ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)
|
Documents
filed as part of this report.
|
|
|
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(1)
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Financial Statements. The following
financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K:
Report of BDO USA, LLP on Consolidated
Financial Statements as of and for the years ended December 31, 2018 and 2017
|
|
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|
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Consolidated Balance
Sheets as of December 31, 2018 and 2017
|
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|
|
|
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Consolidated Statements
of Operations for the Years ended December 31, 2018 and 2017
|
|
|
|
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Consolidated Statements
of Stockholders’ Equity for the Years ended December 31, 2018 and 2017
|
|
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Consolidated Statements
of Cash Flows for Years ended December 31, 2018 and 2017
|
|
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|
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Notes to Consolidated
Financial Statements
|
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(2)
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Financial Statement
Schedules
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Additional Schedules
are omitted as the required information is inapplicable or the information is presented in the financial statements or related
notes.
|
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(3)
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Exhibits required
to be filed by Item 601 of Regulation S-K
|
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|
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EXHIBIT INDEX
The following exhibits are included
herein or incorporated by reference:
Exhibit
Number
|
|
Description
Of Document
|
2.1
|
|
Asset
Purchase Agreement by and between Telkonet, Inc. and Smart Systems International, dated as of February 23, 2007
(incorporated by reference to our Form 8-K (File
No.
001-31972
) filed on March 2, 2007)
|
2.2
|
|
Unit
Purchase Agreement by and among Telkonet, Inc., EthoStream, LLC and the members of EthoStream, LLC dated as of March 15, 2007
(incorporated by reference to our Form 8-K (File
No.
001-31972
) filed on March 19, 2007)
|
2.3
|
|
Asset
Purchase Agreement by and among EthoStream, LLC, Telkonet, Inc., and DCI-Design Communications, dated as of March 28, 2017
(incorporated by reference to our Form 8-K (File
No. 001-31972) filed on March 31, 2017)
|
3.1
|
|
Amended
and Restated Articles of Incorporation of the Company
(incorporated
by reference to our Form S-8 (File No. 333-47986), filed on October 16, 2000)
|
3.2
|
|
Bylaws
of the Company
(incorporated by reference
to our Registration Statement on Form S-1(File No. 333-108307), filed on August 28, 2003
|
3.3
|
|
Amendment
to Amended and Restated Articles of Incorporation of the Company
(incorporated
by reference to our Form 8-K (File No. 001-31972), filed November 18, 2009)
|
3.4
|
|
Amendment
to Amended and Restated Articles of Incorporation
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed on August 9, 2010)
|
3.5
|
|
Amendment
to Amended and Restated Articles of Incorporation of the Company,
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed on April 13, 2011)
|
4.1
|
|
Form
of Warrant to Purchase Common Stock
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed on November 18, 2009)
|
4.2
|
|
Form
of Warrant to Purchase Common Stock
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed on August 9, 2010)
|
4.3
|
|
Form
of Warrant to Purchase Common Stock
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed on April 13, 2011)
|
10.1
|
|
Amended
and Restated Stock Option Plan
(incorporated
by reference to our Registration Statement on Form S-8 (File No. 333-161909), filed on September 14, 2009)
|
10.4
|
|
Series
A Convertible Redeemable Preferred Stock Securities Purchase Agreement, dated November 16, 2009
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed on November 18, 2009)
|
10.5
|
|
Series
A Convertible Redeemable Preferred Stock Registration Rights Agreement, dated November 16, 2009
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed on November 18, 2009)
|
10.6
|
|
Form
of Executive Officer Reimbursement Agreement
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed on November 18, 2009)
|
10.7
|
|
Form
of Director and Officer Indemnification Agreement
(incorporated
by reference to our Form 10-K (File No. 001-31972) filed on March 31, 2010)
|
10.8
|
|
Series
B Convertible Redeemable Preferred Stock Securities Purchase Agreement, dated August 4, 2010
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed on August 9, 2010)
|
10.9
|
|
Series
B Convertible Redeemable Preferred Stock Registration Rights Agreement, dated August 4, 2010
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed on August 9, 2010)
|
10.10
|
|
Form
of Director Reimbursement Agreement
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed on August 9, 2010)
|
10.11
|
|
Form
of Transition Agreement and Release
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed on August 9, 2010)
|
10.12
|
|
2010
Stock Option and Incentive Plan
(incorporated
by reference to our Registration Statement filed on Form S-8 (File No. 333-175737) filed July 22, 2011)
|
10.13
|
|
Securities
Purchase Agreement, dated April 8, 2011, by and among Telkonet, Inc. and the parties listed therein
,
(incorporated by reference to our Form 8-K (File No. 001-31972) filed on April 13, 2011)
|
10.14
|
|
Registration
Rights Agreement, dated April 8, 2011, by and among Telkonet, Inc. and the parties listed therein
,
(incorporated by reference to our Form 8-K (File No. 001-31972) filed on April 13, 2011)
|
*10.15
|
|
Employment Agreement by and between Telkonet, Inc. and Jason L. Tienor, dated as October 1, 2018
|
*10.16
|
|
Employment Agreement by and between Telkonet, Inc. and Jeffrey J. Sobieski, dated as of October 1, 2018
|
*10.17
|
|
Employment
Agreement by and between Telkonet, Inc. and Richard E. Mushrush, dated as of October 1, 2018
|
10.18
|
|
Loan
and Security Agreement, dated September 30, 2014, by and between Telkonet, Inc. and Heritage Bank of Commerce
(incorporated
by reference to our Form 8-K (File No. 001-31972) filed October 2, 2014)
|
10.19
|
|
First
Amendment to Loan and Security Agreement, dated February 17, 2016, by and between Telkonet, Inc. and Heritage Bank of Commerce
(incorporated by reference to our Form 8-K (File
No. 001-31972) filed February 23, 2016)
|
10.20
|
|
Second
Amendment to Loan and Security Agreement, dated October 27, 2016, by and between Telkonet, Inc. and Heritage Bank of Commerce
(incorporated by reference to our Form 8-K (File
No. 001-31972) filed October 28, 2016)
|
10.21
|
|
2010
Amended and Restated Stock Option and Incentive Plan
(amended
and restated effective as of November 17, 2016, incorporated by reference as an exhibit to Form 10-K (File No. 001-31972)
filed April 3, 2017)
|
10.22
|
|
Sixth
Amendment to Loan and Security Agreement, dated October 23, 2017, by and between Telkonet, Inc. and Heritage Bank of Commerce
(incorporated by reference to our Form 8-K (File
No. 001-31972) filed October 26, 2017)
|
10.23
|
|
Seventh Amendment to Loan and Security
Agreement entered into as of February 2, 2018, by and among Telkonet, Inc. and Heritage Bank of Commerce
(incorporated by
reference to our Form 10-Q (File No. 001-31972) filed November 14, 2018)
|
10.24
|
|
Eighth Amendment to Loan and Security Agreement
entered into as of April 5, 2018, by and among Telkonet, Inc. and Heritage Bank of Commerce
(incorporated by
reference to our Form 10-Q (File No. 001-31972) filed November 14, 2018)
|
10.25
|
|
Ninth Amendment to Loan and Security Agreement
entered into as of November 7, 2018, by and among Telkonet, Inc. and Heritage Bank of Commerce
(incorporated by
reference to our Form 10-Q (File No. 001-31972) filed November 14, 2018)
|
10.26
|
|
Tenth Amendment to Loan and Security Agreement
entered into as of February 12, 2019, by and among Telkonet, Inc. and Heritage Bank of Commerce (incorporated by reference
to our Form 8-K
(File No. 001-31972) filed February 14, 2019
|
14
|
|
Code
of Ethics
(incorporated by reference to
our Form 10-KSB (File No. 001-31972), filed on March 30, 2004)
|
21
|
|
Telkonet,
Inc. Subsidiaries
(incorporated by reference
to our Form 10-K (File No. 001-31972) filed March 16, 2007)
|
23
|
|
Consent
of BDO USA, LLP, Independent Registered Public Accounting Firm
|
31.1
|
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jason L. Tienor
|
31.2
|
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Richard E. Mushrush
|
32.1
|
|
Certification
of Jason L. Tienor pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2
|
|
Certification
of Richard E. Mushrush pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
101.INS
|
|
XBRL Instance Document
|
101.SCH
|
|
XBRL Schema Document
|
* Indicates management contract or compensatory
plan or arrangement.
ITEM 16. FORM 10-K SUMMARY.
None.
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
TELKONET, INC.
|
|
|
Dated: April 1, 2019
|
/s/ Jason
L. Tienor
|
|
Jason L. Tienor
Chief Executive Officer
|
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Name
|
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Position
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
/s/ Jason
L. Tienor
|
|
Chief Executive Officer and Director
|
|
April 1, 2019
|
Jason Tienor
|
|
(principal executive
officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Richard
E. Mushrush
|
|
Chief Financial Officer
|
|
April 1, 2019
|
|
|
(principal financial
officer)
|
|
|
|
|
|
|
|
/s/Arthur
E. Byrnes
|
|
Chairman of the Board
|
|
April 1, 2019
|
Arthur E. Byrnes
|
|
|
|
|
|
|
|
|
|
/s/ Tim
S. Ledwick
|
|
Director
|
|
April 1, 2019
|
Tim S. Ledwick
|
|
|
|
|
|
|
|
|
|
/s/ Peter T. Kross
|
|
Director
|
|
April 1, 2019
|
Peter T. Kross
|
|
|
|
|
|
|
|
|
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/s/ Leland
D. Blatt
|
|
Director
|
|
April 1, 2019
|
Leland D. Blatt
|
|
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
FORMING A PART OF ANNUAL REPORT
PURSUANT TO THE SECURITIES EXCHANGE
ACT OF 1934
TELKONET, INC.
TELKONET, INC.
Index to Financial Statements
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Telkonet, Inc.
