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

Quarterly report pursuant to Section 13 or 15(d)

NOTE B - RESTATEMENT OF FINANCIAL STATEMENTS

NOTE B - RESTATEMENT OF FINANCIAL STATEMENTS

9 Months Ended

Sep. 30, 2011

Restatement to Prior Year Income [Table Text Block]

NOTE B – RESTATEMENT OF 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 September 30, 2011 and 2010 and the Company’s previously issued consolidated financial statements as of December 31, 2010 and for the three and nine months ended September 30, 2011 and 2010 as filed on Form 10-Q on November 4, 2011 are as follows:

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

	2011
	For the Three Months Ended (Unaudited)			For the Nine Months Ended (Unaudited)

Increase in sales tax, penalties and interest	$	(41,156	)	$	(120,836	)

Incorrect application of ASC 840, Accounting for Leases, resulted in an understatement of deferred lease liability		-			82,802

Decrease in depreciation expense related to recording depreciation expense in improper periods		17,417			52,251

Increase in expense related to improper recording of various accrued liabilities		-			(30,531	)

Total decrease in net income for the stated period	$	(23,739	)	$	(16,314	)

	2010
	For the Three Months Ended (Unaudited)			For the Nine Months Ended (Unaudited)

Increase in sales tax, penalties and interest	$	(46,082	)	$	(131,903	)

Incorrect application of ASC 840, Accounting for Leases, resulted in an understatement of deferred lease liability		(2,497	)		(23,991	)

Increase in depreciation expense related to recording depreciation expense in improper periods		(17,417	)		(52,251	)

Increase in expense related to improper recording of various accrued liabilities		(48,000	)		(153,343	)

Total increase in net loss for the stated period	$	(113,996	)	$	(361,488	)

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
	September 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	$	172,235		$	137,997		$	(34,238	)	$	197,565		$	163,327		$	(34,238	)
Total current assets		2,959,612			2,925,374			(34,238	)		1,732,182			1,697,944			(34,238	)

Property and equipment, net		34,717			17,300			(17,417	)		112,997			43,329			(69,668	)

Other assets:
Deposits		-			34,238			34,238			-			34,238			34,238
Total other assets		13,472,843			13,507,081			34,238			13,710,835			13,745,073			34,238
Total assets		16,467,172			16,449,755			(17,417	)		15,556,014			15,486,346			(69,668	)

Current liabilities:
Accrued liabilities and expenses		1,211,248			2,095,692			884,444			1,157,873			1,890,951			733,078
Other current liabilities		78,863			59,865			(18,998	)		170,033			151,035			(18,998	)
Total current liabilities		2,969,592			3,835,038			865,446			5,894,602			6,608,682			714,080

Long-term liabilities:
Deferred lease liability		108,862			108,862			-			-			82,802			82,802
Total long-term liabilities		1,025,027			1,025,027			-			1,534,541			1,617,343			82,802

Stockholders' equity:
Additional paid-in-capital		124,576,751			124,638,806			62,055			121,995,117			122,057,171			62,054
Accumulated deficit		(114,384,611	)		(115,329,529	)		(944,918	)		(115,513,353	)		(116,441,957	)		(928,604	)
Total stockholders’ equity	$	10,296,306		$	9,413,443		$	(882,863	)	$	6,583,025		$	5,716,475		$	(866,550	)

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

Revenues, net
Recurring	$	1,162,559		$	1,162,559		$	-		$	1,287,275		$	1,194,856		$	(92,419	)
Total Revenue		2,794,719			2,794,719			-			3,104,666			3,012,247			(92,419	)

Cost of Sales
Product		1,002,816			1,002,816			-			1,195,448			1,129,017			(66,431	)
Recurring		294,846			294,846			-			349,203			340,369			(8,834	)
Total Cost of Sales		1,297,662			1,297,662			-			1,544,651			1,469,386			(75,265	)

Gross Profit		1,497,057			1,497,057			-			1,560,015			1,542,861			(17,154	)

Operating Expenses
Research and development		197,674			197,674			-			251,259			280,848			29,589
Selling, general and administrative		1,165,174			1,194,156			28,982			1,283,657			1,324,028			40,371
Depreciation and amortization		89,880			72,463			(17,417	)		55,074			72,491			17,417
Total Operating Expenses		1,452,728			1,464,293			11,565			1,589,990			1,677,367			87,377

Income (Loss) from Operations		44,329			32,764			(11,565	)		(29,975	)		(134,506	)		(104,531	)

Other Income (Expenses)
Interest expense, net		(11,254	)		(23,428	)		(12,174	)		(147,159	)		(156,624	)		(9,465	)
Total Other Income (Expenses)		(11,254	)		(23,428	)		(12,174	)		(2,152,381	)		(2,161,846	)		(9,465	)

Income (Loss) Before Provision for Income Taxes		33,075			9,336			(23,739	)		(2,182,356	)		(2,296,352	)		(113,996	)

