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

Quarterly report pursuant to Section 13 or 15(d)

L. DISCONTINUED OPERATIONS

L. DISCONTINUED OPERATIONS

9 Months Ended

Sep. 30, 2017

Discontinued Operations and Disposal Groups [Abstract]

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 nine months ended September 30, 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. Another $93,000 is classified in other current assets as a net working capital receivable. 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. On September 29, 2017, the Company 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. The net working capital receivable of $93,000 in other current assets was applied against the cash proceeds of $311,000 received on September 29, 2017 resulting in a gain from sale of discontinued operations of $218,000 recognized during the three months ended September 30, 2017.

The following table summarizes the balance sheet information for discontinued operations.

	September 30,		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 of discontinued operations		–		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 of discontinued operations		–		869,604

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

The following table summarizes the statements of operations information for discontinued operations.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017		2016
Revenues, net:
Product	$	–		$	995,425	$	653,839	$	2,749,001
Recurring		–			1,038,585		925,837		2,985,550
Total Net Revenue		–			2,034,010		1,579,676		5,734,551

Cost of Sales:
Product		(11,600	)		565,276		403,004		1,753,994
Recurring		–			242,678		209,868		697,541
Total Cost of Sales		(11,600	)		807,954		612,872		2,451,535

Gross Profit		11,600			1,226,056		966,804		3,283,016

Operating Expenses:
Selling, general and administrative		197			315,437		252,307		896,385
Depreciation and amortization		–			60,420		60,420		181,697
Total Operating Expenses		197			375,857		312,727		1,078,082

Income from Discontinued Operations before Provision for Income Taxes		11,403			850,199		654,077		2,204,934

Provision for Income Taxes		–			51,312		52,017		153,936
Income from Discontinued Operations (net of tax)	$	11,403		$	798,887	$	602,060	$	2,050,998

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 three and nine months ended September 30, 2017 and 2016.