Waukesha, Wisconsin
Opinion on the Consolidated Financial
Statements
We have audited the accompanying consolidated
balance sheets of Telkonet, Inc. (the “Company”) and subsidiaries as of December 31, 2018 and 2017, the related consolidated
statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the
results of their operations and their cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the consolidated
financial statements, the Company has suffered recurring losses from operations, has negative operating cash flow and is dependent
upon its ability to generate profitable operations in the future and/or obtain additional financing to meet its obligations and
repay its liabilities arising from normal business operations when they come due that raise substantial doubt about its ability
to continue as a going concern. Management’s plans in regard to these matters are also described in Note A. The consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Change in Accounting Principles –
Related to Revenue Recognition
As discussed in Notes A, B and C to the
consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in
the year 2018 due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is
not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor
since 2013.
Milwaukee, Wisconsin
April 1, 2019
TELKONET, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2018 AND 2017
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,678,891
|
|
|
$
|
8,385,595
|
|
Restricted cash on deposit
|
|
|
–
|
|
|
|
810,000
|
|
Accounts receivable, net
|
|
|
1,081,291
|
|
|
|
1,610,286
|
|
Inventories
|
|
|
1,790,919
|
|
|
|
1,259,536
|
|
Contract assets
|
|
|
314,749
|
|
|
|
–
|
|
Prepaid expenses
|
|
|
577,386
|
|
|
|
143,566
|
|
Income taxes receivable
|
|
|
19,695
|
|
|
|
17,300
|
|
Total current assets
|
|
|
8,462,931
|
|
|
|
12,226,283
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
247,289
|
|
|
|
304,170
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
17,130
|
|
|
|
17,130
|
|
Total other assets
|
|
|
17,130
|
|
|
|
17,130
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,727,350
|
|
|
$
|
12,547,583
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
408,045
|
|
|
$
|
978,207
|
|
Accrued liabilities
|
|
|
656,611
|
|
|
|
668,814
|
|
Line of credit
|
|
|
121,474
|
|
|
|
682,211
|
|
Contract liabilities – current
|
|
|
1,070,502
|
|
|
|
–
|
|
Deferred revenue – current
|
|
|
–
|
|
|
|
292,106
|
|
Customer deposits
|
|
|
–
|
|
|
|
124,380
|
|
Total current liabilities
|
|
|
2,256,632
|
|
|
|
2,745,718
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Contract liabilities – long term
|
|
|
162,121
|
|
|
|
–
|
|
Deferred revenue - long term
|
|
|
–
|
|
|
|
219,960
|
|
Deferred lease liability - long term
|
|
|
71,877
|
|
|
|
48,839
|
|
Total long-term liabilities
|
|
|
233,998
|
|
|
|
268,799
|
|
Total Liabilities
|
|
$
|
2,490,630
|
|
|
$
|
3,014,517
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Series A, par value $.001 per share; 215 shares issued, 185 shares outstanding at December 31, 2018 and 2017, preference
in liquidation of $1,600,168 and $1,526,141 as of December 31, 2018 and 2017, respectively
|
|
|
1,340,566
|
|
|
|
1,340,566
|
|
Series B, par value $.001 per share; 538 shares issued, 52 shares outstanding at December 31, 2018 and 2017, preference
in liquidation of $435,081 and $414,258 as of December 31, 2018 and 2017, respectively
|
|
|
362,059
|
|
|
|
362,059
|
|
Common stock, par value $.001 per share; 190,000,000 shares authorized; 134,793,211 and 133,695,111
shares issued and outstanding at December 31, 2018 and 2017, respectively
|
|
|
134,792
|
|
|
|
133,695
|
|
Additional paid-in-capital
|
|
|
127,570,709
|
|
|
|
127,421,402
|
|
Accumulated deficit
|
|
|
(123,171,406
|
)
|
|
|
(119,724,656
|
)
|
Total stockholders’ equity
|
|
|
6,236,720
|
|
|
|
9,533,066
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
8,727,350
|
|
|
$
|
12,547,583
|
|
See accompanying notes to consolidated
financial statements
TELKONET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
|
|
2018
|
|
|
2017
|
|
Revenues, net:
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
7,616,415
|
|
|
$
|
7,798,680
|
|
Recurring
|
|
|
815,564
|
|
|
|
483,889
|
|
Total Net Revenues
|
|
|
8,431,979
|
|
|
|
8,282,569
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
Product
|
|
|
4,392,643
|
|
|
|
4,261,100
|
|
Recurring
|
|
|
269,443
|
|
|
|
176,131
|
|
Total Cost of Sales
|
|
|
4,662,086
|
|
|
|
4,437,231
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
3,769,893
|
|
|
|
3,845,338
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,879,676
|
|
|
|
1,770,597
|
|
Selling, general and administrative
|
|
|
4,843,859
|
|
|
|
5,512,925
|
|
Depreciation and amortization
|
|
|
67,107
|
|
|
|
51,229
|
|
Total Operating Expenses
|
|
|
6,790,642
|
|
|
|
7,334,751
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(3,020,749
|
)
|
|
|
(3,489,413
|
)
|
|
|
|
|
|
|
|
|
|
Other Income:
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
13,622
|
|
|
|
2,434
|
|
Total Other Income
|
|
|
13,622
|
|
|
|
2,434
|
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations before Provision for Income Taxes
|
|
|
(3,007,127
|
)
|
|
|
(3,486,979
|
)
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
|
9,623
|
|
|
|
9,762
|
|
Net loss from continuing operations
|
|
|
(3,016,750
|
)
|
|
|
(3,496,741
|
)
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
Gain from sale of discontinued operations (net of tax)
|
|
|
–
|
|
|
|
6,630,244
|
|
Income from Discontinued Operations (net of tax)
|
|
|
–
|
|
|
|
612,875
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(3,016,750
|
)
|
|
$
|
3,746,378
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic - continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
Basic - discontinued operations
|
|
$
|
0.00
|
|
|
$
|
0.05
|
|
Basic - net income (loss) attributable to common stockholders
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Diluted - continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
Diluted - discontinued operations
|
|
$
|
0.00
|
|
|
$
|
0.05
|
|
Diluted - net income (loss) attributable to common stockholders
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding used in computing basic net loss per share
|
|
|
134,055,098
|
|
|
|
133,116,491
|
|
Weighted Average Common Shares Outstanding used in computing diluted net loss per share
|
|
|
134,055,098
|
|
|
|
133,116,491
|
|
See accompanying notes to consolidated
financial statements
TELKONET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
|
|
Series A Preferred Stock
|
|
|
Series A Preferred Stock
|
|
|
Series B
Preferred
Stock
|
|
|
Series B
Preferred
Stock
|
|
|
Common
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance at January 1, 2017
|
|
|
185
|
|
|
$
|
1,340,566
|
|
|
|
52
|
|
|
$
|
362,059
|
|
|
|
132,744,475
|
|
|
$
|
132,774
|
|
|
$
|
126,955,435
|
|
|
$
|
(123,471,034
|
)
|
|
$
|
5,319,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to directors at $0.15 per share
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
920,636
|
|
|
|
921
|
|
|
|
143,079
|
|
|
|
–
|
|
|
|
144,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense related to
employee stock options
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
322,888
|
|
|
|
–
|
|
|
|
322,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,746,378
|
|
|
|
3,746,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
185
|
|
|
$
|
1,340,566
|
|
|
|
52
|
|
|
$
|
362,059
|
|
|
|
133,695,111
|
|
|
$
|
133,695
|
|
|
$
|
127,421,402
|
|
|
$
|
(119,724,656
|
)
|
|
$
|
9,533,066
|
|
See accompanying notes to the consolidated
financial statements
TELKONET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
|
|
Series
A Preferred Stock
|
|
|
Series
A Preferred Stock
|
|
|
Series
B
Preferred
Stock
|
|
|
Series
B
Preferred
Stock
|
|
|
Common
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance
at January 1, 2018
|
|
|
185
|
|
|
$
|
1,340,566
|
|
|
|
52
|
|
|
$
|
362,059
|
|
|
|
133,695,111
|
|
|
$
|
133,695
|
|
|
$
|
127,421,402
|
|
|
$
|
(119,724,656
|
)
|
|
$
|
9,533,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2018, Cumulative effect of a change in accounting principle related to ASC 606, net of tax
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(430,000
|
)
|
|
|
(430,000
|
)
|
Shares
issued to directors
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,098,100
|
|
|
|
1,097
|
|
|
|
142,903
|
|
|
|
–
|
|
|
|
144,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense related to employee stock options
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
6,404
|
|
|
|
–
|
|
|
|
6,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,016,750
|
)
|
|
|
(3,016,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
|
|
185
|
|
|
$
|
1,340,566
|
|
|
|
52
|
|
|
$
|
362,059
|
|
|
|
134,793,211
|
|
|
$
|
134,792
|
|
|
$
|
127,570,709
|
|
|
$
|
(123,171,406
|
)
|
|
$
|
6,236,720
|
|
See accompanying notes to the consolidated
financial statements
TELKONET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
|
|
|
2018
|
|
|
|
2017
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,016,750
|
)
|
|
$
|
3,746,378
|
|
Less: Net income from discontinued operations
|
|
|
–
|
|
|
|
(612,875
|
)
|
Gain on sale of discontinued operations
|
|
|
–
|
|
|
|
(6,630,244
|
)
|
Net loss from continuing operations
|
|
|
(3,016,750
|
)
|
|
|
(3,496,741
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) from continuing operations to cash used in operating activities of continuing operations:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
6,404
|
|
|
|
322,888
|
|
Stock issued to directors as compensation
|
|
|
144,000
|
|
|
|
144,000
|
|
Depreciation and amortization
|
|
|
67,107
|
|
|
|
51,229
|
|
Provision for doubtful accounts, net of recoveries
|
|
|
55,152
|
|
|
|
35,187
|
|
Reserve for inventory obsolescence
|
|
|
(130,749
|
)
|
|
|
111,400
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
473,845
|
|
|
|
(241,701
|
)
|
Inventories
|
|
|
(400,637
|
)
|
|
|
(593,734
|
)
|
Prepaid expenses and other current assets
|
|
|
(433,820
|
)
|
|
|
61,762
|
|
Deposits and other long term assets
|
|
|
–
|
|
|
|
(17,130
|
)
|
Accounts payable
|
|
|
(570,162
|
)
|
|
|
212,590
|
|
Accrued liabilities and expenses
|
|
|
(12,203
|
)
|
|
|
(256,767
|
)
|
Contract liability
|
|
|
453,623
|
|
|
|
–
|
|
Deferred revenue
|
|
|
(512,066
|
)
|
|
|
206,852
|
|
Related party payable
|
|
|
–
|
|
|
|
(97,127
|
)
|
Customer deposits
|
|
|
(124,380
|
)
|
|
|
(41,450
|
)
|
Contract assets
|
|
|
34,251
|
|
|
|
–
|
|
Income taxes receivable
|
|
|
(2,395
|
)
|
|
|
(17,300
|
)
|
Deferred lease liability
|
|
|
23,038
|
|
|
|
21,136
|
|
Net Cash Used In Operating Activities of Continuing Operations
|
|
|
(3,945,742
|
)
|
|
|
(3,594,906
|
)
|
Net Cash Provided By Operating Activities of Discontinued Operations
|
|
|
–
|
|
|
|
517,242
|
|
Net Cash Used In Operating Activities
|
|
|
(3,945,742
|
)
|
|
|
(3,077,664
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(10,225
|
)
|
|
|
(211,492
|
)
|
Net proceeds from sale of subsidiary
|
|
|
–
|
|
|
|
12,072,811
|
|
Net Cash (Used In) Provided By Investing Activities of Continuing Operations
|
|
|
(10,225
|
)
|
|
|
11,861,319
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from line of credit
|
|
|
3,720,000
|
|
|
|
4,373,600
|
|
Payments on line of credit
|
|
|
(4,280,737
|
)
|
|
|
(4,753,518
|
)
|
Net Cash Used In Financing Activities of Continuing Operations
|
|
|
(560,737
|
)
|
|
|
(379,918
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(4,516,704
|
)
|
|
|
8,403,737
|
|
Cash, cash equivalents and restricted cash at the beginning of the period
|
|
|
9,195,595
|
|
|
|
791,858
|
|
Cash, cash equivalents and restricted cash at the end of the period
|
|
$
|
4,678,891
|
|
|
$
|
9,195,595
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,678,891
|
|
|
$
|
8,385,595
|
|
Restricted cash
|
|
|
–
|
|
|
|
810,000
|
|
Total cash, cash equivalents, and restricted cash
|
|
$
|
4,678,891
|
|
|
$
|
9,195,595
|
|
See accompanying notes to consolidated
financial statements
TELKONET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
|
|
2018
|
|
|
2017
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash transactions:
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
32,662
|
|
|
$
|
17,173
|
|
Cash paid during the year for income taxes, net of refunds
|
|
|
12,410
|
|
|
|
139,823
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Issuance of stock to directors
|
|
$
|
144,000
|
|
|
$
|
144,000
|
|
See accompanying notes to consolidated
financial statements
TELKONET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE A – BASIS OF PRESENTATION
AND SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting
policies applied in the preparation of the accompanying consolidated financial statements follows.
