See accompanying notes to the unaudited
condensed consolidated financial statements
See accompanying notes to the unaudited
condensed consolidated financial statements
See accompanying notes to the unaudited
condensed consolidated financial statements
See accompanying notes to the unaudited
condensed consolidated financial statements
See accompanying notes to the unaudited
condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2019
(UNAUDITED
)
NOTE A – BASIS OF PRESENTATION
AND SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting
policies applied in the preparation of the accompanying condensed consolidated financial statements follows.
General
The accompanying unaudited condensed consolidated
financial statements of Telkonet, Inc. (the “Company”, “Telkonet”) have been prepared in accordance with
Rule S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, the results
from operations for the six months ended June 30, 2019, are not necessarily indicative of the results that may be expected for
the year ending December 31, 2019. The unaudited condensed consolidated financial statements should be read in conjunction with
the consolidated December 31, 2018 financial statements and footnotes thereto included in the Company's Form 10-K filed with the
SEC.
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.
The condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, Telkonet Communications, Inc. We currently operate in a single
reportable business segment.
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 June 30, 2019,
we have incurred cumulative losses of $124,535,585 and have never generated enough funds through operations to support our business.
For the six-month period ended June 30, 2019, we had an operating cash flow deficit of $2,035,842 from 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 identify 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 August 13, 2019, no definitive alternatives had been identified.
At June 30, 2019, the Company had $3,380,382
of cash and approximately $1,056,000 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.
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 six months ended June 30, 2019 and 2018, there were
3,599,793 and 3,557,399 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, related
valuation allowance and 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.
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 technical phone support services revenue and recognized on a straight-line basis
over the term of the contract.
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 June 30, 2020.
Contract Fulfillment Cost
The Company recognizes related costs of
the contract over time in relation to the revenue recognized. Costs included within the projects relate to the cost of the material,
direct labor and costs of outside services utilized to complete projects. These are represented as “Contract assets”
in the condensed consolidated balance sheets.
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 six months ended June 30, 2019 and the year ended December
31, 2018, the Company experienced returns of approximately 1% to 2% of materials included in the cost of sales. As of June 30,
2019 and December 31, 2018, the Company recorded warranty liabilities in the amount of $32,503 and $46,103, respectively, using
this experience factor range.
Product warranties for the six months ended
June 30, 2019 and the year ended December 31, 2018 are as follows:
|
June 30,
2019
|
|
December 31,
2018
|
|
Beginning balance
|
$
|
46,103
|
|
$
|
59,892
|
|
Warranty claims incurred
|
|
(37,658
|
)
|
|
(28,000
|
)
|
Provision charged to expense
|
|
24,058
|
|
|
14,211
|
|
Ending balance
|
$
|
32,503
|
|
$
|
46,103
|
|
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.
Management has evaluated other recently
issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated
financial statements and related disclosures.
Accounting Standards Recently Adopted
Effective January 1, 2019, the Company
has adopted 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 was permitted, however the Company did not elect to 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 chose to elect available practical expedients
permitted under the guidance, which among other items, allowed the Company to carry forward its historical lease classification
to not reassess leases for the definition of lease under the new standard, and to not reassess initial direct costs for existing
leases. Refer below for practical expedient package adopted:
|
·
|
Whether expired or existing contracts contain leases under the new definition of the lease;
|
|
·
|
Lease classification for expired or existing leases; and
|
|
·
|
Whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
|
Upon the adoption of ASC 842, we have elected
to not recognize a right-of-use asset and related lease liability for leases with an initial term of 12 months or less as an accounting
policy choice and elected to account for lease and non-lease components as a single lease component.
The Company elected to utilize the new
alternative transition approach introduced by ASU 2018-11, under which the standard is adopted and measured from the first date
of the fiscal year under adoption, in this case January 1, 2019. Comparative periods are presented in accordance with Topic 840
and do not include any retrospective adjustments to comparative periods to reflect the adoption of Topic 842.
As of June 30, 2019, $1.0 million was included
in total other assets, $0.2 million in total current liabilities, and $0.8 million in total long-term liabilities. There was no
impact on our Condensed Consolidated Statements of Operations. Refer to Note K for further discussion.
