U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 2002
Commission file number 333-47986
TELKONET, INC.
(Name of Small Business Issuer in Its Charter)
Utah 87-0627421
(State of Incorporation) (IRS Employer Identification No.)
902 A Commerce Road Annapolis, Maryland 21401
(Address of Principal Executive Offices)
(410) 897-5900
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 17,326,531 shares of Common Stock
($.001 par value) as of November 7, 2002.
Transitional small business disclosure format: Yes No x
--- ---
TELKONET, INC.
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending September 30, 2002
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets: 3
September 30, 2002 and December 31, 2001
Condensed Consolidated Statements of Losses: 4
Three Months Ended September 30, 2002 and 2001
Nine Months Ended September 30, 2002 and 2001
November 3, 1999 (Date of Inception) through
September 30, 2002
Consolidated Statement of Deficiency in Stockholders' 5-7
Equity November 3, 1999 (Date of Inception) through
September 30, 2002
Condensed Consolidated Statements of Cash Flows: 8
Nine Months Ended September 30, 2002 and 2001
November 3, 1999 (Date of Inception) through
September 30, 2002
Notes to Condensed Consolidated Financial Information: 9
September 30, 2002
Item 2. Plan of Operation 10
Item 3. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
2
Item 1. Financial Statements (Unaudited)
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 4,880 $ 21,885
Accounts receivable 1,194 --
Inventory 43,997 --
Prepaid and deposit 9,625 4,625
------------ ------------
Total current assets 59,696 26,510
PROPERTY AND EQUIPMENT:
Furniture, equipment, and leasehold improvements, at cost 70,588 54,950
Less: Accumulated depreciation 41,522 28,108
------------ ------------
29,066 26,842
OTHER ASSETS
Financing costs, less amortization costs of $499,442
and $415,742 at September 30, 2002 and December 31, 2001,
respectively 600,625 684,325
------------ ------------
600,625 684,325
$ 689,387 $ 737,677
============ ============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 456,502 $ 116,741
Notes payable 533,000 400,000
Due to related parties 33,474 7,500
Total current liabilities 1,022,976 524,241
Convertible Debentures 1,677,200 940,000
COMMITMENTS AND CONTINGENCIES -- --
DEFICIENCY IN STOCKHOLDER'S EQUITY
Common stock, par value $.001 per share; 100,000,000 shares
authorized; 17,049,483 shares issued at September 30, 2002 and
22,115,371 shares issued at December 31, 2001 17,049 22,115
Common stock subscription (1,805,400) --
Additional paid-in-capital 4,791,838 2,221,154
Deficiency accumulated during development stage (5,014,276) (2,969,833)
Deficiency in stockholder's equity (2,010,789) (726,564)
$ 689,387 $ 737,677
See accompanying footnotes to the unaudited condensed consolidated financial information
3
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(UNAUDITED)
For the period
from November 3,
1999 (date of
inception)
Three Months ended Nine Months ended through
September 30, September 30, September 30,
2002 2001 2002 2001 2002
------------- ------------- ------------- ------------- -------------
Net Revenues $ 2,856 $ -- $ 2,856 $ -- $ 2,856
Cost of Sales 1,860 -- 1,860 -- 1,860
------------- ------------- ------------- ------------- -------------
Gross Profit 996 -- 996 -- 996
Costs and Expenses:
Research & Development 91,334 208,321 242,764 300,636 $ 521,879
Selling, General and
Administrative 585,547 205,931 1,595,461 691,921 3,788,720
Interest Expense (Income) 92,884 6,444 110,100 22,154 543,179
Depreciation and Amortization 32,370 7,882 97,114 23,609 162,751
------------- ------------- ------------- ------------- -------------
Operating expense 802,135 428,578 2,045,439 1,038,320 5,016,529
Loss from Operations (801,139) (428,578) (2,044,443) (1,038,320) (5,015,533)
Other Income (Expense) -- -- -- -- 1,257
Provision for Income Tax -- -- -- -- --
------------- ------------- ------------- ------------- -------------
-- -- -- -- 1,257
Net income $ (801,139) $ (428,578) $ (2,044,443) $ (1,038,320) $ (5,014,276)
============= ============= ============= ============= =============