Business and Basis of Presentation
Telkonet, Inc. (the “Company”,
“Telkonet”), formed in 1999 and incorporated under the laws of the state of Utah, is the creator of the EcoSmart Platform
of intelligent automation solutions designed to optimize energy efficiency, comfort and analytics in support of the emerging Internet
of Things (“IoT”).
In 2007, the Company acquired substantially
all of the assets of Smart Systems International (“SSI”), which was a provider of energy management products and solutions
to customers in the United States and Canada and the precursor to the Company’s EcoSmart platform. The EcoSmart platform
provides comprehensive savings, management reporting, analytics and virtual engineering of a customer’s portfolio and/or
property’s room-by-room energy consumption. Telkonet has deployed more than a half million intelligent devices worldwide
in properties within the hospitality, military, educational, healthcare and other commercial markets. The EcoSmart platform is
recognized as a solution for reducing energy consumption, operational costs and carbon footprints, and eliminating the need for
new energy generation in these marketplaces – all whilst improving occupant comfort and convenience.
On March 28, 2017, the Company sold substantially
all of the assets of its wholly-owned subsidiary, EthoStream, LLC. Refer to Note P for further details.
The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Telkonet Communications, Inc., and EthoStream, LLC. The
accounts of EthoStream, LLC have been classified as discontinued operations on the consolidated statement of operations and the
consolidated statement of cash flows for the year ended December 31, 2017. The Company deconsolidated EthoStream, LLC on March
29, 2017, when the Company had sold its controlling financial interest in this subsidiary, refer to Note P for further discussion
on discontinued operations and the sale of EthoStream, LLC. All significant intercompany balances and transactions have been eliminated
in consolidation. We currently operate in a single reportable business segment.
Unless otherwise noted, all financial
information in the consolidated financial statement footnotes reflect the Company’s results from continuing operations.
Going Concern and Management’s
Plan
The accompanying financial statements have
been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities
in the normal course of business for the foreseeable future and, thus, do not include any adjustments relating to the recoverability
and classification of assets and liabilities that may be necessary if the Company is unable to continue as a going concern.
Since inception through December 31, 2018,
we have incurred cumulative losses of $123,171,406 and have never generated enough funds through operations to support our business.
For the year ended December 31, 2018, we had an operating cash flow deficit of $3,945,742 from continuing operations. The Company’s
ability to continue as a going concern is dependent upon generating profitable operations in the future and obtaining the necessary
financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. There can
be no assurance that the Company will be able to secure such financing at commercially reasonable terms, if at all. If cash resources
become insufficient to meet the Company’s ongoing obligations, the Company will be required to scale back or discontinue
portions of its operations or discontinue operations entirely, whereby, the Company’s shareholders may lose some or all of
their investment.
We have not identified, and cannot be certain
we will be able to identify, a course of action that guarantees the achievement of profitable operations in the foreseeable future.
In June 2018, the Company’s Board engaged an investment bank to strategic alternatives to maximize shareholder value, including
but not limited to, a sale of the Company, an investment in the Company, a merger or other business combination, a sale of all
or substantially all assets or a strategic joint venture. At April 1, 2019, no definitive alternatives had been identified.
At December 31, 2018, the Company had
approximately $4,678,891 of cash and approximately $500,000 of availability on its credit facility. The Company currently expects
to draw on these cash reserves and utilize the credit facility to finance its near term working capital needs. It expects to continue
to incur operating losses and negative operating cash flows for one year beyond the date of these financial statements. Accordingly,
and in light of the Company’s historic and continuing losses, there is substantial doubt about the Company’s ability
to continue as a going concern.
Concentrations of Credit Risk
Financial instruments and related items,
which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade
receivables. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments
may be in excess of the FDIC insurance limit. The Company has never experienced any losses related to these balances. With respect
to trade receivables, the Company performs ongoing credit evaluations of its customers’ financial conditions and limits
the amount of credit extended when deemed necessary. The Company provides credit to its customers primarily in the United States
in the normal course of business. The Company routinely assesses the financial strength of its customers and, as a consequence,
believes its trade receivables credit risk exposure is limited.
Cash and Cash Equivalents
The Company considers all highly liquid
debt instruments purchased with an original maturity date of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are
uncollateralized customer obligations due under normal trade terms. The Company records allowances for doubtful accounts
based on customer-specific analysis and general matters such as current assessment of past due balances and economic
conditions. The Company writes off accounts receivable when they become uncollectible. The allowance for doubtful
accounts was $65,542 and $22,173 at December 31, 2018 and 2017, respectively. Management identifies a delinquent customer
based upon the delinquent payment status of an outstanding invoice, generally greater than 30 days past due date. The
delinquent account designation does not trigger an accounting transaction until such time the account is deemed
uncollectible. The allowance for doubtful accounts is determined by examining the reserve history and any outstanding
invoices that are over 30 days past due as of the end of the reporting period. Accounts are deemed uncollectible on a
case-by-case basis, at management’s discretion based upon an examination of the communication with the delinquent
customer and payment history. Typically, accounts are only escalated to “uncollectible” status after multiple
attempts at collection have proven unsuccessful.
The allowance for doubtful accounts for
the years ended December 31 are as follows:
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
22,173
|
|
|
$
|
34,573
|
|
Provision charged to expense
|
|
|
55,152
|
|
|
|
35,187
|
|
Deductions
|
|
|
(11,783
|
)
|
|
|
(47,587
|
)
|
Ending balance
|
|
$
|
65,542
|
|
|
$
|
22,173
|
|
Inventories
Inventories consist of thermostats,
sensors and controllers for Telkonet’s EcoSmart product platform. These inventories are purchased for resale and do
not include manufacturing labor and overhead. Inventories are stated at the lower of cost or net realizable value determined
by the first in, first out (FIFO) method. The Company’s inventories are subject to technological obsolescence. Management
evaluates the net realizable value of its inventories on a quarterly basis and when it is determined that the Company’s
carrying cost of such excess and obsolete inventories cannot be recovered in full, a charge is taken against income for the difference
between the carrying cost and the estimated realizable amount. The reserve for inventory obsolescence balance was approximately
$114,000 and $245,000 for the years ended December 31, 2018, and 2017, respectively.
Property and Equipment
In accordance with Accounting Standards
Codification ASC 360 “Property Plant and Equipment
”
, property and equipment is stated at cost and is depreciated
using the straight-line method over the estimated useful lives of the assets. The estimated useful lives range from 2 to 10 years.
Fair Value of Financial Instruments
The Company accounts for the fair
value of financial instruments in accordance with ASC 820, which defines fair value for accounting purposes, established a
framework for measuring fair value and expanded disclosure requirements regarding fair value measurements. Fair value is
defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a
liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in
measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial
assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively
quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair
value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability
and are generally measured at fair value using valuation models that require more judgment. These valuation techniques
involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the
asset, liability or market and the nature of the asset or liability. The Company categorizes financial assets and liabilities
that are recurring, at fair value into a three-level hierarchy in accordance with these provisions.
|
·
|
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities;
|
|
|
|
|
·
|
Level 2: Quoted
prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the
full term of the asset or liability; or
|
|
|
|
|
·
|
Level 3: Prices
or valuation techniques that require inputs that are both significant to the fair value measurement and are unobservable.
|
The Company’s financial instruments
include cash and cash equivalents, restricted cash on deposit, accounts receivable, accounts payable, line of credit, and certain
accrued liabilities. The carrying amounts of these assets and liabilities approximate fair value due to the short maturity of these
instruments (Level 1 instruments), except for the line of credit. The carrying amount of the line of credit approximates fair value
due to the interest rate and terms approximating those available to the Company for similar obligations (Level 2 instruments).