NOTE C– REVENUE
The following table presents the Company’s
product and recurring revenues disaggregated by industry for the three months ended June 30, 2019.
|
Hospitality
|
|
Education
|
|
Multiple Dwelling Units
|
|
Government
|
|
Total
|
|
Product
|
$
|
2,326,641
|
|
$
|
452,417
|
|
$
|
111,624
|
|
$
|
490,210
|
|
$
|
3,380,892
|
|
Recurring
|
|
149,224
|
|
|
21,604
|
|
|
18,315
|
|
|
–
|
|
|
189,143
|
|
|
$
|
2,475,865
|
|
$
|
474,021
|
|
$
|
129,939
|
|
$
|
490,210
|
|
$
|
3,570,035
|
|
The following table presents the Company’s
product and recurring revenues disaggregated by industry for the six months ended June 30, 2019.
|
Hospitality
|
|
Education
|
|
Multiple Dwelling Units
|
|
Government
|
|
Total
|
|
Product
|
$
|
4,021,290
|
|
$
|
708,153
|
|
$
|
312,050
|
|
$
|
926,068
|
|
$
|
5,967,561
|
|
Recurring
|
|
305,496
|
|
|
41,049
|
|
|
19,131
|
|
|
–
|
|
|
365,676
|
|
|
$
|
4,326,786
|
|
$
|
749,202
|
|
$
|
331,181
|
|
$
|
926,068
|
|
$
|
6,333,237
|
|
Sales taxes and other usage-based taxes
are excluded from revenues.
Remaining performance obligations
As of June 30, 2019, the aggregate amount
of the transaction price allocated to remaining performance obligations was approximately $0.6 million. Except for support services,
the Company expects to recognize 100% of the remaining performance obligations over the next six months.
Contract assets and liabilities
|
June 30,
2019
|
|
December 31,
2018
|
|
Variance
|
|
Contract assets
|
$
|
515,080
|
|
$
|
314,749
|
|
$
|
200,331
|
|
Contract liabilities
|
|
963,916
|
|
|
1,232,623
|
|
|
(268,707
|
)
|
Net contract liabilities
|
$
|
448,836
|
|
$
|
917,874
|
|
$
|
(469,038
|
)
|
Contracts are billed in accordance with
the terms and conditions, either at periodic intervals or upon substantial completion. This can result in billings occurring subsequent
to revenue recognition, resulting in contract assets. Contract assets are presented as current assets in the Condensed Consolidated
Balance Sheet. There were $0.2 million of costs incurred to fulfill contracts in the closing balance of contract assets.
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. The change in the contract liability balance during the six-month period ended June 30, 2019 is
the result of cash payments received and billing in advance of satisfying performance obligations.
NOTE D – ACCOUNTS RECEIVABLE
Components of accounts receivable as of June 30, 2019 and December
31, 2018 are as follows:
|
June 30,
2019
|
|
December 31,
2018
|
|
Accounts receivable
|
$
|
2,523,149
|
|
$
|
1,146,832
|
|
Allowance for doubtful accounts
|
|
(67,894
|
)
|
|
(65,541
|
)
|
Accounts receivable, net
|
$
|
2,455,255
|
|
$
|
1,081,291
|
|
NOTE E – ACCRUED LIABILITIES AND EXPENSES
Accrued liabilities and expenses at June 30, 2019 and December
31, 2018 are as follows
:
|
June 30,
2019
|
|
December 31,
2018
|
|
Accrued payroll and payroll taxes
|
$
|
254,677
|
|
$
|
241,253
|
|
Accrued expenses
|
|
451,122
|
|
|
239,793
|
|
Accrued professional
|
|
88,930
|
|
|
86,062
|
|
Accrued sales taxes, penalties, and interest
|
|
68,376
|
|
|
43,400
|
|
Product warranties
|
|
32,503
|
|
|
46,103
|
|
Total accrued liabilities
|
$
|
895,608
|
|
$
|
656,611
|
|
NOTE F – DEBT
Revolving Credit Facility
The Company is a party to a loan and security
agreement (the “Heritage Bank Loan Agreement”), with Heritage Bank of Commerce, a California state chartered bank (“Heritage
Bank”), governing a revolving credit facility in a principal amount not to exceed $2,000,000 (the “Credit Facility”).
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 June 30, 2019 and 8.50% at December 31, 2018. 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 I. 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 and the quarter ended March 31, 2019, 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 $864,125 and $121,474 at June 30, 2019 and December 31, 2018 and the remaining available borrowing capacity was approximately
$1,056,000 and $499,000, respectively. As of June 30, 2019, the Company was in compliance with all financial covenants.
NOTE G – PREFERRED STOCK
Preferred stock carries certain preference
rights as detailed in the Company’s Amended and Restated 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 June 30,
2019, the liquidation preference of the preferred stock is based on the following order: first, Series B with a preference value
of $445,406, which includes cumulative accrued unpaid dividends of $185,406, and second, Series A with a preference value of $1,636,875,
which includes cumulative accrued unpaid dividends of $711,875. 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.
NOTE H – 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 June 30, 2019 and December 31, 2018, there were 185 shares
of Series A and 52 shares of Series B outstanding.
The Company has authorized 190,000,000
shares of common stock with a par value of $.001 per share. As of June 30, 2019 and December 31, 2018 the Company had 135,331,951
and 134,793,211 common shares issued and outstanding, respectively.
NOTE I – STOCK OPTIONS
AND WARRANTS
Employee 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. 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 June 30, 2019.
