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
MARCH 31, 2020
(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 three months ended March 31, 2020, are not necessarily indicative of the results that may be expected for
the year ending December 31, 2020. The unaudited condensed consolidated financial statements should be read in conjunction with
the consolidated December 31, 2019 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 March 31, 2020,
we have incurred cumulative losses of $125,758,040 and have never generated enough cash through operations to support our business.
For the three-month period ended March 31, 2020, we had a cash flow deficit from operations of $109,888. Since 2012, the Company
has made significant investments in the engineering, development and marketing of an intelligent automation platform, including
but not limited to, hardware and software enhancements, support services and applications. The funding for these development efforts
has contributed to the ongoing operating losses and use of cash. Operating losses have been financed by debt and equity transactions,
credit facility capacity, the sale of a wholly-owned subsidiary and management of working capital levels. The report from our previous
independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2019 stated
there is substantial doubt about our ability to continue as a going concern.
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.
The Company’s operations and financial
results have also been impacted by the COVID-19 pandemic. On January 30, 2020 the World Health Organization (“WHO”)
announced a global health emergency because of a new strain of a novel coronavirus in Wuhan, China (the “COVID-19 outbreak”)
and the risks to the international community as the virus spreads globally. In March 2020, the WHO classified the COVID-19 outbreak
a pandemic, based on the rapid increase in exposure globally. The spread of the COVID-19 outbreak has caused significant volatility
and uncertainty in U.S. and international markets.
The Company’s sales have been disrupted
as a result of its customers furloughing and laying off their employees and/or suspending projects. Despite these challenges, quoting
remains active and the aggregate pipeline has not contracted significantly. Thus far, the impact has been delays as opposed to
cancellations. Due to travel restrictions, social distancing and shelter at home edicts, the hospitality industry, our largest
market that generally contributes more than 50% of our revenue, has suffered as much as any. At this time, the disruption is expected
to be temporary; however, the length or severity of this pandemic is unknown. Depending on the length and severity, the demand
for our products, our customers’ ability to meet payment obligations to the Company, our supply chain and production capabilities,
and our workforces’ ability to deliver our products and services could be impacted. Management is actively monitoring the
impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. While we
expect this disruption to have a material adverse impact our results of operations, financial condition and cash flows for the
year 2020, the Company is unable to reasonably determine the impact at this time.
In response to the COVID-19 pandemic and
its effects (and potential further effects) on the Company’s operations and financial results, the Company has taken and
is continuing to take a number of actions to preserve cash. These actions include suspending the use of engineering consultants,
and cancelling all travel and the Company’s attendance at tradeshows (implemented prior to applicable government stay-at-home
orders being put in place). In addition, in early April of 2020, management made the decision to furlough certain employees, instituted
pay cuts for certain other employees and suspended the Company’s 401(k) match through the end of 2020. With the receipt
of the PPP Loan (discussed below), the Company was able to bring back the furloughed employees, restore payroll to prior levels
and delay suspension of the 401(k) match. The actions taken in response to the COVID-19 pandemic are in addition to the cost elimination
and liquidity management actions that the Company began implementing in the second half of 2019, including reviewing opportunities
to decrease spend with third party consultants and providers, strategically reviewing whether or not to fill employee positions
in the event of vacancies, and implementing sales campaigns to sell slow-moving inventory and reducing existing inventory volumes.
There is no guarantee, however, that these actions, nor any other actions identified, will yield profitable operations in the
foreseeable future.
In addition, on April 21, 2020, the Company
entered into an unsecured promissory note, dated as of April 17, 2020 (“the PPP Loan”), with Heritage Bank of Commerce
for a $913,063 loan under the Paycheck Protection Program (“PPP”) SBA 7(a) loan. The PPP SBA 7(a) loan program is being
administered by the United States Small Business Administration (“SBA”) and was authorized by the Keeping American
Workers Employed and Paid Act, which is part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that
was signed into law on March 27, 2020. The principal amount of the Loan is $913,063, bears interest of 1.0% per annum and has a
maturity date of April 21, 2022. See Note N – Subsequent Event for a summary of the terms of the PPP Loan.
At March 31, 2020, the Company had $3,084,828
of cash and approximately $153,000 of availability on its credit facility. However, the credit facility requires that the Company
maintain an unrestricted cash balance of $2,000,000, limiting the ability of the Company to use its cash reserves to fund its operations.
As of March 31, 2020, the outstanding balance on the credit facility was $518,463. On average, during the twelve-month period between
April 1, 2019 and March 31, 2020, the Company’s cash balance decreased $55,000 per month.
