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NOTE K - COMMITMENTS AND CONTINGENCIES
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Jun. 30, 2011
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| Commitments and Contingencies Disclosure [Text Block] |
NOTE
K - COMMITMENTS AND CONTINGENCIES
Office
Leases Obligations
The
Company presently leases approximately 14,000 square feet of
office space in Milwaukee, WI for its corporate
headquarters. The Milwaukee lease expires in March
2020.
The Company presently leases 16,416
square feet of commercial office space in Germantown,
MD. The lease commitments expire in December
2015. On July 15, 2011, Telkonet executed a
sublease agreement for 11,626 square feet of its former
corporate headquarters located in Germantown,
MD. The sublease term will expire on January 31,
2013. The subtenant received a one month rent
abatement and has the option to extend the sublease from
January 31, 2013 to December 31, 2015.
Commitments
for minimum rentals under non cancelable leases at June 30,
2011 are as follows:
Rental
expenses charged to operations for the six months ended June
30, 2011 and 2010 are $405,637 and $325,116,
respectively.
Employment
and Consulting Agreements
The
Company has employment agreements with certain of its key
employees which include non-disclosure and confidentiality
provisions for protection of the Company’s proprietary
information.
Jason
Tienor, President and Chief Executive Officer, is employed
pursuant to an employment agreement dated April 11,
2011. Mr. Tienor’s employment agreement is
for a term expiring on April 10, 2012, is renewable at the
agreement of the parties and provides for a base salary of
$200,000 per year.
Jeff
Sobieski, Chief Operating Officer, is employed pursuant to an
employment agreement, dated April 11, 2011. Mr.
Sobieski’s employment agreement is for a term expiring
on April 10, 2012, is renewable at the agreement of the
parties and provides for a base salary of $190,000 per
year.
Litigation
The
Company is subject to legal proceedings and claims which
arise in the ordinary course of its
business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final
disposition of such matters should not have a material
adverse effect on its financial position, results of
operations or liquidity.
Linksmart
Wireless Technology, LLC v. T-Mobile USA, Inc.
On
July 1, 2008, Linksmart Wireless Technology, LLC, or
Linksmart, filed a civil lawsuit in the Eastern District of
Texas against EthoStream, LLC, our wholly-owned subsidiary
and 22 other defendants (Linksmart
Wireless Technology, LLC v. T-Mobile USA, Inc., et al,
U.S. District Court, for the Eastern District of Texas,
Marshall Division, No.2:08-cv-00264-TJW-CE). This
lawsuit alleges that the defendants’ services infringe
a wireless network security patent held by Linksmart.
Linksmart seeks a permanent injunction enjoining the
defendants from infringing, inducing the infringement of, or
contributing to the infringement of its patent, an award of
damages and attorney’s fees.
On
August 1, 2008, we timely filed an answer to the complaint
denying the allegations. On February 27, 2009, the USPTO
granted a reexamination request with respect to the patent in
issue in this lawsuit. Based upon four highly
relevant and material prior art references that had not been
considered by the USPTO in its initial examination, it found
a “substantial new question of patentability”
affecting all claims of the patent in suit. On
August 2, 2010, the USPTO issued a Final Office Action
rejecting every claim of the patent in suit. If
this action is upheld on appeal it will result in the
elimination of all of the issues in the pending litigation.
There is a possibility that the claims of the patent will be
reinstated on appeal either in their original form or as
amended.
Defendant
Ramada Worldwide, Inc. provided us with notice of the suit
and demanded that we defend and indemnify it pursuant to a
vendor direct supplier agreement between EthoStream and WWC
Supplier Services, Inc., a Ramada affiliate (wherein we
agreed to indemnify, defend and hold Ramada harmless from and
against claims of infringement). After a review of
that agreement, it was determined that EthoStream owes the
duty to defend and indemnify with respect to services
provided by Telkonet to Ramada and it has assumed
Ramada’s defense. An answer on
Ramada’s behalf was filed in U.S. District Court, for
the Eastern District of Texas, Marshall Division on September
19, 2008.
On
September 1, 2010, the court entered a 60 day stay at the
plaintiff’s request. On September 15, 2010 we, along
with other defendants, filed a motion seeking a stay of the
litigation pending the conclusion of the reexamination
proceeding. Subject to certain conditions, Linksmart agreed
to entry of a stay. The court granted the defendants’
motion on October 26, 2010 and, subject to the agreed upon
conditions, the matter is now stayed pending conclusion of
the reexamination, including all appeals. A mandatory
mediation was held in October, 2010 which did not achieve any
results. As of June 30, 2011, the case continued
to be in stay pending a dismissal or
appeal. Because of the above, the Company is
unable to estimate potential damages.
Robert
P. Crabb v. Telkonet Inc.
On
November 9, 2010, a former executive, Robert P.
Crabb, served Telkonet, Inc. and Telkonet
Communications, Inc. ("Telkonet") with a Complaint in
the Circuit Court for Montgomery County, MD
alleging (1) violation of Maryland’s Wage
Payment and Collection Act (2) Breach of
Contract and (3) Promissory Estoppel/Detrimental
Reliance. The claims in his Complaint arise out
of his retirement in September 2007. On December
6, 2010, Telkonet filed an Answer and Counterclaim,
alleging “Recoupment.” Mr. Crabb filed an
Answer to the Counterclaim on January 10,
2011. In terms of relief, Mr. Crabb is
seeking "severance compensation" in the amount of
$156,000, treble damages, interest, and attorneys’
fees. Treble damages and attorneys’ fees
are only available under the Maryland Wage Payment and
Collection Act. Mr. Crabb's Complaint provides
no specific accounting for the relief sought. A
pre-trial conference was held on July 28, 2011, during
which time the Court scheduled a four day jury trial
beginning on December 12, 2011. On July
28, Plaintiff also filed a Motion for Partial Summary
Judgment on his claims and Defendants' Counterclaim.
Defendants' Opposition is due on August 12,
2011. Although discovery in this matter has closed,
there are two discovery motions pending before the Court.
Stephen
L. Sadle v. Telkonet, Inc
On
April 15, 2011, a former executive, Stephen L. Sadle,
served Telkonet, Inc. and Telkonet Communications, Inc.
("Telkonet") with a Complaint in the Circuit Court for
Montgomery County, MD alleging (1) Breach of Contract, (2)
Promissory Estoppel/Detrimental Reliance and (3)
violation of Maryland's Wage Payment and Collection
Act. The three claims in his Complaint each arise out
of his retirement in 2007. On May 27,
2011 Defendants filed a motion to dismiss Mr. Sadle's
claims. A hearing on Defendants' motion to dismiss
will be held on August 10, 2011. In terms of
relief, Mr. Sadle is seeking "severance compensation" in the
amount of $195,000, treble damages, interest, and
attorneys’ fees. Treble damages and
attorneys’ fees are only available under the Maryland
Wage Payment and Collection Act. Mr. Sadle's
Complaint provides no specific accounting for the relief
sought. The trial in this case will likely be scheduled
between February and June 2012.
Sales
Tax
The
Company believes there exists the possibility of sales tax
exposure in multiple states covering multiple years. At the
quarter ended June 30, 2011, the Company has approximately
$225,000 accrued for any potential sales tax exposure.
However the Company is unable to estimate if there will be
any additional sales tax exposure in excess of this
accrual.
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