Loss per common share (basic
and assuming dilution) $ (0.05) $ (0.02) $ (0.12) $ (0.05) $ (0.32)
============= ============= ============= ============= =============
Weighted average common shares
outstanding 16,692,841 21,841,593 17,005,847 21,925,075 15,915,997
See accompanying footnotes to the unaudited condensed consolidated financial information
4
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 3, 1999 (DATE OF INCEPTION) TO SEPTEMBER 30, 2002
Deficit
Accumulated
Additional Common During
Common Paid in Stock Development
Shares Stock Amount Capital Subscription Stage Total
------------ ------------ ------------ ------------ ------------ ------------
Net Loss -- $ -- $ -- $ -- $ (33,973) $ (33,973)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 -- -- -- -- (33,973) (33,973)
============ ============ ============ ============ ============ ============
Shares issued to founders January 2000,
in exchange for services and costs
valued at $ 0.60 per share 19,300 193 11,387 -- -- 11,580
Shares issued in June 2000, for cash in
connection with private placement at
$375 per share, net of costs 1,735 17 644,219 -- -- 644,236
Shares issued in July 2000, for warrants
exercised at a price of $375 per share 190 -- 71,250 -- -- 71,250
Shares issued in August 2000, in connection
with the merger of Comstock Coal
and Telkonet Communications, Inc 21,775,335 21,775 -- -- -- 21,775
August 2000, retirement of Telkonet
Communications, Inc shares (21,225) (210) -- -- -- (210)
Shares issued in October 2000, in exchange
for warrants exercised at a price of
$1 per share 29,145 29 29,115 -- -- 29,144
Shares issued in October 2000, in exchange
for warrants exercised at a price of
$0.40 per share 10,891 11 4,345 -- -- 4,356
Net loss -- -- -- -- (929,720) (929,720)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2000 21,815,371 $ 21,815 $ 760,316 $ -- $ (963,693) $ (181,562)
============ ============ ============ ============ ============ ============
See accompanying footnotes to the unaudited condensed consolidated financial information
5
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 3, 1999 (DATE OF INCEPTION) TO SEPTEMBER 30, 2002
Deficit
Accumulated
Additional Common During
Common Paid in Stock Development
Shares Stock Amount Capital Subscription Stage Total
------------ ------------ ------------ ------------ ------------ ------------
BALANCE FORWARD 21,815,371 $ 21,815 $ 760,316 $ -- $ (963,693) $ (181,562)
Shares issued in June 2001, for cash in connection
with a private placement, shares issued at
$.50 a share, net of costs 260,000 260 129,740 -- -- 130,000
1,839,378 warrants issued in June 2001, valued at
$0.13 per warrant, in exchange for services -- -- 237,036 -- -- 237,036
72,668 stock options issued in June 2001, valued at
$0.09 per stock option, in exchange for services -- -- 6,375 -- -- 6,375
245,287 warrants issued in July 2001, valued at
$0.08 per warrant, in exchange for services -- -- 18,568 -- -- 18,568
36,917 stock options issued in July 2001, valued at
$0.08 per warrant, in exchange for services -- -- 2,795 -- -- 2,795
Shares issued in August 2001, for cash in connection
with a private placement, shares issued at
$.50 a share, net of costs 40,000 40 19,960 -- -- 20,000
241,000 warrants issued in August 2001, valued at
$0.39 per warrant in exchange for financing costs -- -- 94,687 -- -- 94,687
114,000 warrants issued in August 2001, valued at
$0.43 per warrant, in exchange for interest -- -- 49,020 -- -- 49,020
150,000 warrants issued in August 2001, valued at
$0.16 per warrant, in exchange for services -- -- 23,340 -- -- 23,340
36,917 stock options issued in August 2001, valued at
$0.06 per stock option, in exchange for services -- -- 2,422 -- -- 2,422
818,000 warrants issued in September 2001, valued at
$0.14 per warrant, in exchange for financing costs -- -- 112,230 -- -- 112,230
1,636,000 warrants issued in September 2001, valued at
$0.40 per warrant, in exchange for interest -- -- 654,400 -- -- 654,400
25,000 warrants issued in September 2001, valued at
$0.30 per warrant in exchange for services -- -- 7,380 -- -- 7,380
60,000 warrants issued in October 2001, valued at