The Company is using the proceeds of the
PPP Loan to support its ongoing operations and currently expects to also draw on its 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. The Credit Facility provides us with needed liquidity to assist in
meeting our obligations or pursuing strategic objectives. Continued operating losses will deplete these cash reserves and could
result in a violation of the financial covenants. Consequently, repayment of amounts borrowed 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
occurrence of any of these events could have a material adverse effect on our business and results of operations.
The Company’s Board also continues
to consider 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.
However, these actions are not solely within the control of the Company. At May 15, 2020, no definitive alternatives had been identified.
Accordingly, and in light of the Company’s
historic 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 both the three months ended March 31, 2020 and 2019,
there were 3,599,793 shares of common stock underlying options and warrants excluded due to these instruments being anti-dilutive.
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 follows 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.
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.
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 March 31, 2021.
Contract Completion 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.
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 three months ended March 31, 2020 and the year ended December
31, 2019, the Company experienced returns of approximately 1% to 3% of materials included in the cost of sales. As of March 31,
2020 and December 31, 2019, the Company recorded warranty liabilities in the amount of $61,742 and $58,791, respectively, using
this experience factor range.
Product warranties for the three months
ended March 31, 2020 and the year ended December 31, 2019 are as follows:
|
|
March 31,
2020
|
|
December 31,
2019
|
Beginning balance
|
|
$
|
58,791
|
|
|
$
|
46,103
|
|
Warranty claims incurred
|
|
|
(2,947
|
)
|
|
|
(66,803
|
)
|
Provision charged to expense
|
|
|
5,898
|
|
|
|
79,491
|
|
Ending balance
|
|
$
|
61,742
|
|
|
$
|
58,791
|
|
Advertising
The Company follows the policy of charging
the costs of advertising to expenses as incurred. The Company incurred $5,893 and $10,805 in advertising costs during the three
months ended March 31, 2020 and 2019, 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 the three months ended March 31, 2020 and 2019 were $369,243 and $486,626,
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 2019 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 both the three months ended March 31, 2020 and 2019 was $1,815.
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 requires a modified retrospective transition
method and early adoption is permitted. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses,
Derivatives and Hedging, and Leases (“ASU 2019-10”), which defers the adoption of ASU 2016-13 for smaller reporting
companies until January 1, 2023. The Company will continue to evaluate the impact of ASU 2016-13 on its consolidated financial
statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This
guidance modifies, removes, and adds certain disclosure requirements on fair value measurements. This ASU is effective for annual
periods beginning after December 15, 2019, including interim periods therein. The adoption of this guidance did not have a material
impact on the Company’s consolidated financial statements.
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 three months ended March 31, 2020.
|
|
Hospitality
|
|
Education
|
|
Multiple Dwelling Units
|
|
Government
|
|
Total
|
Product
|
|
$
|
1,202,342
|
|
|
$
|
249,432
|
|
|
$
|
93,072
|
|
|
$
|
64,416
|
|
|
$
|
1,609,292
|
|
Recurring
|
|
|
173,572
|
|
|
|
20,263
|
|
|
|
327
|
|
|
|
–
|
|
|
|
194,162
|
|
|
|
$
|
1,375,914
|
|
|
$
|
269,695
|
|
|
$
|
93,399
|
|
|
$
|
64,416
|
|
|
$
|
1,803,424
|
|
The following table presents the Company’s
product and recurring revenues disaggregated by industry for the three months ended March 31, 2019.
|
|
Hospitality
|
|
Education
|
|
Multiple Dwelling Units
|
|
Government
|
|
Total
|
Product
|
|
$
|
1,694,649
|
|
|
$
|
255,736
|
|
|
$
|
200,426
|
|
|
$
|
435,858
|
|
|
$
|
2,586,669
|
|
Recurring
|
|
|
156,272
|
|
|
|
19,445
|
|
|
|
816
|
|
|
|
–
|
|
|
|
176,533
|
|
|
|
$
|
1,850,921
|
|
|
$
|
275,181
|
|
|
$
|
201,242
|
|
|
$
|
435,858
|
|
|
$
|
2,763,202
|
|
Sales taxes and other usage-based taxes
are excluded from revenues.
Remaining performance obligations
As of March 31, 2020, the aggregate amount
of the transaction price allocated to remaining performance obligations was approximately $0.29 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
|
|
March 31,
2020
|
|
December 31,
2019
|
Contract assets
|
|
$
|
72,764
|
|
|
$
|
188,120
|
|
Contract liabilities
|
|
|
607,120
|
|
|
|
764,184
|
|
Net contract liabilities
|
|
$
|
534,356
|
|
|
$
|
576,064
|
|
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.