Long-Lived Assets
The Company reviews long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable
in accordance with ASC 360-10. Recoverability is measured by comparison of the carrying amount to the future net cash flows which
the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds their fair value. Based on the assessment for impairment
performed during 2018 and 2017, no impairment was recorded.
Income (Loss) per Common Share
The Company computes earnings per
share under ASC 260-10, “Earnings Per Share”. Basic net income (loss) per common share is computed using the
weighted average shares outstanding. Diluted net income (loss) per common share is computed using the treasury stock method, which
assumes that the proceeds to be received on exercise of outstanding stock options and warrants are used to repurchase shares of
the Company at the average market price of the common shares for the year. Dilutive common stock equivalents consist of shares
issuable upon the exercise of the Company's outstanding stock options and warrants. For the years ended December 31, 2018 and
2017, there were 3,599,793 and 4,626,474 shares of common stock underlying options and warrants excluded due to these instruments
being anti-dilutive, respectively.
Use of Estimates
The preparation of financial statements
in conformity with United States of America (U.S.) generally accepted accounting principles (“GAAP”) requires management
to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Estimates are used when accounting for items and matters such as revenue recognition and allowances
for uncollectible accounts receivable, inventory obsolescence, depreciation and amortization, long-lived assets, taxes and related
valuation allowance, income tax provisions, stock-based compensation, and contingencies. The Company believes that the estimates,
judgments and assumptions are reasonable, based on information available at the time they are made. Actual results may differ
from those estimates.
Income Taxes
The Company accounts for income taxes in
accordance with ASC 740-10 “Income Taxes.” Under this method, deferred income taxes (when required) are provided based
on the difference between the financial reporting and income tax bases of assets and liabilities and net operating losses at the
statutory rates enacted for future periods. The Company has a policy of establishing a valuation allowance when it is more likely
than not that the Company will not realize the benefits of its deferred income tax assets in the future.
The Company adopted ASC 740-10-25, which
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. ASC 740-10-25 also provides guidance on de-recognition, classification, treatment
of interest and penalties, and disclosure of such positions. The Securities and Exchange Commission issued Staff Accounting Bulletin
118 to address uncertainty regarding the application of ASC 740 to the income tax effects of the Tax Cuts and Jobs Act, signed
into law on December 22, 2017. The bulletin provides a measurement period (not to exceed one year from the Tax Act enactment date)
for companies to complete the accounting under ASC 740. To the extent that a company’s accounting for certain income tax
effects is incomplete, but is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
If a company cannot determine a provisional estimate in the financial statements, it should continue to apply ASC 740 on the basis
of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The company was able to
make reasonable estimates of certain effects and, therefore, recorded non-material provisional adjustments.
The revaluation of the net deferred tax
assets resulted in an increase to tax expense of $12.72 million. This was offset by the revaluation of the valuation allowance
of $13.71 million. The sale of EthoStream generated income, resulting in an increase to tax expense of $1.067 million. Tax
credits generated during the year resulted in a tax benefit of $.07 million.
The provision for income taxes was $.001
million for the year ended December 31, 2018, relatively unchanged from the prior year amount of $.001 million. The effective income
tax rate was 0.3% for the year ended December 31, 2018 similarly to 0.3% for the prior year. On December 22, 2017, the U.S. government
enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), which effectively
lower the federal tax rate from 35% to 21%. For the year ended December 31, 2018, the Company has recorded all known and estimable
impacts of the Tax Act that are effective for 2018.
Revenue from Contracts with Customers
Accounting Standards Codification Topic
606, Revenue from Contracts with Customers (“ASC 606, the Standard”) supersedes nearly all legacy revenue recognition
guidance. ASC 606, the Standard outlines a comprehensive five-step revenue recognition model based on the principle that an entity
should recognize revenue based on when it satisfies its performance obligations by transferring control of promised goods or services
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for said goods or services.
Identify the customer contracts
The Company accounts for a customer contract
under ASC 606 when the contract is legally enforceable. A contract is legally enforceable when all of the following criteria are
met: (1) the contract has been approved by the Company and the customer and both parties are committed to perform their respective
obligations, (2) the Company can identify each party’s rights regarding goods or services transferred, (3) the Company can
identify payment terms for goods or services transferred, (4) the contract has commercial substance, and (5) collectability of
all the consideration to which the Company is entitled in exchange for the goods or services transferred is probable.
A contract does not exist if each party
to the contract has the unilateral right to terminate a wholly unperformed contract without compensating the other party (or parties).
Nearly all of the Company’s contracts do not contain such mutual termination rights for convenience. All contracts are in
written form.
Identify the performance obligations
The Company will enter into product only
contracts that contain a single performance obligation related to the transfer of EcoSmart products to a customer.
The Company will also enter into certain
customer contracts that encompass product and installation services, referred to as “turnkey” solutions. These contracts
ultimately provide the customer with a solution that enhances the functionality of the customer’s existing equipment. For
this reason, the Company has determined that the product and installation services are not separately identifiable performance
obligations, but in essence represent one, combined performance obligation (“turnkey”).
The Company also offers technical
phone support services to customers. This service is considered a separate performance obligation.
Determine the transaction price
The Company generally enters into contracts
containing fixed prices. It is not customary for the Company to include contract terms that would result in variable consideration.
In the rare situation that a contract does include this type of provision, it is not expected to result in a material adjustment
to the transaction price. The Company regularly extends pricing discounts; however, they are negotiated up front and adjust the
fixed transaction price set out in the contract.
Customer contracts will typically contain
upfront deposits that will be applied against future invoices, as well as customer retainage. The intent of any required deposit
or retainage is to ensure that the obligations of either party are honored and follow customary industry practices. In addition,
the Company will typically be paid in advance at the beginning of any support contracts, consistent with industry practices. None
of these payment provisions are intended to represent significant implicit financing. The Company’s standard payment terms
are thirty days from invoice date. Products are fully refundable when returned in their original packaging without damage or defacing
less a restocking fee. Historical returns have shown to be immaterial. The Company offers a standard one-year assurance warranty.
However customers can purchase an extended warranty. Under the new standard, extended warranties are accounted for as a service
warranty, requiring the revenue to be recognized over the extended service periods. Contracts involving an extended warranty are
immaterial and will continue to be combined with support revenue and recognized on a straight-line basis over the support revenue
term.
Allocate the transaction price to the performance obligations
Revenues from customer contracts are allocated
to the separate performance obligations based on their relative stand-alone selling price (“SSP”) at contract inception.
The SSP is the price at which the Company would sell a promised good or service separately. The best evidence of an SSP is the
observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar
customers. However, turnkey solutions are sold for a broad range of amounts resulting from, but not limited to, tiered discounting
for value added resellers (“VAR”) based upon committed volumes and other economic factors. Due to the high variability
of our pricing, the Company cannot establish a reliable SSP using observable data. Accordingly, the Company uses the residual approach
to allocate the transaction price to performance obligations related to its turnkey solutions. When support services are not included
within the turnkey solution, the residual method is not utilized and no allocation of the transaction price to the performance
obligation is necessary.
All support service agreements, whether
single or multi-year terms, automatically renew for one-year terms at a suggested retail price (“SRP”). Support service
renewals are consistently priced and therefore would support the use of SRP as the best estimate of an SSP for such performance
obligations.
Revenue Recognition
The Company recognizes revenues from product
only sales at a point in time, when control over the product has transferred to the customer. As the Company’s principal
terms of sale are FOB shipping point, the Company primarily transfers control and records revenue for product only sales upon shipment.
A typical turnkey project involves the
installation and integration of 200-300 rooms in a customer-controlled facility and usually takes sixty days to complete. Since
control over goods and services transfers to a customer once a room is installed, the Company recognizes revenue for turnkey solutions
over time. The Company uses an outputs measure based on the number of rooms installed to recognize revenues from turnkey solutions.
Revenues from support services are recognized
over time, in even daily increments over the term of the contract, and are presented as “Recurring Revenue” in the
Statement of Operations.
Contract liabilities include deferrals
for the monthly support service fees. Long-term contract liabilities represent support service fees that will be recognized as
revenue after December 31, 2019.
Contract Fulfillment Cost
The Company recognizes related costs of
the contract over time in relation to the revenue recognition. Costs included within the projects relate to the cost of material,
direct labor and costs of outside services utilized to complete projects. . These are presented as “Contract assets” in the consolidated balance sheets.
Transition
The Company adopted ASC 606 using a modified
retrospective approach to all contracts not completed as of January 1, 2018. Results for reporting periods beginning January 1,
2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with
the Company’s historic accounting under Topic 605, Revenue Recognition. The Company recorded a net decrease to beginning
retained earnings of $0.43 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The impact to beginning
retained earnings was primarily driven by the deferral of revenue for unfulfilled performance obligations related to the Company’s
turnkey solutions.
Sales Taxes
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.
Guarantees and Product Warranties
The Company records a liability for potential
warranty claims in cost of sales at the time of sale. The amount of the liability is based on the trend in the historical ratio
of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and
other factors. The products sold are generally covered by a warranty for a period of one year. In the event the Company determines
that its current or future product repair and replacement costs exceed its estimates, an adjustment to these reserves would be
charged to earnings in the period such determination is made. For the years ended December 31, 2018 and 2017, the Company experienced
returns of approximately 1% to 3% of material’s included in cost of sales. As of December 31, 2018 and 2017, the Company
recorded warranty liabilities in the amount of $46,103 and $59,892, respectively, using this experience factor range.
