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

Annual report pursuant to Section 13 and 15(d)

P. DISCONTINUED OPERATIONS

P. DISCONTINUED OPERATIONS

12 Months Ended

Dec. 31, 2017

Discontinued Operations and Disposal Groups [Abstract]

NOTE P – DISCONTINUED OPERATIONS

In October of 2016, the Company, under the direction and authority of the Board of Directors, committed to a plan to offer for sale EthoStream, the Company’s wholly–owned High-Speed Internet Access (“HSIA”) subsidiary. As a result of this decision to sell EthoStream, the operating results of EthoStream as of and for the year ended December 31, 2016 were reclassified as discontinued operations and as assets and liabilities held for sale in the consolidated financial statements as detailed in the table below. During the year ended December 31, 2017, the Company, and EthoStream, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with DCI-Design Communications LLC (“DCI”), a Delaware limited liability company, whereby DCI acquired all of the assets and certain liabilities of EthoStream for a base purchase price of $12,750,000. The Purchase Agreement includes that proceeds of $900,000 are to be withheld from the $12,750,000 base purchase price and placed into an escrow account to support potential indemnification obligations of up to $800,000 and net working capital adjustments of up to $100,000. The escrow amount, net of potential claims, would be fully released after an escrow period not to exceed 12 months after closing. The assets included, among other items, certain inventory, contracts and intellectual property. DCI acquired only the liabilities provided for in the Purchase Agreement.

On March 29, 2017, pursuant to the terms and the conditions of the Purchase Agreement, the Company closed on the sale.

On September 27, 2017, the Company reached a final settlement with DCI on net working capital as set forth in the Purchase Agreement and subsequently received $100,000 from the escrow account for the portion of the escrow account set aside for net working capital adjustments and cash proceeds of $311,000 from DCI in the settlement of net working capital adjustments. During the year ended December 31, 2017, the Company recorded a gain from the sale of EthoStream (net of tax) of $6,630,244.

The following table summarizes the balance sheet information from discontinued operations:

	December 31,
	2017		2016

Accounts receivable, net	$	–	$	456,478
Inventories		–		350,506
Other current assets		–		12,980
Other asset - goodwill		–		5,796,430
Other asset – intangible asset, net		–		533,577
Current assets held for sale		–		7,149,971

Accounts payable		–		465,346
Accrued liabilities and expenses		–		90,187
Deferred revenues		–		37,509
Customer deposits		–		200,466
Deferred lease liability		–		76,096
Current liabilities held for sale		–		869,604

Net assets of discontinued operations	$	–	$	6,280,367

The following table summarizes the statements of operations information for discontinued operations for the years ended December 31, 2017 and 2016.

	2017		2016
Revenues, net:
Product	$	653,839	$	3,529,012
Recurring		925,837		3,894,998
Total Net Revenues		1,579,676		7,424,010

Cost of Sales:
Product		393,804		2,235,641
Recurring		209,868		925,212
Total Cost of Sales		603,672		3,160,853

Gross Profit		976,004		4,263,157

Operating Expenses:
Research and development		–		2,511
Selling, general and administrative		252,378		1,191,385
Depreciation and amortization		60,420		242,117
Total Operating Expenses		312,798		1,436,013

Income from Discontinued Operations before Provision for Income Taxes		663,206		2,827,144

Provision for Income Taxes		50,331		199,386
Income from Discontinued Operations (net of tax)	$	612,875	$	2,627,758

The consolidated statements of cash flows do not present the cash flows from discontinued operations for investing activities or financing activities because there were no investing or financing activities associated with the discontinued operations in the years ended December 31, 2017 and 2016.