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
|
|
|
|
7.51
|
|
|
$
|
0.14
|
|
|
|
2,000,000
|
|
|
$
|
0.14
|
|
|
$0.16 - $0.99
|
|
|
|
1,349,793
|
|
|
|
4.35
|
|
|
|
0.18
|
|
|
|
1,171,488
|
|
|
|
0.18
|
|
|
|
|
|
|
3,349,793
|
|
|
|
6.24
|
|
|
$
|
0.16
|
|
|
|
3,171,488
|
|
|
$
|
0.16
|
|
Transactions involving stock options issued
to employees are summarized as follows:
|
Number of
Shares
|
|
Weighted Average
Price Per Share
|
|
Outstanding at January 1, 2018
|
|
4,376,474
|
|
$
|
0.18
|
|
Granted
|
|
67,394
|
|
|
0.14
|
|
Exercised
|
|
–
|
|
|
–
|
|
Cancelled or expired
|
|
(1,094,075
|
)
|
|
0.17
|
|
Outstanding at December 31, 2018
|
|
3,349,793
|
|
$
|
0.16
|
|
Granted
|
|
–
|
|
|
–
|
|
Exercised
|
|
–
|
|
|
–
|
|
Cancelled or expired
|
|
–
|
|
|
–
|
|
Outstanding at June 30, 2019
|
|
3,349,793
|
|
$
|
0.16
|
|
During the six months ended June 30,
2019 and 2018, no options were granted nor were any options exercised. During the six months ended June 30, 2019 and 2018,
zero and 1,069,075 options were cancelled or expired, respectively. Total stock-based compensation expense in connection with
options granted to employees recognized in the condensed consolidated statements of operations for the three months ended
June 30, 2019 and 2018 was $1,815 and $1,531, respectively. Total stock-based compensation expense in connection with options
granted to employees recognized in the condensed consolidated statements of operations for the six months ended June 30, 2019
was $3,631, and $3,061, respectively.
Warrants
The following table summarizes the changes
in warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the
Company.
|
|
|
|
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
|
|
|
2.27
|
|
|
$
|
0.20
|
|
|
250,000
|
|
$
|
0.20
|
|
Transactions involving warrants are summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted Average
Price Per Share
|
|
Outstanding at January 1, 2018
|
|
|
250,000
|
|
|
$
|
0.20
|
|
Issued
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Cancelled or expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at December 31, 2018
|
|
|
250,000
|
|
|
|
0.20
|
|
Issued
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Cancelled or expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at June 30, 2019
|
|
|
250,000
|
|
|
$
|
0.20
|
|
There were no warrants granted, exercised,
cancelled or forfeited during the six months ended June 30, 2019 and 2018.
NOTE J – RELATED PARTY
TRANSACTIONS
During the six months ended June 30, 2019
and during the year ended December 31, 2018, the Company agreed to issue common stock in the amount of $72,000 and $144,000, respectively,
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 K – COMMITMENTS AND CONTINGENCIES
Leases
On January 1, 2019 the Company adopted
ASC Topic 842 “Leases” (“ASC 842”), which supersedes ASC Topic 840 “Leases” (“ASC 840”),
using the alternative transition method of adoption. Under this method of adoption, the Company has recognized and measured all
leases that exist as at January 1, 2019 (the effective date) using a modified retrospective transition approach. Comparative periods
are presented in accordance with Topic 840 and do not include any retrospective adjustments to comparative periods to reflect the
adoption of Topic 842. Any cumulative-effect adjustments to retained earnings is recognized as of January 1, 2019. Upon adoption,
we recognized our leases with greater than one year in duration on the balance sheet as right-of-use assets and lease liabilities.
For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance.
Classification is based on criteria that are largely similar to those applied in prior lease accounting, but without explicit lines.
We have made certain assumptions in judgments when applying ASC 842. Those judgments of most significance are as follows:
|
·
|
We elected the package of practical expedients available for transition which allow us to not reassess the following:
|
|
o
|
Whether expired or existing contracts contain leases under the new definition of the lease;
|
|
o
|
Lease classification for expired or existing leases; and
|
|
o
|
Whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
|
|
·
|
We did not elect to use hindsight for transition when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
|
|
·
|
For all asset classes, we elected to not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less.
|
|
·
|
For all asset classes, we elected to not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component.
|
We determine if an arrangement is a lease
at inception. Operating leases are included in our consolidated balance sheet as right-of-use assets, operating lease liabilities
- current and operating lease liabilities – long term. Upon adoption, the Company determined there were no financing leases.
Our current operating leases are for facilities and office equipment. Our leases may contain renewal options; however, we do not
recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of
renewing the lease at inception or when a triggering event occurs. Some of our lease agreements may contain rent escalation clauses,
rent holidays, capital improvement funding, or other lease concessions. We recognize our minimum rental expense on a straight-line
basis based on the fixed components of a lease arrangement. Payments are set on a pre-determined schedule within each lease agreement.