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 three-month period ended March 31, 2020
is the result of cash payments received and billing in advance of satisfying performance obligations.
Contract costs
Costs to complete 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 costs to complete 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.
NOTE D – ACCOUNTS RECEIVABLE
Components of accounts receivable as of March 31, 2020 and December
31, 2019 are as follows:
|
|
March 31,
2020
|
|
December 31,
2019
|
Accounts receivable
|
|
$
|
1,396,924
|
|
|
$
|
2,338,626
|
|
Allowance for doubtful accounts
|
|
|
(74,334
|
)
|
|
|
(55,039
|
)
|
Accounts receivable, net
|
|
$
|
1,322,590
|
|
|
$
|
2,283,587
|
|
NOTE E – INVENTORIES
Components of inventories as of March 31, 2020 and December
31, 2019 are as follows:
|
|
March 31,
2020
|
|
December 31,
2019
|
Product purchased for resale
|
|
$
|
1,374,466
|
|
|
$
|
1,613,733
|
|
Reserve for obsolescence
|
|
|
(332,653
|
)
|
|
|
(240,659
|
)
|
Inventory, net
|
|
$
|
1,041,813
|
|
|
$
|
1,373,074
|
|
NOTE F – ACCRUED LIABILITIES AND EXPENSES
Accrued liabilities at March 31, 2020 and December 31, 2019
are as follows:
|
|
March 31,
2020
|
|
December 31,
2019
|
Accrued liabilities and expenses
|
|
|
106,915
|
|
|
|
214,925
|
|
Accrued payroll and payroll taxes
|
|
|
265,309
|
|
|
|
227,153
|
|
Accrued sales taxes, penalties, and interest
|
|
|
8,890
|
|
|
|
26,957
|
|
Product warranties
|
|
|
61,742
|
|
|
|
58,791
|
|
Total accrued liabilities and expenses
|
|
$
|
442,856
|
|
|
$
|
527,826
|
|
NOTE G – DEBT
Revolving Credit Facility
On September 30, 2014, the Company 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 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 6.25% at March 31, 2020 and 7.75% December 31, 2019. 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 November 6, 2019, the eleventh amendment to the Credit Facility was executed to extend
the maturity date to September 30, 2021, unless earlier accelerated under the terms of the Heritage Bank Loan Agreement, and eliminate
the maximum EBITDA loss covenant. The eleventh amendment was effective as of September 30, 2019.
The Heritage Bank Loan Agreement contains
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. As discussed above, the EBITDA loss covenant was eliminated in the eleventh
amendment to the Credit Facility. The sole financial covenants are a minimum asset coverage ratio and a minimum unrestricted cash
balance of $2 million, both of which are measured at the end of each month. 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 $518,463 and $624,347 at March 31, 2020 and December 31, 2019 and the remaining available borrowing capacity was approximately
$153,000 and $424,000, respectively. As of March 31, 2020, the Company was in compliance with all financial covenants.
NOTE H – PREFERRED STOCK
Series A
The Company has authorized 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 authorized 567 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 March 31, 2020, the
liquidation preference of the preferred stock is based on the following order: first, Series B with a preference value of $461,094,
which includes cumulative accrued unpaid dividends of $201,094, and second, Series A with a preference value of $1,692,649, which
includes cumulative accrued unpaid dividends of $767,649. As of December 31, 2019, the liquidation preference of the preferred
stock is based on the following order: first, Series B with a preference value of $455,904, which includes cumulative accrued unpaid
dividends of $195,904, and second, Series A with a preference value of $1,674,195, which includes cumulative accrued unpaid dividends
of $749,195.
NOTE I – CAPITAL STOCK
The Company has authorized 15,000,000 shares
of preferred stock, with a par value of $.001 per share. The Company has authorized 215 shares as Series A preferred stock and
567 shares as Series B preferred stock. At March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, the Company had 136,311,335
and 135,990,491 common shares issued and outstanding, respectively.
During the three months ended March 31,
2020 and 2019, the Company issued 320,844 and 292,308 shares of common stock, respectively to directors for services performed
during the three months ended March 31, 2020 and 2019. These shares were valued at $18,000 and $36,002, respectively, which approximated
the fair value of the shares when they were issued.
