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NOTE A - SUMMARY OF ACCOUNTING POLICIES
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9 Months Ended |
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Sep. 30, 2011
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| Significant Accounting Policies [Text Block] |
NOTE
A – SUMMARY OF ACCOUNTING POLICIES
A
summary of the significant accounting policies applied in the
preparation of the accompanying condensed consolidated
financial statements follows.
General
The
restated condensed consolidated balance sheet as of December
31, 2010 and the restated condensed consolidated statement of
stockholders’ equity for the year ended December 31,
2010 have been derived from the restated financial
statements. The accompanying unaudited condensed consolidated
financial statements of Telkonet, Inc. (the
“Company”) have been prepared in accordance with
Rule S-X of the Securities and Exchange Commission (the
“SEC”) and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting
principles for complete financial statements.
In
the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included. However, the
restated results from operations for the three and nine month
periods ended September 30, 2011 and 2010, are not
necessarily indicative of the results that may be expected
for the year ending December 31. The unaudited
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and
footnotes thereto included in the Company's Form 2011 10-K to
be filed here after with the SEC.
Business
and Basis of Presentation
Telkonet,
Inc., formed in 1999 and incorporated under the laws of the
state of Utah, has evolved into a Clean Technology company
that develops, manufactures and sells proprietary energy
efficiency and SmartGrid networking technology. Prior to
January 1, 2007, the Company was primarily engaged in the
business of developing, producing and marketing proprietary
equipment enabling the transmission of voice and data
communications over a building’s internal electrical
wiring.
In
March 2007, the Company acquired substantially all of the
assets of Smart Systems International (“SSI”), a
leading provider of energy management products and solutions
to customers in the United States and Canada.
In
March 2007, the Company acquired 100% of the outstanding
membership units of EthoStream, LLC, a network solutions
integration company that offers installation, sales and
service to the hospitality industry. The EthoStream
acquisition enabled Telkonet to provide installation and
support for PLC products and third party applications to
customers across North America.
In
March 2011, the Company sold all its Series 5 PLC product
line assets to Wisconsin-based Dynamic Ratings, Inc. under an
Asset Purchase Agreement.
The
condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries,
Telkonet Communications, Inc., and EthoStream, LLC. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Going
Concern
The accompanying condensed
consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in
the United States of America, which contemplate continuation
of the Company as a going concern. The Company has reported
net income of $1,112,428 for the nine month period
ended September 30, 2011, accumulated deficit of
$115,329,529 and total current liabilities in excess of
current assets of $909,664 as of September 30, 2011.
The accompanying financial
statements do not include any adjustments that might result
from the outcome of these uncertainties.
We
continue to experience net operating losses and deficits in
cash flows from operations. Our ability to
continue as a going concern is subject to our ability to
generate a profit and/or obtain necessary funding from
outside sources, including by the sale of our securities or
assets, or obtaining loans from financial institutions, where
possible. Our continued net operating losses and
the uncertainty regarding contingent liabilities cast doubt
on our ability to meet such goals and the Company cannot make
any representations for fiscal 2012 and beyond.
The
Company believes that anticipated revenues from operations
will be insufficient to satisfy its ongoing capital
requirements for at least the next 12 months. If
the Company’s financial resources from operations are
insufficient, the Company will require financing in addition
to the funds received from the sale of the Series 5 product
line in order to execute its operating plan and continue as a
going concern. The Company cannot predict whether this
additional financing will be in the form of equity or debt,
or be in another form. The Company may not be able to obtain
the necessary additional capital on a timely basis, on
acceptable terms, or at all. In any of these
events, the Company may be unable to implement its current
plans for expansion, repay its debt obligations as they
become due, or respond to competitive pressures, any of which
circumstances would have a material adverse effect on its
business, prospects, financial condition and results of
operations.
Management intends
to review the options for raising capital including, but not
limited to, through asset-based financing, private
placements, and/or disposition. Management
believes that with this financing, the Company will be able
to generate additional revenues that will allow the Company
to continue as a going concern. There can be no
assurance that the Company will be successful in obtaining
additional funding.
Fair
Value of Financial Instruments
The
Company accounts for the fair value of financial instruments
in accordance with Accounting Standard Codification (ASC)
820, which defines fair value for accounting purposes,
established a framework for measuring fair value and expanded
disclosure requirements regarding fair value
measurements. Fair value is defined as an exit
price, which is the price that would be received upon sale of
an asset or paid upon transfer of a liability in an orderly
transaction between market participants at the measurement
date. The degree of judgment utilized in measuring
the fair value of assets and liabilities generally correlates
to the level of pricing observability. Financial
assets and liabilities with readily available, actively
quoted prices or for which fair value can be measured from
actively quoted prices in active markets generally have more
pricing observability and require less judgment in measuring
fair value. Conversely, financial assets and
liabilities that are rarely traded or not quoted have less
price observability and are generally measured at fair value
using valuation models that require more
judgment. These valuation techniques involve some
level of management estimation and judgment, the degree of
which is dependent on the price transparency of the asset,
liability or market and the nature of the asset or
liability. We have categorized our financial
assets and liabilities that are recurring, at fair value into
a three-level hierarchy in accordance with these
provisions.
Restricted
Cash on Deposit
During
the third quarter, the Company was awarded a contract that
contained a bonding requirement. The Company
satisfied this requirement with cash collateral supported by
an irrevocable standby letter of credit in the amount of
$91,000 which expires September 30, 2012. The
amount is presented as restricted cash on deposit on the
condensed consolidated balance sheets.