Product warranties for the years ended
December 31 is as follows:
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
59,892
|
|
|
$
|
95,540
|
|
Warranty claims incurred
|
|
|
(28,000
|
)
|
|
|
(84,087
|
)
|
Provision charged to expense
|
|
|
14,211
|
|
|
|
48,439
|
|
Ending balance
|
|
$
|
46,103
|
|
|
$
|
59,892
|
|
Advertising
The Company follows the policy of charging
the costs of advertising to expenses as incurred. The Company incurred $108,632 and $33,520 in advertising costs during the years
ended December 31, 2018 and 2017, respectively.
Research and Development
The Company accounts for research and
development costs in accordance with the ASC 730-10, “Research and Development”. Under ASC 730-10, all research and
development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as
incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone
results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed
in the period incurred. Total expenditures on research and product development for 2018 and 2017 were $1,879,676 and $1,770,597,
respectively.
Stock-Based Compensation
The Company accounts for stock-based awards
in accordance with ASC 718-10, “Share-Based Compensation”, which requires a fair value measurement and recognition
of compensation expense for all share-based payment awards made to the Company’s employees and directors, including employee
stock options and restricted stock awards. The Company estimates the fair value of stock options granted using the Black-Scholes
valuation model. This model requires the Company to make estimates and assumptions including, among other things, estimates regarding
the length of time an employee will hold vested stock options before exercising them, the estimated volatility of the Company’s
common stock price and the number of options that will be forfeited prior to vesting. The fair value is then amortized on a straight-line
basis over the requisite service periods of the awards, which is generally the vesting period. Changes in these estimates and
assumptions can materially affect the determination of the fair value of stock-based compensation and consequently, the related
amount recognized in the Company’s consolidated statements of operations.
The expected term of the options represents
the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the
contractual terms, vesting schedules and expectations of future employee behavior. For 2018 and prior years, expected stock price
volatility is based on the historical volatility of the Company’s stock for the related expected term.
Stock-based compensation expense in connection
with options granted to employees for the years ended December 31, 2018 and 2017 was $6,405 and $322,888, respectively.
Deferred Lease Liability
Rent expense is recorded on a straight-line
basis over the term of the lease. Rent escalations and rent abatement periods during the term of the lease create a deferred lease
liability which represents the excess of cumulative rent expense recorded to date over the actual rent paid to date.
Reclassification
Certain prior year amounts have been reclassified
to conform to the current year presentation in the consolidated financial statements and accompanying notes to the consolidated
financial statements.
NOTE B – NEW ACCOUNTING
PRONOUNCEMENTS
In June 2016, the FASB issued ASU No.
2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU
2016-13 provides guidance for estimating credit losses on certain types of financial instruments, including trade receivables,
by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations
of historical information, current information and reasonable and supportable forecasts. ASU 2016-13 also amends the accounting
for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The guidance
is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance
requires a modified retrospective transition method and early adoption is permitted. The Company does not expect the adoption
of ASU 2016-13 to have a material impact on its consolidated financial statements.
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU 2016-02, Leases (“ASU 2016-02”), subsequently amended in 2018 by ASU
2018-10, ASU 2018-11 and ASU 2018-20 and codified in ASC 842, Leases (“ASC 842”). ASC 842 is effective for annual
periods beginning after December 15, 2018 and interim periods thereafter. Earlier application is permitted, however the Company
will not do so. ASC 842 supersedes current lease guidance in ASC 840 and requires a lessee to recognize a right-of-use asset and
a corresponding lease liability for substantially all leases. The lease liability will be equal to the present value of the remaining
lease payments while the right-of-use asset will be similarly calculated and then adjusted for initial direct costs. In addition,
ASC 842 expands the disclosure requirements to increase the transparency and comparability of the amount, timing and uncertainty
of cash flows arising from leases.
We will elect available practical expedients
permitted under the guidance, which among other items, allow the Company to carry forward its historical lease classification
and not reassess leases for the definition of lease under the new standard. Upon the adoption of ASC 842, we do not expect to
record a right-of-use asset and related lease liability for leases with an initial term of 12 months or less and we plan to account
for lease and non-lease components as a single lease component.
ASU 2016-02 may be applied using either
an optional alternative approach, under which all years included in the financial statements will be presented under the revised
guidance, a modified retrospective approach, under which financial statements will be prepared under the revised guidance for
the year of adoption, but not for prior years, or a new transition alternative approach, under which the standard is adopted and
measured from the first date of the fiscal year under adoption, in this case January 1, 2019. We adopted the new transition alternative
approach, where entities will measure current leases from date of adoption, January 1, 2019. Initial direct costs are to be recognized
as a cumulative catch-up adjustment to the opening balance of retained earnings on January 1, 2019. The Company did not incur
any initial direct costs upon the initial assessment of leases and thus will not be require a cumulative catch-up adjustment.
We expect to recognize additional lease
assets and liabilities of approximately $1.0 million and $1.1 million, respectively, to reflect the present value of remaining
lease payments under existing leasing arrangements. The cumulative impact of adopting ASC 842 is based on the Company’s best
estimates at the time of the preparation of the consolidated financial statements. Our conclusions are preliminary and subject
to change as we finalize our analysis. Changes in our lease population or changes in incremental borrowing rates may alter these
estimates. We will expand our consolidated financial statement disclosure upon adoption of the new standard. We do not expect significant
changes to our business processes, systems, or internal controls as a result of implementing the standard.
Accounting Standards Recently Adopted
Effective January 1, 2018, the Company
has adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606, the Standard”),
which supersedes nearly all legacy revenue recognition guidance. ASC 606 outlines a comprehensive five-step revenue recognition
model based on the principle that an entity should recognize revenue based on when an it satisfies its performance obligations
by transferring control of promised goods or services in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for said goods or services. Refer to Note C for further consideration of the recently adopted standard.
In November 2016, the Financial Accounting
Standards Board issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, (“Update 2016-18”). Update
2016-18 provides guidance on the classification of restricted cash in the statement of cash flows. The amendments are effective
for interim and annual periods beginning after December 15, 2017. The amendments in Update 2016-18 should be adopted on a retrospective
basis. The adoption of this amendment increased the beginning cash balance by $810,000 as of January 1, 2018 in our statement
of cash flows, due to the reclassification of $810,000 of restricted cash into the cash and cash equivalents category.
Management has evaluated other recently
issued accounting pronouncements and does not believe any will have a significant impact on our consolidated financial statements
and related disclosures.
NOTE C– REVENUE
The following table presents the Company’s
product and recurring revenues disaggregated by industry for the year ended December 31, 2018.
|
|
|
|
Hospitality
|
|
|
Education
|
|
|
Multiple Dwelling Units
|
|
|
Government
|
|
|
Total
|
|
|
Product
|
|
|
$
|
6,410,615
|
|
|
$
|
652,019
|
|
|
$
|
472,462
|
|
|
$
|
81,319
|
|
|
$
|
7,616,415
|
|
|
Recurring
|
|
|
|
668,039
|
|
|
|
128,872
|
|
|
|
18,653
|
|
|
|
–
|
|
|
|
815,564
|
|
|
|
|
|
$
|
7,078,654
|
|
|
$
|
780,891
|
|
|
$
|
491,115
|
|
|
$
|
81,319
|
|
|
$
|
8,431,979
|
|
Sales taxes and other usage-based taxes
are excluded from revenues.
Contract assets
Contracts are billed in accordance with
the terms and conditions, either at periodic intervals or upon substantial completion. This can result in billing occurring subsequent
to revenue recognition, resulting in contract assets. Contract assets are presented as current assets in the Condensed Consolidated
Balance Sheet. The balance of contract assets as of December 31, 2018 and at the date of adoption of ASC 606 was $0.31 million
and $0.35 million, respectively. There were approximately $0.03 million of costs incurred to fulfill a contract in the closing
balance of contract assets.
Contract liabilities
Contracts are billed in accordance with
the terms and conditions, either at periodic intervals or upon substantial completion. Often, the Company will require customers
to pay a deposit upon contract signing that will be applied against work performed or products shipped. In addition, the Company
will often invoice the full term of support at the start of the support period. Billings that occur prior to revenue recognition
result in contract liabilities. As of December 31, 2018 and at the date of adoption of ASC 606, contract liabilities were $1.23
million and $0.78 million, respectively. The change in the contract liability balance during the 12 month period ended December
31, 2018 is the result of cash payments received and billing in advance of satisfying performance obligations, previously unrecognized
cost of goods sold proportionate with the related percentage of completion, and customer deposits.
Contract costs
Costs to fulfill a turnkey contract primarily
relate to the materials cost and direct labor and are recognized proportionately as the performance obligation is satisfied. The
Company will defer cost to fulfill a contract when materials have shipped (and control over the materials has transferred to the
customer), but an insignificant amount of rooms have been installed. The Company will recognize any deferred costs in proportion
to revenues recognized from the related turnkey contract. The Company does not expect deferred contract costs to be long-lived
since a typical turnkey project takes sixty days to complete. Deferred contract costs are generally presented as other current
assets in the condensed consolidated balance sheets.
The Company incurs incremental costs to
obtain a contract in the form of sales commissions. These costs, whether related to performance obligations that extend beyond
twelve months or not, are immaterial and will continue to be recognized in the period incurred within selling, general and administrative
expenses.