Net Income (Loss)		33,075			9,336			(23,739	)		(2,182,356	)		(2,296,352	)		(113,996	)
Net income (loss) attributable to common stockholders	$	(161,249	)	$	(184,988	)	$	(23,739	)	$	(2,262,641	)	$	(2,376,637	)	$	(113,996	)
Net income (loss) per common share:
Net income (loss) per common share – basic	$	0.00		$	0.00		$	0.00		$	(0.02	)	$	(0.02	)	$	0.00
Net income (loss) per common share – diluted	$	0.00		$	0.00		$	0.00		$	(0.02	)	$	(0.02	)	$	0.00
Weighted Average Common Shares Outstanding – basic		102,970,585			102,970,585			-			98,947,412			98,947,412			-
Weighted Average Common Shares Outstanding – diluted		104,399,613			104,399,613			-			98,947,412			98,947,412			-

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 Statements of Operations
	Nine Months ended September 30, 2011 (Unaudited)									Nine Months ended September 30, 2010 (Unaudited)
	As Previously Reported			As Restated			Effect of Correction			As Previously Reported			As Restated			Effect of Correction

Revenues net
Recurring	$	3,445,234		$	3,445,234		$	-		$	3,517,979		$	3,267,885		$	(250,094	)
Total Revenue		8,205,354			8,205,354			-			8,872,107			8,622,013			(250,094	)

Cost of Sales
Product		2,728,980			2,728,980			-			3,107,355			2,918,499			(188,856	)
Recurring		849,962			849,962			-			981,110			960,670			(20,440	)
Total Cost of Sales		3,578,942			3,578,942			-			4,088,465			3,879,169			(209,296	)

Gross Profit		4,626,412			4,626,412			-			4,783,642			4,742,844			(40,798	)

Operating Expenses
Research and development		568,992			588,908			19,916			781,159			869,044			87,885
Selling, general and administrative		3,475,896			3,488,802			(12,906	)		4,279,241			4,432,702			153,461
Depreciation and amortization		255,060			202,809			(52,251	)		213,274			265,525			52,251
Total Operating Expense		4,299,948			4,280,519			(19,429	)		5,273,674			5,567,271			293,597

Income (Loss) from Operations		326,464			345,893			19,429			(490,032	)		(824,427	)		(334,395	)

Other Income (Expense)
Interest expense, net		(201,660	)		(237,402	)		(35,742	)		(471,452	)		(498,545	)		(27,093	)
Total Other Income (Expense)		802,278			766,535			(35,743	)		(1,880,625	)		(1,907,718	)		(27,093	)

Income (Loss) Before Provision for Income Taxes		1,128,742			1,112,428			(16,314	)		(2,370,657	)		(2,732,145	)		(361,488	)

Net Income (Loss)		1,128,742			1,112,428			(16,314	)		(2,370,657	)		(2,732,145	)		(361,488	)
Net income (loss) attributable to common stockholders	$	620,551		$	604,237		$	(16,314	)	$	(2,529,402	)	$	(2,890,890	)	$	(361,488	)

Net income (loss) per common share:
Net income (loss) per common share – basic	$	0.01		$	0.01		$	-		$	(0.02	)	$	(0.03	)	$	(0.01	)
Net income (loss) per common share – diluted	$	0.01		$	0.01		$	-		$	(0.02	)	$	(0.03	)	$	(0.01	)
Weighted Average Common Shares Outstanding – basic		101,914,800			102,033,143			118,343			97,387,490			97,387,490			-
Weighted Average Common Shares Outstanding – diluted		103,343,829			103,462,171			118,342			97,387,490			97,387,490			-

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 Statements of Cash Flows
	Nine Months ended September 30, 2011 (Unaudited)									Nine Months ended September 30, 2010 (Unaudited)
	As Previously Reported			As Restated			Effect of Correction			As Previously Reported			As Restated			Effect of Correction

Net income (loss)	$	1,128,742		$	1,112,428		$	(16,314	)	$	(2,370,657	)	$	(2,732,145	)	$	(361,488	)
Gain (loss) on derivative liability		(172,477	)		(172,476	)		1			1,304,905			1,304,905			-
Provision for lease loss		56,659			59,937			3,278			-			-			-
Depreciation		73,800			21,549			(52,251	)		32,014			84,265			52,251
Accounts payable, accrued liabilities & expenses, net		(800,345	)		(652,257	)		148,088			(5,834	)		279,412			285,246
Deferred lease liability		108,862			26,060			(82,802	)		-			23,991			23,991

The financial statement restatement process included a comprehensive review and restatement of the condensed consolidated balance sheet as of January 1, 2010. The net adjustments to stockholders’ equity, resulting from this process and related corrections was to increase in accumulated deficit by $(521,459) from $(113,741,481) as reported to a restated amount of $(114,262,940). The correction 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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