Telkonet, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

NOTE B - RESTATEMENT OF 2010 FINANCIAL STATEMENTS

NOTE B - RESTATEMENT OF 2010 FINANCIAL STATEMENTS

12 Months Ended

Dec. 31, 2011

Restatement to Prior Year Income [Table Text Block]

NOTE B – RESTATEMENT OF 2010 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 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.

All amounts presented as of and for the year ended December 31, 2010 that have been corrected are labeled “As Restated”. The specific line-item effect of the restatement on the Company’s previously issued consolidated financial statements as of and for the year ended December 31, 2010 included in our 2010 Annual Report on Form 10-K filed on March 30, 2011, are as disclosed in the following tables:

	For the Year Ended December 31, 2010

Increase in sales tax, penalties and interest	$	(168,415	)

Incorrect application of ASC 840, Accounting for Leases, resulted in an understatement of deferred lease liability		(27,717	)

Increase in depreciation expense related to recording depreciation expense in improper periods		(69,668	)

Incorrect application of ASC 450, Accounting for Contingencies, resulting in an understatement of accrued warranty expense		(7,000	)

Increase in expense related to improper recording of various accrued liabilities		(134,345	)

Total increase in net loss for the stated period	$	(407,145	)

The net 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 Consolidated Balance Sheet as of December 31, 2010

	As Previously Reported			As Restated			Reference*	Effect of Correction
Assets:
Current assets:
Prepaid expenses	$	197,565		$	163,327		(6)	$	(34,238	)
Total current assets		1,732,182			1,697,944				(34,238	)

Property and equipment, net		112,997			43,329		(4)		(69,668	)

Other assets:
Deposits		-			34,238		(6)		34,238
Total other assets		13,710,835			13,745,073				34,238
Total assets		15,556,014			15,486,346				(69,668	)

Current liabilities:
Accrued liabilities and expenses		1,157,873			1,890,951		(1)(2)(5)		733,078
Deferred revenue		-			51,265		(5)(6)		51,265
Customer deposits		-			99,770		(6)		99,770
Other current liabilities		170,033			-		(5)(6)		(170,033	)
Total current liabilities		5,894,602			6,608,682				714,080

Long-term liabilities:
Deferred lease liability		-			82,802		(3)		82,802
Total long-term liabilities		1,534,541			1,617,343				82,802

Stockholders' equity:
Additional paid-in-capital		121,995,117			122,057,171		(5)		62,054
Accumulated deficit		(115,513,353	)		(116,441,957	)			(928,604	)
Total stockholders’ equity	$	6,583,025		$	5,716,475			$	(866,550	)

* Description of the references can be found at the end of Note B.

Effect on Consolidated Statement of Operations for the Year Ended December 31, 2010

	As Previously Reported			As Restated			Reference	Effect of Correction

Revenues net
Product	$	6,632,107		$	6,632,108			$	(1	)
Recurring		4,626,669			4,328,080		(6)		298,589
Total Revenues		11,258,776			10,960,188				298,588

Cost of Sales
Product		4,133,533			3,902,183		(2)(6)		(231,350	)
Recurring		1,285,575			1,258,610		(6)		(26,965	)
Total Cost of Sales		5,419,108			5,160,793				(258,315	)

Gross Profit		5,839,668			5,799,395				40,273

Operating Expenses
Research and development		1,010,719			1,130,383		(6)		119,664
Selling, general and administrative		5,577,194			5,720,141		(1)(3)(5)(6)		142,947
Depreciation and amortization		283,714			353,382		(4)		69,668
Total Operating Expenses		6,871,627			7,203,906				332,279

Loss from Operations		(1,031,959	)		(1,404,511	)			(372,552	)

Other Income (Expense)
Interest expense, net		(607,674	)		(642,267	)	(1)		(34,593	)
Total Other Income (Expense)		(739,913	)		(774,506	)			(34,593	)

Loss Before Provision for Income Taxes		(1,771,872	)		(2,179,017	)			(407,145	)

Net Loss		(1,771,872	)		(2,179,017	)			(407,145	)
Net loss attributable to common stockholders	$	(1,771,872	)	$	(2,443,738	)		$	(671,866	)
Net loss per common share:
Net loss per common share – basic	$	(0.02	)	$	(0.02	)		$	0.00
Net loss per common share – diluted	$	(0.02	)	$	(0.02	)		$	0.00
Weighted Average Common Shares Outstanding – basic		98,233,829			98,233,829				-
Weighted Average Common Shares Outstanding – diluted		98,233,829			98,233,829				-

The net 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 Consolidated Statement of Cash Flows for the Year Ended December 31, 2010

	As Previously Reported			As Restated			Reference	Effect of Correction

Net loss	$	(1,771,872	)	$	(2,179,017	)		$	(407,145	)
Depreciation		42,033			111,701		(4)		69,668
Provision for doubtful accounts		-			196,108		(6)		196,108
Accounts receivable, trade and other		(615,163	)		(811,271	)	(6)		(196,108	)
Deferred revenue		(33,893	)		(52,891	)	(5)		(18,998	)
Accounts payable, accrued expenses, net		(522,705	)		(193,947	)	(1)(2)(5)		328,758
Deferred lease liability		-			27,717		(3)		27,717

(1)	The Company had understated accrued sales tax, penalties, interest and related expenses.

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

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

(4)	Errors related to the improper recording of depreciation expense and related understatement of accumulated depreciation.

(5)	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.

(6)

Additionally, certain reclassifications have been made in prior year’s consolidated financial statements to conform to classifications used in the current reporting periods. These amounts are not considered by management to be corrections and do not have a significant impact on the reported results contained in this Form 10-K.

The financial statement restatement process included a comprehensive review and restatement of the 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 taxes, penalties, and interest 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)
Decrease 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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