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

Annual report pursuant to Section 13 and 15(d)

C. INTANGIBLE ASSETS AND GOODWILL

C. INTANGIBLE ASSETS AND GOODWILL

12 Months Ended

Dec. 31, 2014

Goodwill and Intangible Assets Disclosure [Abstract]

Total identifiable intangible assets acquired and their carrying values at December 31, 2014 are:

	Cost		Accumulated Amortization			Accumulated Impairment			Carrying Value		Weighted Average Amortization Period (Years)
Amortized Identifiable Intangible Assets:
Subscriber lists – EthoStream	$	2,900,000	$	(1,883,063	)	$	–		$	1,016,937		12.0
Total Amortized Identifiable Intangible Assets		2,900,000		(1,883,063	)		–			1,016,937
Goodwill – EthoStream	8,796,430			–			(3,000,000	)		5,796,430
Goodwill – SSI	5,874,016			–			(5,874,016	)		–
Total Goodwill	14,670,446			–			(8,874,016	)		5,796,430
Total	$	17,570,446	$	(1,883,063	)	$	(8,874,016	)	$	6,813,367

Total identifiable intangible assets acquired and their carrying values at December 31, 2013 are:

	Cost		Accumulated Amortization			Accumulated Impairment			Carrying Value		Weighted Average Amortization Period (Years)
Amortized Identifiable Intangible Assets:
Subscriber lists – EthoStream	$	2,900,000	$	(1,641,383	)	$	–		$	1,258,617		12.0
Total Amortized Identifiable Intangible Assets		2,900,000		(1,641,383	)		–			1,258,617
Goodwill – EthoStream	8,796,430			–			(3,000,000	)		5,796,430
Goodwill – SSI	5,874,016			–			(5,874,016	)		–
Total Goodwill	14,670,446			–			(8,874,016	)		5,796,430
Total	$	17,570,446	$	(1,641,383	)	$	(8,874,016	)	$	7,055,047

Total amortization expense charged to operations for the years ended December 31, 2014 and 2013 was $241,680 per year.

Estimated future amortization expense as of December 31, 2014 is as follows:

Years Ended December 31,
2015	$	241,680
2016		241,680
2017		241,680
2018		241,680
2019		50,217
Total	$	1,016,937

The Company does not amortize goodwill. The Company recorded goodwill in the amount of $14,670,446 as a result of the acquisitions of EthoStream and SSI during the year ended December 31, 2007. The Company evaluates goodwill for impairment based on the fair value of the reporting units to which this goodwill relates at least once a year. We utilize a discounted cash flow valuation methodology (income approach) to determine the fair value of the reporting unit. At December 31, 2009 and 2008, the Company determined that a portion of the value of EthoStream’s goodwill had been impaired based upon management’s assessment of operating results and forecasted discounted cash flow and wrote off $1,000,000 and $2,000,000, respectively, of its value. At December 31, 2011, the Company determined that a portion of the value for Smart Systems International’s goodwill was impaired based upon management’s assessment of operating results and forecasted discounted cash flow and wrote off $3,100,000 in connection with the impairment. At December 31, 2013, the Company determined that the remainder of Smart Systems International’s goodwill was impaired based upon management’s assessment of operating results and forecasted discounted cash flow and recorded an additional impairment charge of $2,774,016. Since acquisition, the Company has written off $3,000,000 and $5,874,016 of goodwill for Ethostream and Smart Systems International, respectively.

Significant assumptions used in our goodwill impairment test at December 31, 2013 included: expected revenue growth rates, reporting unit profit margins, working capital levels, discount rates of 12.4% for EthoStream and 21.8% for SSI, respectively, and a terminal value multiple. The expected future revenue growth rates and the expected reporting unit profit margins were determined after considering our historical revenue growth rates and reporting unit profit margins, our assessment of future market potential, and our expectations of future business performance. At December 31, 2013, the Company determined that the value of Smart Systems International’s goodwill was impaired based upon management’s assessment of operating results and forecasted discounted cash flow and has recorded an impairment charge of $2,774,016.

Significant assumptions used in our goodwill impairment test at December 31, 2014 for EthoStream included: expected revenue growth rates, reporting unit profit margins, working capital levels, discount rate of 10.8% and a terminal value multiple. The expected future revenue growth rates and the expected reporting unit profit margins were determined after considering our historical revenue growth rates and reporting unit profit margins, our assessment of future market potential, and our expectations of future business performance.

The carrying value of our goodwill could change if the Company is unable to achieve operating results at the levels that have been forecasted, or if there is a permanent, negative change in the market demand for the services offered by the Company. These changes could result in an impairment of the remaining goodwill balance that could require an additional material non-cash charge to our results of operations.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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