During the three months ended March 31,
2020 and 2019, no warrants were exercised. These warrants were originally granted to shareholders of the April 8, 2011 Series B
preferred stock issuance.
During the three months ended March 31,
2020 and 2019, no shares of Series A or B preferred stock were converted to shares of common stock.
NOTE J – 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. 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 March 31, 2020, there were approximately 85,425 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 March 31, 2020.
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
|
|
|
|
6.76
|
|
|
$
|
0.14
|
|
|
|
2,000,000
|
|
|
$
|
0.14
|
|
$
|
0.16 - $1.00
|
|
|
|
1,349,793
|
|
|
|
3.59
|
|
|
|
0.18
|
|
|
|
1,227,001
|
|
|
|
0.18
|
|
|
|
|
|
|
3,349,793
|
|
|
|
5.48
|
|
|
$
|
0.16
|
|
|
|
3,227,001
|
|
|
$
|
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, 2019
|
|
|
3,349,793
|
|
|
$
|
0.16
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Cancelled or expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at December 31, 2019
|
|
|
3,349,793
|
|
|
$
|
0.16
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Cancelled or expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at March 31, 2020
|
|
|
3,349,793
|
|
|
$
|
0.16
|
|
No options were granted, exercised, cancelled
or expired during the three months ended March 31, 2020 or 2019. Total stock-based compensation expense in connection with options
granted to employees recognized in the condensed consolidated statements of operations for both the three months ended March 31,
2020 and 2019 was $1,815.
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
|
|
|
|
1.52
|
|
|
$
|
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, 2019
|
|
|
250,000
|
|
|
$
|
0.20
|
|
Issued
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Cancelled or expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at December 31, 2019
|
|
|
250,000
|
|
|
|
0.20
|
|
Issued
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Cancelled or expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at March 31, 2020
|
|
|
250,000
|
|
|
$
|
0.20
|
|
No warrants were granted, exercised, cancelled
or forfeited during the three months ended March 31, 2020 or 2019.
NOTE K – STOCK ISSUANCE TO NON-EMPLOYEE
DIRECTORS
During the three months ended March 31,
2020 and during the year ended December 31, 2019, the Company issued common stock in the amount of $18,000 and $132,000 and paid
cash consideration of $24,000 and $20,000, 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 L – 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.
The Company determines if an arrangement
is a lease at inception. This determination generally depends on whether the arrangement conveys to the Company the right to control
the use of an explicitly or implicitly identified fixed asset for a period of time in exchange for consideration. Control of an
underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially
all of the economic benefits from using the underlying asset. The Company does not separate non-lease components from lease components
to which they relate and accounts for the combined lease and non-lease components as a single lease component.
Operating leases are included in our condensed
consolidated balance sheet as right-of-use assets, operating lease liabilities – current and operating lease liabilities –
long-term. We do not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less. Our current
operating leases are for facilities. Our leases may contain renewal options; however, we do not recognize right-of-use assets or
lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception
or when a triggering event occurs. Some of our lease agreements may contain rent escalation clauses, rent holidays, capital improvement
funding, or other lease concessions.
In determining our right-of-use assets
and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us
to use the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term, an amount
equal to the lease payments in a similar economic environment. When we cannot readily determine the discount rate implicit in the
lease agreement, we utilize our current borrowing rate on our outstanding line of credit. The Company’s line of credit utilizes
market rates to assess an interest rate. Refer to Note G for further discussion.
We recognize our minimum rental expense
on a straight-line basis based on the fixed components of a lease arrangement. Payments are set on a pre-determined schedule within
each lease agreement. We amortize this expense over the term of the lease beginning with the date of the standard adoption for
current leases and beginning with the date of initial possession, which is the date we enter the leased space and begin to make
improvements in the preparation for its intended use, for future leases. Variable lease components represent amounts that are not
fixed in nature and are not tied to an index or rate, and are recognized as incurred. Variable lease components consist primarily
of the Company's proportionate share of common area maintenance, utilities, taxes and insurance and are presented as operating
expenses in the Company’s statements of operations in the same line item as expense arising from fixed lease payments.
We lease certain property under non-cancelable
operating leases, primarily facilities. The impact of the adoption of ASC 842 at January 1, 2019 created a right-of-use asset of
$1,042,004, lease liability of $1,095,761 and unwound the $71,877 balance of the deferred lease liability account.