The tables below present the impacts of
our adoption of the new revenue standard on our income statement and balance sheet.
|
|
For
the 12 Months Ended
December
31, 2018
|
|
|
|
As Reported
|
|
|
Pro-Forma as if Previous Accounting
Guidance was in Effect
(Unaudited)
|
|
|
Effect
of
Change
Higher/(Lower)
(Unaudited)
|
|
Income Statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
8,431,979
|
|
|
$
|
9,254,508
|
|
|
$
|
(822,529
|
)
|
Cost of Goods Sold
|
|
|
4,662,086
|
|
|
|
4,878,490
|
|
|
|
(216,403
|
)
|
Net loss
|
|
$
|
(3,016,750
|
)
|
|
$
|
(2,410,624
|
)
|
|
$
|
606,126
|
|
|
|
As
of December 31, 2018
|
|
|
|
As Reported
|
|
|
Pro-Forma as if Previous Accounting
Guidance was in Effect
(Unaudited)
|
|
|
Effect
of
Change
Higher/(Lower)
(Unaudited)
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Assets
|
|
$
|
314,749
|
|
|
|
–
|
|
|
$
|
314,749
|
|
Inventories
|
|
|
1,790,992
|
|
|
|
1,585,124
|
|
|
|
205,798
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Liabilities - ST
|
|
|
1,070,502
|
|
|
|
–
|
|
|
|
1,070,502
|
|
Contract Liabilities - LT
|
|
|
162,121
|
|
|
|
–
|
|
|
|
162,121
|
|
Customer Deposits
|
|
|
–
|
|
|
|
751,801
|
|
|
|
(751,801
|
)
|
Deferred Revenue - Current
|
|
|
–
|
|
|
|
233,122
|
|
|
|
(233,122
|
)
|
Deferred Revenue – Long Term
|
|
|
–
|
|
|
|
162,121
|
|
|
|
(162,121
|
)
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Deficit
|
|
$
|
(123,171,406
|
)
|
|
|
(122,565,280
|
)
|
|
$
|
606,126
|
|
The table below presents the cumulative
effect of the changes made to our consolidated balance sheet as of January 1, 2018 after the adoption of ASU 2014-09, Revenue
from Contracts with Customers (Topic 606).
|
|
December 31, 2017
|
|
|
Transition Adjustments
|
|
|
January 1,
2018
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Assets
|
|
$
|
–
|
|
|
|
349,000
|
|
|
$
|
349,000
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Liabilities
|
|
|
–
|
|
|
|
1,415,446
|
|
|
|
1,415,446
|
|
Customer Deposit
|
|
|
124,380
|
|
|
|
(124,380
|
)
|
|
|
–
|
|
Deferred Revenue – Current
|
|
|
292,106
|
|
|
|
(292,106
|
)
|
|
|
–
|
|
Deferred Revenue – Long Term
|
|
|
219,960
|
|
|
|
(219,960
|
)
|
|
|
–
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Deficit
|
|
$
|
(119,724,656
|
)
|
|
|
(430,000
|
)
|
|
$
|
(120,154,656
|
)
|
Remaining performance obligations
As of December 31, 2018, the aggregate
amount of the transaction price allocated to remaining performance obligations was approximately $1.68 million. Except for support
services, the Company expects to recognize 100% of the remaining performance obligations over the next six months.
NOTE D – ACCOUNTS RECEIVABLE
Components of accounts receivable as of
December 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Accounts receivable
|
|
$
|
1,146,832
|
|
|
$
|
1,632,459
|
|
Allowance for doubtful accounts
|
|
|
(65,542
|
)
|
|
|
(22,173
|
)
|
Accounts receivable, net
|
|
$
|
1,081,291
|
|
|
$
|
1,610,286
|
|
NOTE E – PROPERTY AND EQUIPMENT
The Company’s property and equipment
as of December 31, 2018 and 2017 consists of the following:
|
|
2018
|
|
|
2017
|
|
Development test equipment
|
|
$
|
19,110
|
|
|
$
|
19,110
|
|
Computer software
|
|
|
76,134
|
|
|
|
76,134
|
|
Office equipment
|
|
|
61,367
|
|
|
|
51,142
|
|
Office fixtures and furniture
|
|
|
330,568
|
|
|
|
330,568
|
|
Leasehold improvements
|
|
|
18,016
|
|
|
|
18,016
|
|
Total
|
|
|
505,195
|
|
|
|
494,970
|
|
Accumulated depreciation and amortization
|
|
|
(257,907
|
)
|
|
|
(190,800
|
)
|
Total property and equipment
|
|
$
|
247,289
|
|
|
$
|
304,170
|
|
Depreciation and amortization expense
included as a charge to income was $67,107 and $51,229 for the years ended December 31, 2018 and 2017, respectively.
NOTE F – ACCRUED LIABILITIES AND EXPENSES
Accrued liabilities and expenses as of December 31, 2018 and
2017 are as follows
:
|
|
2018
|
|
|
2017
|
|
Accrued liabilities and expenses
|
|
$
|
325,855
|
|
|
$
|
294,709
|
|
Accrued payroll and payroll taxes
|
|
|
241,253
|
|
|
|
230,931
|
|
Accrued sales taxes, penalties, and interest
|
|
|
43,400
|
|
|
|
83,282
|
|
Product warranties
|
|
|
46,103
|
|
|
|
59,892
|
|
Total accrued liabilities and expenses
|
|
$
|
656,611
|
|
|
$
|
668,814
|
|
NOTE G – DEBT
Revolving Credit Facility
On September 30, 2014, the Company
and its wholly-owned subsidiary, EthoStream, as co-borrowers (collectively, the “Borrowers”), entered into a loan
and security agreement (the “Heritage Bank Loan Agreement”), with Heritage Bank of Commerce, a California state chartered
bank (“Heritage Bank”), governing a new revolving credit facility in a principal amount not to exceed $2,000,000 (the
“Credit Facility”). Following the sale of EthoStream in March of 2017, it was removed as a co-borrower. Availability
of borrowings under the Credit Facility is subject to a borrowing base calculation based on the Company’s eligible accounts
receivable and eligible inventory each multiplied by an applicable advance rate, with an overall limitation tied to the Company’s
eligible accounts receivable. The Heritage Bank Loan Agreement is available for working capital and other general business purposes.
The outstanding principal balance of the Credit Facility bears interest at the Prime Rate plus 3.00%, which was 8.50% at December
31, 2018 and 7.50% at December 31, 2017. On October 9, 2014, as part of the Heritage Bank Loan Agreement, Heritage Bank was granted
a warrant to purchase 250,000 shares of Telkonet common stock, for further information on the accounting for warrants, refer to
Note J. The warrant has an exercise price of $0.20 and expires October 9, 2021. On February 13, 2019, the tenth amendment to the
Credit Facility was executed extending the maturity date to September 30, 2020, unless earlier accelerated under the terms of
the Heritage Bank Loan Agreement.
The Heritage Bank Loan Agreement also
contains financial covenants that place restrictions on, among other things, the incurrence of debt, granting of liens and sale
of assets. The Heritage Bank Loan Agreement also contains financial covenants, including a maximum EBITDA loss covenant, measured
quarterly, a minimum asset coverage ratio, measured monthly, and a minimum unrestricted cash balance of $2 million. During the
year ended December 31, 2018, the Company and Heritage Bank entered into several amendments to the Credit Facility to adjust these
covenant levels. As long as the Company maintains the minimum unrestricted cash balance of $2 million, a violation of the minimum
EBITDA level will not trigger an event of default. A violation of any of these covenants could result in an event of default under
the Heritage Bank Loan Agreement. Upon the occurrence of such an event of default or certain other customary events of defaults,
payment of any outstanding amounts under the Credit Facility may be accelerated and Heritage Bank’s commitment to extend
credit under the Heritage Bank Loan Agreement may be terminated. The Heritage Bank Loan Agreement contains other representations
and warranties, covenants, and other provisions customary to transactions of this nature.
The outstanding balance on the Credit
Facility was $121,474 and $682,211 at December 31, 2018 and 2017 and the remaining available borrowing capacity was approximately
$499,000 and $202,000, respectively. As of December 31, 2018, the Company was in compliance with all financial covenants.
NOTE H – REDEEMABLE PREFERRED
STOCK
Series A
The Company has designated 215 shares
of preferred stock as Series A Preferred Stock (“Series A”). Each share of Series A is convertible, at the option
of the holder thereof, at any time, into shares of the Company’s common stock at a conversion price of $0.363 per share.
On November 16, 2009, the Company sold 215 shares of Series A with attached warrants to purchase an aggregate of 1,628,800 shares
of the Company’s common stock at $0.33 per share. The Series A shares were sold at a price per share of $5,000 and each
Series A share is convertible into approximately 13,774 shares of common stock at a conversion price of $0.363 per share. The
Company received $1,075,000 from the sale of the Series A shares. In prior years, 30 of the preferred shares issued on November
16, 2009 were converted to shares of the Company’s common stock. In a prior year, the redemption feature available to the
Series A holders expired.
Series B
The Company has designated 538 shares
of preferred stock as Series B Preferred Stock (“Series B”). Each share of Series B is convertible, at the option
of the holder thereof, at any time, into shares of the Company’s common stock at a conversion price of $0.13 per share. On
August 4, 2010, the Company sold 267 shares of Series B with attached warrants to purchase an aggregate of 5,134,626 shares of
the Company’s common stock at $0.13 per share. The Series B shares were sold at a price per share of $5,000 and each
Series B share was convertible into approximately 38,461 shares of common stock at a conversion price of $0.13 per share. The
Company received $1,335,000 from the sale of the Series B shares on August 4, 2010. On April 8, 2011, the Company sold
271 additional shares of Series B with attached warrants to purchase an aggregate of 5,211,542 shares of the Company’s common
stock at $0.13 per share. The Series B shares were sold at a price per share of $5,000 and each Series B share was convertible
into approximately 38,461 shares of common stock at a conversion price of $0.13 per share. The Company received $1,355,000 from
the sale of the Series B shares on April 8, 2011. In prior years, 486 of the preferred shares issued on August 4, 2010 and April
8, 2011 were converted to shares of the Company’s common stock. In a prior year, the redemption feature available to the
Series B holders expired.
Preferred stock carries certain preference
rights as detailed in the Company’s Amended Articles of Incorporation related to both the payment of dividends and as to
payments upon liquidation in preference to any other class or series of capital stock of the Company. As of December 31, 2018,
the liquidation preference of the preferred stock is based on the following order: first, Series B with a preference value of
$435,081, which includes cumulative accrued unpaid dividends of $175,081, and second, Series A with a preference value of $1,600,168,
which includes cumulative accrued unpaid dividends of $675,168. As of December 31, 2017, the liquidation preference of the preferred
stock is based on the following order: first, Series B with a preference value of $414,258, which includes cumulative accrued
unpaid dividends of $154,258, and second, Series A with a preference value of $1,526,141, which includes cumulative accrued unpaid
dividends of $601,141.