We amortize this expense over the term of the lease beginning with the date of the standard adoption for current leases and beginning
with the date of initial possession, which is the date we enter the leased space and begin to make improvements in the preparation
for its intended use, for future leases. Variable lease components represent amounts that are not fixed in nature and are not tied
to an index or rate, and are recognized as incurred. Variable lease components consist primarily of common area maintenance, taxes
and insurance.
The Company does not, upon adoption of
ASC 842, control a specific space or underlying asset used in providing a service by a third-party service provider, under any
third party service agreements. There are no such arrangements that meet the definition under ASC 842.
In determining our right-of-use assets
and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us
to use the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term, an amount
equal to the lease payments in a similar economic environment. When we cannot readily determine the discount rate implicit in the
lease agreement, we utilize our current borrowing rate on our outstanding line of credit. The Company’s line of credit utilizes
market rates to assess an interest rate. Refer to Note F for further discussion.
We lease certain property under non-cancelable
operating leases, primarily facilities. The impact of the adoption of ASC 842 at January 1, 2019 created a right-of-use asset of
$1,042,004, lease liability of $1,095,761 and unwound the $71,877 balance of the deferred lease liability account.
The components of lease expense for the six months ended June
30, 2019 were as follows:
Operating lease expense:
|
|
|
|
Operating lease cost - fixed
|
|
$
|
118,949
|
|
Variable lease cost
|
|
|
61,883
|
|
Total operating lease cost
|
|
$
|
180,832
|
|
Other information related to leases as of June 30, 2019 was
as follows:
Operating lease liability - current
|
|
$
|
218,614
|
|
Operating lease liability - long-term
|
|
$
|
830,907
|
|
Operating cash outflows from operating leases
|
|
$
|
109,794
|
|
|
|
|
|
|
Weighted-average remaining lease term of operating leases
|
|
|
6.1 years
|
|
Weighted-average discount rate of operating leases
|
|
|
8.5%
|
|
Future annual minimum operating lease payments as of June 30,
2019 were as follows:
2019 (excluding the six months ended June 30, 2019)
|
|
$
|
110,005
|
|
2020
|
|
|
223,835
|
|
2021
|
|
|
242,299
|
|
2022
|
|
|
195,176
|
|
2023
|
|
|
193,169
|
|
2024 and thereafter
|
|
|
384,119
|
|
Total minimum lease payments
|
|
$
|
1,348,603
|
|
Less imputed interest
|
|
|
(299,082
|
)
|
Total
|
|
$
|
1,049,521
|
|
Future annual minimum lease payments under
non-cancelable leases as of December 31, 2018 prior to our adoption of ASU 2016-02, Leases (Topic 842) are as follows:
2019
|
|
$
|
211,448
|
|
2020
|
|
|
223,417
|
|
2021
|
|
|
242,785
|
|
2022
|
|
|
195,176
|
|
2023
|
|
|
193,168
|
|
2024 and thereafter
|
|
|
380,714
|
|
Total
|
|
$
|
1,446,708
|
|
Rental expenses charged to operations for
the three ended June 30, 2019 and 2018 was $91,306 and $87,067. Rental expenses charged to operations for the six months ended
June 30, 2019 and 2018 was $180,832 and $170,949, respectively.
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.
Sales Tax
The following table sets forth the change in the sales tax accrual
as of June 30, 2019 and December 31, 2018:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Balance, beginning of year
|
|
$
|
43,400
|
|
|
$
|
83,282
|
|
Sales tax collected
|
|
|
92,226
|
|
|
|
101,145
|
|
Provisions
|
|
|
(3,544
|
)
|
|
|
30,465
|
|
Interest and penalties
|
|
|
–
|
|
|
|
–
|
|
Payments
|
|
|
(63,707
|
)
|
|
|
(171,492
|
)
|
Balance, end of period
|
|
$
|
68,375
|
|
|
$
|
43,400
|
|
NOTE L – BUSINESS CONCENTRATION
For the six months ended June 30, 2019,
three customers represented 15%, 12% and 11% of total net revenues. For the six months ended June 30, 2018, one customer represented
approximately 11% of total net revenues. As of June 30, 2019, three customers represented 17%, 15% and 13% of the Company’s
net accounts receivable. As of December 31, 2018, two customers represented 29% and 11% of the Company’s net accounts receivable.
Purchases from one supplier approximated
$1,855,000, or 83%, of purchases for the six months ended June 30, 2019 and $1,975,000, or 88%, of purchases for the six months
ended June 30, 2018. Totals due to this supplier, net of deposits, were approximately $440,000 as of June 30, 2019. Deposits paid
exceeded totals due to this supplier by $320,352 as of December 31, 2018.