The components of lease expense for the three months ended March
31, 2020 were as follows:
Operating lease expense:
|
|
|
Operating lease cost – fixed
|
|
$
|
58,779
|
|
Variable lease cost
|
|
|
38,732
|
|
Total operating lease cost
|
|
$
|
97,511
|
|
Other information related to leases as of March 31, 2020 was
as follows:
Operating lease liability – current
|
|
$
|
226,464
|
|
Operating lease liability – long-term
|
|
$
|
720,890
|
|
Operating cash outflows from operating leases
|
|
$
|
55,029
|
|
|
|
|
|
|
Weighted-average remaining lease term of operating leases
|
|
|
5.43 years
|
|
Weighted-average discount rate of operating leases
|
|
|
8.5 %
|
|
Future annual minimum operating lease payments as of March 31,
2020 were as follows:
2020 (excluding the three months ended March 31, 2020)
|
|
$
|
168,806
|
|
2021
|
|
|
242,299
|
|
2022
|
|
|
195,176
|
|
2023
|
|
|
193,169
|
|
2024 and thereafter
|
|
|
384,119
|
|
Total minimum lease payments
|
|
|
1,183,569
|
|
Less imputed interest
|
|
|
(236,215
|
)
|
Total
|
|
$
|
947,354
|
|
Rental expenses charged to operations for the three months ended
March 31, 2020 and 2019 was $97,511 and
$89,526, 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
Unless provided with a resale or tax exemption
certificate, the Company assesses and collects sales tax on sales transactions and records the amount as a liability. It is recognized
as a liability until remitted to the applicable state. Total revenues do not include sales tax as the Company is considered a pass
through conduit for collecting and remitting sales taxes.
The following table sets forth the change in the sales tax accrual
as of March 31, 2020 and December 31, 2019:
|
|
March 31,
2020
|
|
December 31, 2019
|
Balance, beginning of year
|
|
$
|
26,957
|
|
|
$
|
43,400
|
|
Sales tax collected
|
|
|
20,449
|
|
|
|
167,233
|
|
Provisions (reversals)
|
|
|
15,553
|
|
|
|
(10,664
|
)
|
Payments
|
|
|
(54,069
|
)
|
|
|
(173,012
|
)
|
Balance, end of period
|
|
$
|
8,890
|
|
|
$
|
26,957
|
|
NOTE M – BUSINESS CONCENTRATION
For the three months ended March 31, 2020,
there were two customers represented approximately 23% of total net revenues. For the three months ended March 31, 2019, two customers
represented approximately 31% of total net revenues.
As of March 31, 2020, two customers accounted
for approximately 29% of the Company’s net accounts receivable. As of December 31, 2019, two customers represented 36% of
the Company’s net accounts receivable.
Purchases from one supplier approximated
$385,000, or 84%, of total purchases for the three months ended March 31, 2020 and approximately $775,000, or 76%, of total purchases
for the three months ended March 31, 2019. The amount due to this supplier, net of deposits paid, was approximately $71,000 and
$579,000 as of March 30, 2020 and December 31, 2019, respectively.
NOTE N – SUBSEQUENT EVENT
On April 21, 2020, Telkonet, Inc.
(the “Company”) entered into an unsecured promissory note, dated as of April 17, 2020 (“the PPP
Loan”), with Heritage Bank of Commerce under the Paycheck Protection Program (the “PPP”) administered by
the United States Small Business Administration (“SBA”) and authorized by the Keeping American Workers Employed
and Paid Act, which is part of the Coronavirus Aid, Relief, and Economic Security Act, enacted on March 27, 2020. The
principal amount of the PPP Loan is $913,063, bears interest of 1.0% per annum and was disbursed on April 21, 2020.
The PPP Loan has a maturity date of April 21, 2022. No payments of principal or interest are
required during the first six months, but interest accrues during this period. After this period, monthly payments of principal
and interest are required and continue until maturity with respect to any portion of the PPP Loan not forgiven, as discussed below.
The PPP Loan may be prepaid, in full or in part, at any time prior to maturity with no prepayment penalties. The note contains
events of default and other provisions customary for a loan of this type.
Under the terms of the PPP, the Company
can apply for, and be granted, forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to
limitations and ongoing rulemaking by the SBA, based on the use of loan proceeds for eligible purposes, including payroll costs,
mortgage interest, rent, utility costs and the maintenance of employee and compensation levels. At least 75% of such forgiven amounts
must be used for eligible payroll costs. The amount of loan forgiveness will be reduced if the Company terminates employees or
reduces salaries during the eight-week period following the date the proceeds are disbursed. No assurance is provided that the
Company will obtain forgiveness of the PPP Loan in whole or in part.