

Other Income (Expenses)
Interest expense, net		(190,406	)		(213,974	)		(23,568	)		(324,293	)		(341,921	)		(17,628	)
Gain on derivative liability		172,477			172,476			(1	)		-			-			-
Total Other Income (Expense)		813,532			789,963			(23,569	)		271,756			254,128			(17,628	)

Income (Loss) Before Provision for Income Taxes		1,095,667			1,103,093			7,426			(188,301	)		(435,793	)		(247,492	)

Net Income (Loss)		1,095,667			1,103,093			7,426			(188,301	)		(435,793	)		(247,492	)
Net income (loss) attributable to common stockholders	$	781,800		$	789,226		$	7,426		$	(266,761	)	$	(514,253	)	$	(247,492	)

Net income per common share:
Net income per common share – basic	$	0.01		$	0.01		$	0.00		$	0.00		$	0.00		$	0.00
Net income per common share – diluted	$	0.01		$	0.01		$	0.00		$	0.00		$	0.00		$	0.00
Weighted Average Common Shares Outstanding – basic		101,475,906			101,556,654			80,748			96,714,804			96,714,804			-
Weighted Average Common Shares Outstanding – diluted		103,002,389			103,083,137			80,748			96,714,804			96,714,804			-

The weighted average per share effect of these changes has not been reported individually due to the fact that there is no effect on the per share amounts.

	Effect on Condensed Consolidated Statements of Cash Flows
	Six Months ended June 30, 2011 (Unaudited)									Six Months ended June 30, 2010 (Unaudited)
	As Previously Reported			As Restated			Effect of Correction			As Previously Reported			As Restated			Effect of Correction

Net income (loss)	$	1,095,667		$	1,103,093		$	7,426		$	(188,301	)	$	(435,793	)	$	(247,492	)
Gain (loss) on derivative liability		(172,477	)		(172,476	)		1			(696,793	)		(696,793	)		-
Depreciation		44,340			9,506			(34,834	)		37,360			72,194			34,834
Accounts payable, accrued expenses, net		(579,096	)		(468,887	)		110,209			827,855			1,019,019			191,164
Deferred lease liability		98,218			15,416			(82,802	)		-			21,494			21,494

The financial statement restatement process included a comprehensive review and restatement of the condensed consolidated balance sheet as of January 1, 2010 to address all errors that arose in 2009 and prior periods. The net adjustments to stockholders’ equity, resulting from this process and related error corrections was to increase accumulated deficit in stockholders’ equity by $(521,459) from $(113,741,481) as reported to a restated amount of $(114,262,940). The corrections mainly consisted of sales and use tax expense and other accrued liabilities and expenses.

The primary components of the net corrections to the accumulated deficit at January 1, 2010 are as follows:

Non tax effected corrections:
Increase in sales tax liability, penalties and interest	$	(449,453	)
Increase in deferred lease liability		(55,085	)
Increase in accrued warranty		(51,000	)
Other unrecorded liabilities		34,079
Net adjustment to accumulated deficit	$	(521,459	)

Due to the Company’s accumulated net operating losses (NOLs) and related valuation allowance, there is no tax effect resulting from the restatement.

- Definition

Tabular disclosure of the nature and effects of a restatement to correct an error in the reported results of operations of prior periods. When prior period adjustments are recorded, the resulting effects (both gross and net of applicable income tax) on the net income of prior periods are disclosed in the annual report for the year in which the adjustments are made, and amended filings of previously issued reports are typically issued.

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