NOTE I – CAPITAL STOCK
The Company has authorized 15,000,000
shares of preferred stock (designated and undesignated), with a par value of $.001 per share. The Company has designated 215 shares
as Series A preferred stock and 538 shares as Series B preferred stock. At December 31, 2018 and 2017, there were 185 shares of
Series A and 52 shares of Series B outstanding, respectively.
The Company has authorized 190,000,000
shares of common stock with a par value of $.001 per share. As of December 31, 2018 and 2017, the Company had 134,793,211 and
133,695,111 common shares issued and outstanding, respectively.
During the years ended December 31, 2018
and 2017, the Company issued 1,098,100 and 920,636 shares of common stock, respectively to directors for services performed during
2018 and 2017. These shares were valued at $144,000 and $144,000, respectively, which approximated the fair value of the shares
when they were issued.
During the years ended December 31, 2018
and 2017, no warrants were exercised. These warrants were originally granted to shareholders of the April 8, 2011 Series B preferred
stock issuance.
During the years ended December 31, 2018
and 2017, no shares of Series A or B preferred stock were converted to shares of common stock.
NOTE J – STOCK OPTIONS
AND WARRANTS
Stock Options
The Company maintains an equity incentive
plan (the “Plan”). The Plan was established in 2010 as an incentive plan for officers, employees, non-employee directors,
prospective employees and other key persons. The Plan is administered by the Board of Directors or the compensation committee,
which is comprised of not less than two non-employee directors who are independent. A total of 10,000,000 shares of stock were
reserved and available for issuance under the Plan. The exercise price per share for the stock covered by a stock option granted
shall be determined by the administrator at the time of grant but shall not be less than 100 percent of the fair market value
on the date of grant. The term of each stock option shall be fixed by the administrator, but no stock option shall be exercisable
more than ten years after the date the stock option is granted. As of December 31, 2018, there were approximately 1,606,549 shares
remaining for issuance in the Plan.
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 the Plan as of December 31, 2018.
Options Outstanding
|
|
Options Exercisable
|
|
Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted Average
Exercise Price
|
|
$
|
0.01 -
$0.15
|
|
|
|
2,000,000
|
|
|
|
8.01
|
|
|
$
|
0.14
|
|
|
|
2,000,000
|
|
|
$
|
0.14
|
|
$
|
0.16
- $1.00
|
|
|
|
1,349,793
|
|
|
|
4.84
|
|
|
|
0.18
|
|
|
|
1,134,950
|
|
|
|
0.18
|
|
|
|
|
|
|
3,349,793
|
|
|
|
6.73
|
|
|
$
|
0.16
|
|
|
|
3,134,950
|
|
|
$
|
0.16
|
|
Transactions involving stock options issued
to employees are summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted Average Exercise
Price Per Share
|
|
Outstanding at January 1, 2017
|
|
|
2,832,725
|
|
|
$
|
0.18
|
|
Granted
|
|
|
3,000,000
|
|
|
|
0.14
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Cancelled or expired
|
|
|
(1,456,251
|
)
|
|
|
0.17
|
|
Outstanding at December 31, 2017
|
|
|
4,376,474
|
|
|
$
|
0.16
|
|
Granted
|
|
|
67,394
|
|
|
|
0.17
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Cancelled or expired
|
|
|
(1,094,075
|
)
|
|
|
0.14
|
|
Outstanding at December 31, 2018
|
|
|
3,349,793
|
|
|
$
|
0.16
|
|
The expected life of awards granted represents
the period of time that they are expected to be outstanding. The Company determines 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. The Company estimates the volatility of the Company’s common stock based on the calculated historical
volatility of the Company’s common stock using the share price data for the trailing period equal to the expected term prior
to the date of the award. The Company bases the risk-free interest rate used in the Black-Scholes 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. The Company has not paid any cash dividends on the Company’s common stock and does not anticipate paying
any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes
option valuation model. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation
for those awards that are expected to vest. In accordance with ASC 718-10, the Company calculates share-based compensation for
changes to the estimate of expected equity award forfeitures based on actual forfeiture experience.
The following table summarizes the assumptions
used to estimate the fair value of options granted during the years ended December 2018 and 2017, using the Black-Scholes option-pricing
model:
|
|
2018
|
|
|
2017
|
|
Expected life of option (years)
|
|
|
10
|
|
|
|
7
|
|
Risk-free interest rate
|
|
|
2.80%
|
|
|
|
1.22%
|
|
Assumed volatility
|
|
|
87%
|
|
|
|
81%
|
|
Expected dividend rate
|
|
|
0
|
|
|
|
0
|
|
Expected forfeiture rate
|
|
|
65%
|
|
|
|
10%
|
|
The total estimated fair value of the
options granted during the years ended December 31, 2018 and 2017 was $244 and $360,000. The total fair value of underlying shares
related to options that vested during the years ended December 31, 2018 and 2017 was $6,811 and $368,544. Future compensation
expense related to non-vested options at December 31, 2018 was $18,724 and will be recognized over the next 3.0 years. The aggregate
intrinsic value of the vested options was zero as of December 31, 2018 and 2017. Total stock-based compensation expense recognized
in the consolidated statements of operations for the years ended December 31, 2018 and 2017 was $6,404 and $322,888, respectively.
Warrants
The following table summarizes the changes
in warrants outstanding and the related exercise prices for the warrants issued to the debt holder in relation to the revolving
credit facility, see Note G.
|
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
0.20
|
|
|
250,000
|
|
|
3.02
|
|
|
$
|
0.20
|
|
|
250,000
|
|
|
0.20
|
|
Transactions involving warrants are summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted Average Exercise
Price Per Share
|
|
Outstanding at January 1, 2017
|
|
|
300,000
|
|
|
|
0.20
|
|
Issued
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Cancelled or expired
|
|
|
(50,000
|
)
|
|
|
0.18
|
|
Outstanding at December 31, 2017
|
|
|
250,000
|
|
|
$
|
0.20
|
|
Issued
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Cancelled or expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at December 31, 2018
|
|
|
250,000
|
|
|
$
|
0.20
|
|
There were no warrants granted, exercised,
cancelled or forfeited during the year ended December 31, 2018. There were no warrants granted or exercised and 50,000 cancelled
or forfeited during the year ended December 31, 2017.
NOTE K – RELATED PARTY
TRANSACTIONS
During the years ended December 31, 2018
and 2017, the Company agreed to issue common stock in the amount of $144,000 and $144,000 to the Company’s non-employee
directors as compensation for their attendance and participation in the Company’s Board of Director and committee meetings.
NOTE L – INCOME TAXES
On December 22, 2017, the U.S. government
enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act
makes broad and complex changes to the Internal Revenue Code. The Tax Act is generally applicable for tax years beginning after
December 31, 2017, but certain provisions of the Tax Act have an impact upon the Company’s financial statements for 2017,
such as the reduction of the U.S. federal corporate tax rate from 35% to 21%.
The Securities and Exchange Commission
issued Staff Accounting Bulletin 118 to address uncertainty regarding the application of ASC 740 to the income tax effects of the
Tax Cuts and Jobs Act, signed into law on December 22, 2017. The bulletin provides a measurement period (not to exceed one year
from the Tax Act enactment date) for companies to complete the accounting under ASC 740. To the extent that a company’s accounting
for certain income tax effects is incomplete, but is able to determine a reasonable estimate, it must record a provisional estimate
in the financial statements. If a company cannot determine a provisional estimate in the financial statements, it should continue
to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax
Act.
Such measurement period is deemed to end
when all necessary information has been obtained, prepared and analyzed such that a final accounting determination can be concluded,
but in no event should the period extend beyond one year. If a company does not have the necessary information available, prepared
or analyzed for certain income tax effects of the Tax Act, SAB 118 allows a company to report provisional numbers and adjust those
amounts during the measurement period not to extend beyond one year. For the year ended December 31, 2018, the Company has recorded
all known and estimable impacts of the Tax Act that are effective for 2018.
The Company follows ASC 740-10 “Income
Taxes” which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
A reconciliation of tax expense computed at the statutory federal
tax rate on income (loss) from operations before income taxes to the actual income tax (benefit) / expense is as follows:
|
|
2018
|
|
|
2017
|
|
Tax provision (benefits) computed at the statutory rate
|
|
$
|
(631,497
|
)
|
|
$
|
1,000,507
|
|
State taxes
|
|
|
6,874
|
|
|
|
8,419
|
|
Tax credits
|
|
|
–
|
|
|
|
(67,357
|
)
|
Book expenses not deductible for tax purposes
|
|
|
2,882
|
|
|
|
6,782
|
|
Tax Cut and Jobs Act impact
|
|
|
–
|
|
|
|
12,721,278
|
|
Sale of subsidiary
|
|
|
–
|
|
|
|
45,327
|
|
Other(prior period adjustments)
|
|
|
(27,286
|
)
|
|
|
5,750
|
|
|
|
|
(649,027
|
)
|
|
|
13,720,706
|
|
Change in valuation allowance for deferred tax assets
|
|
|
658,650
|
|
|
|
(13,710,944
|
)
|
Income tax expense
|
|
$
|
9,623
|
|
|
$
|
9,762
|
|
Deferred income taxes include the net
tax effects of net operating loss (NOL) carry forwards and the temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's
deferred tax assets are as follows:
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
20,342,559
|
|
|
|
21,077,944
|
|
Intangibles
|
|
|
318,178
|
|
|
|
422,955
|
|
Credits
|
|
|
112,086
|
|
|
|
67,357
|
|
Other
|
|
|
613,202
|
|
|
|
512,796
|
|
Total deferred tax assets
|
|
|
21,386,025
|
|
|
|
22,081,052
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
–
|
|
|
|
–
|
|
Total deferred tax liabilities
|
|
|
–
|
|
|
|
–
|
|
Valuation allowance
|
|
|
(21,386,025
|
)
|
|
|
(22,081,052
|
)
|
Net deferred tax liabilities
|
|
$
|
–
|
|
|
|
–
|
|
A valuation allowance is recorded when
it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization
of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character
in the future and in the appropriate taxing jurisdictions. As of December 31, 2018 and December 31, 2017, the Company’s
valuation allowance, established for the tax benefit that may not be realized, totaled approximately $21,390,000 and $22,080,000,
respectively. The overall decrease in the valuation allowance is related to insignificant fluctuations in the temporary differences
and federal and state net operating losses.
