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

Quarterly report pursuant to Section 13 or 15(d)

NOTE I - STOCK OPTIONS AND WARRANTS

NOTE I - STOCK OPTIONS AND WARRANTS

9 Months Ended

Sep. 30, 2011

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

NOTE I - STOCK OPTIONS AND WARRANTS

Employee Stock Options

The Company maintains two stock option plans. The first plan was initiated in the year 2000 and was established as a long term incentive plan for employees and consultants, including board of director members. The second plan was established in 2010 also as an incentive plan for officers, employees, non employee directors, prospective employees and other key persons. It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a better alignment of their interests with those of the Company and its stockholders.

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees of the Company under a non-qualified employee stock option plan.

Options Outstanding								Options Exercisable
Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	1.00 - $1.99		480,000		3.97	$	1.17		413,869	$	1.16
$	2.00 - $2.99		110,000		3.94	$	2.52		94,688	$	2.52
$	3.00 - $3.99		40,000		4.45	$	3.09		40,000	$	3.09
$	4.00 - $4.99		35,000		3.99	$	4.27		35,000	$	4.27
$	5.00 - $5.99		20,000		3.83	$	5.60		20,000	$	5.60
			685,000		3.99	$	1.78		603,557	$	1.83

Transactions involving stock options issued to employees are summarized as follows:

	Number of Shares			Weighted Average Price Per Share
Outstanding at January 1, 2010		6,120,883		$	1.56
Granted		-			-
Exercised		-			-
Cancelled or expired		(3,572,083	)		1.62
Outstanding at December 31, 2010		2,548,800		$	1.57
Granted		-			-
Exercised		-			-
Cancelled or expired		(1,863,800	)		1.10
Outstanding at September 30, 2011		685,000		$	1.84

The expected life of awards granted represents the period of time that they are expected to be outstanding. We determine the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures. We estimate the volatility of our common stock based on the calculated historical volatility of our own common stock using the trailing 24 months of share price data prior to the date of the award. We base the risk-free interest rate used in the Black-Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. We have not paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes-Merton option valuation model. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation for those awards that are expected to vest. In accordance with ASC 718-10, we adjust share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience.

There were no options granted or exercised during the nine months ended September 30, 2011 and 2010.

Total stock-based compensation expense in connection with options granted to employees recognized in the condensed consolidated statement of operations for the three and nine months ended September 30, 2011 and 2010 was $5,655 and $23,077, and $21,643 and $111,258, respectively.

Non-Employee Stock Options

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to the Company consultants. These options were granted in lieu of cash compensation for services performed.

Options Outstanding								Options Exercisable
Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	1.00		425,000		.37	$	1.00		425,000	$	1.00

Transactions involving options issued to non-employees are summarized as follows:

	Number of Shares			Weighted Average Price Per Share
Outstanding at January 1, 2010		675,000		$	1.00
Granted		-			-
Exercised		-			-
Canceled or expired		(250,000	)		1.00
Outstanding at December 31, 2010		425,000		$	1.00
Granted		-			-
Exercised		-			-
Canceled or expired					-
Outstanding at September 30, 2011		425,000		$	1.00

There were no non-employee stock options vested during the periods ended September 30, 2011 and 2010.

Warrants

The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company. These warrants were granted in lieu of cash compensation for services performed or financing expenses and in connection with placement of convertible debentures.

		Warrants Outstanding						Warrants Exercisable
Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighed Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	0.13		10,346,168		4.21	$	0.13		10,346,168	$	0.13
$	0.33		1,705,539		3.01	$	0.33		1,705,539	$	0.33
$	0.60		800,000		1.60	$	0.60		800,000	$	0.60
$	1.00		500,000		.28	$	1.00		500,000	$	1.00
$	3.05		986,476		2.63	$	3.05		986,476	$	3.05
$	4.17		359,712		.81	$	4.17		359,712	$	4.17
			14,697,895		3.61	$	.50		14,697,895	$	.50

Transactions involving warrants are summarized as follows:

	Number of Shares			Weighted Average Price Per Share
Outstanding at January 1, 2010		12,158,941		$	1.60
Issued		12,819,897			0.28
Exercised		-			-
Canceled or expired		(2,874,096	)		3.29
Outstanding at December 31, 2010		22,104,742			.51
Issued		5,322,847			.19
Exercised		-			-
Canceled or expired		(12,729,694	)		.34
Outstanding at September 30, 2011		14,697,895		$	.50

On April 8, 2011, the Company issued 271 shares of Series B Preferred Stock (“Series B”) with attached warrants to purchase 5,211,542 shares of the Company’s common stock at $0.13 per share. The Company issued 111,305 warrants during the nine months ended September 30, 2011. These warrants were issued pursuant to anti-dilution provisions in existing warrant agreements that were triggered by the completion of the Series B preferred stock private placement.

The Company issued warrants to purchase 12,819,897 shares of common stock during the nine months ended September 30, 2010. These warrants were issued pursuant to anti-dilution provisions in existing warrant agreements that were triggered by the completion of the August 2010 Series B preferred stock private placement.

- Definition

Disclosure of accounting policy for stock option and stock incentive plans. This disclosure may include (1) the types of stock option or incentive plans sponsored by the entity (2) the groups that participate in (or are covered by) each plan (3) significant plan provisions and (4) how stock compensation is measured, and the methodologies and significant assumptions used to determine that measurement.

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