Goodwill
and Other Intangibles
Goodwill
represents the excess of the cost of businesses acquired over
fair value or net identifiable assets at the date of
acquisition. Goodwill is subject to a periodic
impairment assessment by applying a fair value test based
upon a two-step method. The first step of the
process compares the fair value of the reporting unit with
the carrying value of the reporting unit, including any
goodwill. We utilize a discounted cash flow
valuation methodology to determine the fair value of the
reporting unit. If the fair value of the reporting
unit exceeds the carrying amount of the reporting unit,
goodwill is deemed not to be impaired in which case the
second step in the process is unnecessary. If the
carrying amount exceeds fair value, we perform the second
step to measure the amount of impairment loss. Any
impairment loss is measured by comparing the implied fair
value of goodwill with the carrying amount of goodwill at the
reporting unit, with the excess of the carrying amount over
the fair value recognized as an impairment loss.
Long-Lived
Assets
We
review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of
an asset may not be recoverable in accordance with ASC
360-10. Recoverability is measured by comparison of the
carrying amount to the future net cash flows which the assets
are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the projected discounted future cash flows
arising from the asset using a discount rate determined by
management to be commensurate with the risk inherent to our
current business model.
Income
(Loss) per Common Share
The
Company computes earnings per share under ASC 260-10,
Earnings Per Share. Basic net income per common share
is computed by dividing net income (loss) by the weighted
average number of shares of outstanding common stock.
Diluted earnings per share is computed using the weighted
average number of common and common stock equivalent shares
outstanding during the period. There is no effect on
diluted income (loss) per share since the common stock
equivalents are anti-dilutive. Dilutive common stock
equivalents consist of shares issuable upon the exercise of
the Company's outstanding stock options and warrants.
Use of
Estimates
The
preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC
740-10 “Income Taxes.” Under this method,
deferred income taxes (when required) are provided based on
the difference between the financial reporting and income tax
bases of assets and liabilities and net operating losses at
the statutory rates enacted for future periods. The Company
has a policy of establishing a valuation allowance when it is
more likely than not that the Company will not realize the
benefits of its deferred income tax assets in the
future.
The
Company has adopted the Financial Accounting Standards Board
(“FASB”) issued ASC 740-10-25, which prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. ASC
740-10-25 also provides guidance on derecognition,
classification, treatment of interest and penalties, and
disclosure of such positions.
Revenue
Recognition
For
revenue from product sales, we recognize revenue in
accordance with ASC 605-10, and ASC Topic 13 guidelines that
require that four basic criteria must be met before revenue
can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is
fixed and determinable; and (4) collectability is reasonably
assured. Determination of criteria (3) and (4) are
based on management’s judgments regarding the fixed
nature of the selling prices of the products delivered and
the collectability of those amounts. Provisions
for discounts and rebates to customers, estimated returns and
allowances, and other adjustments are provided for in the
same period the related sales are recorded. We
defer any revenue for which the product has not been
delivered or is subject to refund until such time that we and
the customer jointly determine that the product has been
delivered or no refund will be required. The
guidelines also address the accounting for arrangements that
may involve the delivery or performance of multiple products,
services and/or rights to use assets.
We
provide call center support services to properties installed
by us and also to properties installed by other providers. In
addition, we provide the property with the portal to access
the Internet. We receive monthly service fees from such
properties for our services and Internet access. We recognize
the service fee ratably over the term of the contract. The
prices for these services are fixed and determinable prior to
delivery of the service. The fair value of these services is
known due to objective and reliable evidence from contracts
and standalone sales. We report such revenues as
recurring revenues.
Stock-Based
Compensation
We
account for our stock based awards in accordance with ASC
718-10, Compensation, which requires a fair value measurement
and recognition of compensation expense for all share-based
payment awards made to our employees and directors, including
employee stock options and restricted stock awards. We
estimate the fair value of stock options granted using the
Black-Scholes valuation model. This model requires us to make
estimates and assumptions including, among other things,
estimates regarding the length of time an employee will
retain vested stock options before exercising them, the
estimated volatility of our common stock price and the number
of options that will be forfeited prior to vesting. The fair
value is then amortized on a straight-line basis over the
requisite service periods of the awards, which is generally
the vesting period. Changes in these estimates and
assumptions can materially affect the determination of the
fair value of stock-based compensation and consequently, the
related amount recognized in our consolidated statements of
operations.
The
expected term of the options represents the estimated period
of time until exercise and is based on historical experience
of similar awards, giving consideration to the contractual
terms, vesting schedules and expectations of future employee
behavior. For 2011 and prior years, expected stock price
volatility is based on the historical volatility of the
Company’s stock for the related vesting periods.
Stock-based compensation expense in
connection with options granted to employees for the three
and nine months ended September 30, 2011 and 2010 was $5,655
and $21,643 and $44,720
and $111,258, respectively.
Deferred
Lease Liability
Rent
expense is recorded on a straight-line basis over the term of
the lease. Rent escalations and rent abatement periods during
the term of the lease create a deferred lease liability which
represents the excess of cumulative rent expense recorded to
date over the actual rent paid to date.
Lease
Abandonment
On
July 15, 2011, the Company executed a sublease agreement for
approximately 12,000 sq ft of commercial office space in
Germantown, MD. The subtenant has the option to extend the
sublease from January 31, 2013 to December 31, 2015. Because
we no longer have access to subleased space, we have recorded
a charge of $56,659 during the period ended September 30,
2011 which is included in accrued liabilities and expenses
related to this abandonment.
Reclassifications
Certain
reclassifications have been made in prior years financial
statements to conform to classifications used in the current
year.
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