At December 31, 2018 the Company had net
operating loss carryforwards of approximately $90,100,000 and $46,500,000 for federal and state income tax purposes which will
expire at various dates from 2019 through 2038.
The Company’s NOL and tax credit
carryovers may be significantly limited under Section 382 of the Internal Revenue Code (IRC). NOL and tax credit carryovers are
limited under Section 382 when there is a significant “ownership change” as defined in the IRC. During 2005 and in
prior years, the Company may have experienced such ownership changes that could have imposed such limitations.
The limitation imposed by Section 382
would place an annual limitation on the amount of NOL and tax credit carryovers that can be utilized. When the Company completes
the necessary studies, the amount of NOL carryovers available may be reduced significantly. However, since the valuation allowance
fully reserves for all available carryovers, the effect of the reduction would be offset by a reduction in the valuation allowance.
The Company files income tax returns in
the U.S. federal jurisdiction and various state jurisdictions. The Company is generally no longer subject to U.S. federal income
tax examinations by tax authorities for years before 2014 and various states before 2014. Although these years are no longer subject
to examination by the Internal Revenue Service (IRS) and various state taxing authorities, net operating loss carryforwards generated
in those years may still be adjusted upon examination by the IRS or state taxing authorities if they have been or will be used
in a future period.
The Company follows the provisions of
uncertain tax positions as addressed in FASB Accounting Standards Codification 740-10-65-1. The Company recognized no change in
the liability for unrecognized tax benefits. The Company has no tax positions at December 31, 2018 or 2017 for which the ultimate
deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The Company recognizes
interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expense. No such interest
or penalties were recognized during the periods presented. The Company had no accruals for interest and penalties at December
31, 2018 or 2017. The Company’s utilization of any net operating loss carryforwards may be unlikely due to its continuing
losses.
NOTE M – COMMITMENTS AND
CONTINGENCIES
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.
Commitments for minimum rentals under
non-cancelable leases as of December 31, 2018 are as follows:
Years ending December 31,
|
2019
|
|
|
$
|
211,448
|
|
|
2020
|
|
|
|
223,417
|
|
|
2021
|
|
|
|
242,785
|
|
|
2022
|
|
|
|
195,176
|
|
|
2023
|
|
|
|
193,169
|
|
|
2024
and thereafter
|
|
|
|
380,714
|
|
|
Total
|
|
|
$
|
1,446,708
|
|
Rental expenses charged to operations
for the years ended December 31, 2018 and 2017 was $342,975 and $284,714, 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 L. Tienor, President and Chief Executive
Officer, is employed pursuant to an employment agreement with us dated October 1, 2018. Mr. Tienor’s employment agreement
has a term of two (2) years, which will automatically renew for a period of an additional twelve (12) months, and provides for
a base salary of $222,800 per year and bonuses and benefits based upon the Company’s internal policies and participation
in the Company’s incentive and benefit plans. The agreement also calls for a bonus to be paid upon the sale of the Company.
The bonus will be equal to $20,000 if The Company’s shares are valued at minimum $0.20 per share, $35,000 if shares are
valued at minimum $0.225 per share, or $50,000 if shares are valued at minimum $0.25 per share. If sale price exceeds $0.25 per
share, Mr. Tienor is eligible to receive an additional $6,000 for every $0.01 above a share price of $0.25.
Jeffrey J. Sobieski, Chief Technology
Officer, is employed pursuant to an employment agreement with us dated October 1, 2018. Mr. Sobieski’s employment agreement
has a term of two (2) years, which will automatically renew for a period of an additional twelve (12) months, and provides for
a base salary of $211,625 per year and bonuses and benefits based upon the Company’s internal policies and participation
in the Company’s incentive and benefit plans. The agreement also calls for a bonus to be paid upon the sale of the Company.
The bonus will be equal to $20,000 if the Company’s shares are valued at minimum $0.20 per share, $35,000 if shares are
valued at minimum $0.225 per share, or $50,000 if shares are valued at minimum $0.25 per share. If sale price exceeds $0.25 per
share, Mr. Sobieski is eligible to receive an additional $6,000 for every $0.01 above a share price of $0.25.
Richard E. Mushrush, Chief Financial Officer,
is employed pursuant to an employment agreement with us dated October 1, 2018. Mr. Mushrush’s employment agreement has a
term of two (2) years, which will automatically renew for a period of an additional twelve (12) months, and provides for a base
salary of $122,000 per year and bonuses and benefits based upon the Company’s internal policies and participation in the
Company’s incentive and benefit plans. The agreement also calls for a bonus to be paid upon the sale of the Company.
The bonus will be equal to $20,000 if the Company’s shares are valued at minimum $0.20 per share, $35,000 if shares are
valued at minimum $0.225 per share, or $50,000 if shares are valued at minimum $0.25 per share. If sale price exceeds $0.25 per
share, Mr. Mushrush is eligible to receive an additional $6,000 for every $0.01 above a share price of $0.25.
In addition to the foregoing, stock options
are periodically granted to employees under the Company’s 2010 equity incentive plan at the discretion of the Compensation
Committee of the Board of Directors. Executives of the Company are eligible to receive stock option grants, based upon individual
performance and the performance of the Company as a whole.
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.
Indemnification Agreements
On March 31, 2010, the Company entered
into Indemnification Agreements with executives Jason L. Tienor, President and Chief Executive Officer and Jeffrey J. Sobieski,
then Chief Operating Officer. On April 24, 2012, the Company entered into an Indemnification Agreement with director Timothy S.
Ledwick. On July 1, 2016, the Company entered into Indemnification Agreements with director’s Arthur E. Byrnes, Peter T.
Kross and Leland D. Blatt. On January 1, 2017, the Company entered into an Indemnification Agreement with Chief Financial Officer
Richard E. Mushrush.
The Indemnification Agreements provide
that the Company will indemnify the Company's officers and directors, to the fullest extent permitted by law, relating to, resulting
from or arising out of any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation by reason
of the fact that such officer or director (i) is or was a director, officer, employee or agent of the Company or (ii) is or was
serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. In addition, the Indemnification Agreements provide that the Company will make an advance payment of expenses
to any officer or director who has entered into an Indemnification Agreement, in order to cover a claim relating to any fact or
occurrence arising from or relating to events or occurrences specified in this paragraph, subject to receipt of an undertaking
by or on behalf of such officer or director to repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Company as authorized under the Indemnification Agreement.
Sales Taxes
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 during the years ended December 31:
|
|
2018
|
|
|
2017
|
|
Balance, beginning of year
|
|
$
|
83,282
|
|
|
$
|
274,869
|
|
Sales tax collected
|
|
|
101,144
|
|
|
|
297,673
|
|
Provisions (reversals)
|
|
|
30,465
|
|
|
|
(33,000
|
)
|
Interest and penalties
|
|
|
–
|
|
|
|
(5,890
|
)
|
Payments
|
|
|
(171,492
|
)
|
|
|
(450,370
|
)
|
Balance, end of year
|
|
$
|
43,400
|
|
|
$
|
83,282
|
|
NOTE N – BUSINESS CONCENTRATION
For the years ended December 31, 2018
and 2017, no single customer represented 10% or more of the Company’s total net revenues.
As of December 31, 2018, three customers
accounted for 47% of the Company’s net accounts receivable. As of December 31, 2017, three customers accounted for 54% of
the Company’s net accounts receivable.
Purchases from one supplier approximated
$3,622,000, or 81%, of total purchases for the year ended December 31, 2018 and approximately $2,796,000, or 79%, of total purchases
for the year ended December 31, 2017. Deposits paid to this vendor were in excess of total accounts payable due to this supplier
in the amount of $320,352 as of December 31, 2018 and total due to this supplier, net of deposits, was $202,258 as of December
31, 2017.
NOTE O – EMPLOYEE BENEFIT PLAN
The Company has an employee savings
plan covering substantially all employees who are at least 21 years of age and have completed at least 3 months of
service. The plan provides for matching contributions equal to 100% of each dollar contributed by the employee up to 4% of
the employee’s salary. The Company’s matching contributions vest immediately. The Company may also elect to make
discretionary contributions. The Company made contributions to the plan of approximately $116,000 and $123,000 for the years
ended December 31, 2018 and 2017, respectively.
NOTE P – DISCONTINUED OPERATIONS
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 year ended December 31, 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. 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 and subsequently 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. During the year ended December 31, 2017, the Company recorded a
gain from the sale of EthoStream (net of tax) of $6,630,244.
For the years ended December 31, 2018
and 2017, there were no balance sheet balances from discontinued operations.
The following table summarizes the statements
of operations information for discontinued operations for the years ended December 31, 2018 and 2017.
|
|
2018
|
|
|
2017
|
|
Revenues, net:
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
–
|
|
|
$
|
653,839
|
|
Recurring
|
|
|
–
|
|
|
|
925,837
|
|
Total Net Revenues
|
|
|
–
|
|
|
|
1,579,676
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
Product
|
|
|
–
|
|
|
|
393,804
|
|
Recurring
|
|
|
–
|
|
|
|
209,868
|
|
Total Cost of Sales
|
|
|
–
|
|
|
|
603,672
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
–
|
|
|
|
976,004
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
–
|
|
|
|
–
|
|
Selling, general and administrative
|
|
|
–
|
|
|
|
252,378
|
|
Depreciation and amortization
|
|
|
–
|
|
|
|
60,420
|
|
Total Operating Expenses
|
|
|
–
|
|
|
|
312,798
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations before Provision for Income Taxes
|
|
|
–
|
|
|
|
663,206
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
|
–
|
|
|
|
50,331
|
|
Income from Discontinued Operations (net of tax)
|
|
$
|
–
|
|
|
$
|
612,875
|
|
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 the years ended December 31, 2018 and 2017.
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