Quarterly report pursuant to Section 13 or 15(d)


6 Months Ended
Jun. 30, 2020
Commitments and Contingencies Disclosure [Abstract]  



Office Leases Obligations


In October 2013, the Company entered into a lease agreement for 6,362 square feet of commercial office space in Waukesha, Wisconsin for its corporate headquarters. The Waukesha lease would have expired in April 2021, but was subsequently amended and extended through April 2026. On April 7, 2017 the Company executed an amendment to its’ existing lease in Waukesha, Wisconsin to expand another 3,982 square feet, bringing the total leased space to 10,344 square feet. In addition, the lease term was extended from May 1, 2021 to April 30, 2026. The commencement date for this amendment was July 15, 2017.


In January 2016, the Company entered into a lease agreement for 2,237 square feet of commercial office space in Germantown, Maryland for its Maryland employees. The Germantown lease, as amended, was set to expire at the end of January 2018. In November 2017, the Company entered into a second amendment to the lease agreement extending the lease through the end of January 2019. In November 2018, the Company entered into a third amendment to the lease agreement extending the lease through the end of January 2022.


In May 2017, the Company entered into a lease agreement for 5,838 square feet of floor space in Waukesha, Wisconsin for its inventory warehousing operations. The Waukesha lease expires in May 2024.


The Company determines if an arrangement is a lease at inception. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified fixed asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. The Company does not separate non-lease components from lease components to which they relate and accounts for the combined lease and non-lease components as a single lease component.


Operating leases are included in our condensed consolidated balance sheet as right-of-use assets, operating lease liabilities – current and operating lease liabilities – long-term. We do not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less. Our current operating leases are for facilities. Our leases may contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs. Some of our lease agreements may contain rent escalation clauses, rent holidays, capital improvement funding, or other lease concessions.


In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us to use the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. When we cannot readily determine the discount rate implicit in the lease agreement, we utilize our current borrowing rate on our outstanding line of credit. The Company’s line of credit utilizes market rates to assess an interest rate. Refer to Note G for further discussion.


We recognize our minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. Payments are set on a pre-determined schedule within each lease agreement. We amortize this expense over the term of the lease beginning with the date of the standard adoption for current leases and beginning with the date of initial possession, which is the date we enter the leased space and begin to make improvements in the preparation for its intended use, for future leases. Variable lease components represent amounts that are not fixed in nature and are not tied to an index or rate, and are recognized as incurred. Variable lease components consist primarily of the Company's proportionate share of common area maintenance, utilities, taxes and insurance and are presented as operating expenses in the Company’s statements of operations in the same line item as expense arising from fixed lease payments.


We lease certain property under non-cancelable operating leases, primarily facilities. The impact of the adoption of ASC 842 at January 1, 2019 created a right-of-use asset of $1,042,004, lease liability of $1,095,761 and unwound the $71,877 deferred lease liability.


The components of lease expense for the six months ended June 30, 2020 were as follows:


Operating lease expense:      
Operating lease cost – fixed   $ 116,167  
Variable lease cost     72,785  
Total operating lease cost   $ 188,952  


Other information related to leases as of June 30, 2020 was as follows:


Operating lease liability – current   $ 231,796  
Operating lease liability – long-term   $ 680,087  
Operating cash outflows from operating leases   $ 110,000  
Weighted-average remaining lease term of operating leases     5.22 years  
Weighted-average discount rate of operating leases     8.5%  


Future annual minimum operating lease payments as of June 30, 2020 were as follows:


2020 (excluding the six months ended June 30, 2020)   $ 113,835  
2021     242,299  
2022     195,176  
2023     193,169  
2024 and thereafter     384,119  
Total minimum lease payments     1,128,598  
Less imputed interest     (216,715 )
Total   $ 911,883  


Rental expenses charged to operations for the three months ended June 30, 2020 and 2019 were $91,441 and $91,306, respectively. Rental expenses charged to operations for the six months ended June 30, 2020 and 2019 were $188,952 and $180,832, respectively.




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.


Sipco, LLC v Telkonet, Inc.


On June 30, 2020, the Company was named as a defendant in a civil action alleging infringement on multiple essential wireless mesh (“EWM”) patents held by the plaintiff. The EWM patent portfolio covers technologies used in multi-hop wireless networks utilizing wireless protocols such as, but not limited, to Zigbee. The portfolio also covers applications including, but not limited to, home and building automation and industrial controls. The suit contends the Company sells various automated networked products designed to manage energy, lighting and temperature and those products employ wireless mesh network communication utilizing Zigbee enabled technology. The Company is currently discussing possible resolutions. No liability has been recorded for this case.


Sales Tax


Unless provided with a resale or tax exemption certificate, the Company assesses and collects sales tax on sales transactions and records the amount as a liability. It is recognized as a liability until remitted to the applicable state. Total revenues do not include sales tax as the Company is considered a pass through conduit for collecting and remitting sales taxes.


The following table sets forth the change in the sales tax accrual as of June 30, 2020 and December 31, 2019:


    June 30,

December 31,


Balance, beginning of year   $ 26,957     $ 43,400  
Sales tax collected     31,384       167,233  
Provisions (reversals)     25,944       (10,664 )
Payments     (62,976 )     (173,012 )
Balance, end of period   $ 21,309     $ 26,957