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NOTE H - REDEEMABLE PREFERRED STOCK
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9 Months Ended |
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Sep. 30, 2011
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| Preferred Stock [Text Block] |
NOTE H –
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 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 redeemable preferred stock
on the balance sheets.
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. The discount is being 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 three and nine months ended September 30, 2011 was
$17,901 and $53,703, respectively.
For the three and nine months ended
September 30, 2011 we have accrued dividends in the
amounts of $19,832 and $62,256, respectively, 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 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 5,134,626
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 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 redeemable preferred stock
on the balance sheets.
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 approximately 4 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. The discount is being 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
5,211,542 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 redeemable preferred stock
on the balance sheets.
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 approximately 3.5 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. The discount is being 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 three and nine months ended September 30, 2011 was
$105,210 and $263,205, respectively.
For the three and nine months ended
September 30, 2011, we have accrued dividends for Series B in
the amounts of $51,381 and $129,027,
respectively, 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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