$0.16 per warrant, in exchange for financing costs -- -- 9,720 -- -- 9,720
120,000 warrants issued in October 2001, valued at
$0.44 per warrant, in exchange for interest -- -- 52,800 -- -- 52,800
95,000 warrants issued in October 2001, valued at
$0.21 per warrant, in exchange for services -- -- 19,558 -- -- 19,558
5,000 warrants issued in November 2001, valued at
$0.16 per warrant, in exchange for financing costs -- -- 810 -- -- 810
10,000 warrants issued in November 2001, valued at
$0.44 per warrant, in exchange for interest -- -- 4,400 -- -- 4,400
25,000 warrants issued in November 2001, valued at
$0.33 per warrant, in exchange for services -- -- 8,218 -- -- 8,218
25,000 warrants issued in December 2001, valued at
$0.30 per warrant, in exchange for services -- -- 7,380 -- -- 7,380
Net loss -- -- -- -- (2,006,140) (2,006,140)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2001 22,115,371 $ 22,115 $ 2,221,155 $ -- $(2,969,833) $ (726,563)
============ ============ ============ ============ ============ ============
See accompanying footnotes to the unaudited condensed consolidated financial information
6
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 3, 1999 (DATE OF INCEPTION) TO SEPTEMBER 30, 2002
Deficit
Accumulated
Additional Common During
Common Paid in Stock Development
Shares Stock Amount Capital Subscription Stage Total
------------- ------------- ------------- ------------- ------------- -------------
BALANCE FORWARD 22,115,371 $ 22,115 $ 2,221,155 $ -- $ (2,969,833) $ (726,563)
Shares issued in February 2002, in exchange
for convertible debentures interest, at
$.50 per share 43,586 44 21,749 -- -- 21,793
Shares issued in March 2002, to a founder
in exchange for shares canceled (Note B) 5,250,000 5,250 (5,250) -- -- --
Shares canceled in March 2002 due to capital
restructure (Note B)
(13,480,961) (13,481) 13,481 -- -- --
Shares issued in June 2002, for warrants
exercised at $1.00 per share for services
rendered 47,906 48 47,858 -- -- 47,906
Shares issued in June 2002, for warrants
exercised at $.40 per share for services
rendered 26,443 26 10,551 -- -- 10,577
Shares issued in June 2002 to founders, for
options exercised at $1.00 per share
(Note B) 1,000,000 1,000 999,000 -- -- 1,000,000
Shares issued in June 2002, for warrants
exercised at $1.0025 per share, for
services rendered 80,039 80 80,159 -- -- 80,239
Shares issued in June 2002, for warrants
exercised at $.402, in connection with
original private placement 189,327 189 77,720 -- -- 77,909
Shares issued in July 2002, for warrants
exercised at $.402, in connection with
original private placement 41,970 42 16,830 -- -- 16,872
Shares issued in July 2002 to founders, for
options exercised at $1.00 per share
(Note B) 1,000,000 1,000 999,000 -- -- 1,000,000
Shares issued in August 2002, for warrants
exercised at $.402, in connection with
original private placement 542,500 543 232,458 -- -- 233,001
Shares issued in August 2002, for warrants
exercised at $.403, in connection with
original private placement 193,302 193 77,127 -- -- 77,320
Common stock subscription (Note C) -- -- -- (1,805,400) -- (1,805,400)
Net Loss -- -- -- -- (2,044,443) (2,044,443)
------------- ------------- ------------- ------------- ------------- -------------
BALANCE AT SEPTEMBER 30, 2002 17,049,483 $ 17,049 $ 4,791,838 $ (1,805,400) $ (5,014,276) $ (2,010,789)
============= ============= ============= ============= ============= =============
See accompanying footnotes to the unaudited condensed consolidated financial information
7
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the period from
November 3, 1999
(date of inception)
Nine Months Ended through
September 30, September 30,
2002 2001 2002
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from development stage operations $(2,044,443) $(1,038,320) $(5,014,276)
Adjustments to reconcile net loss from development stage operations
to cash used for operating activities
Warrants issued in exchange for financing and interest -- -- 378,213
Warrants issued in exchange for services -- -- 333,072
Common stock issued in exchange for services rendered 138,722 -- 150,302
Depreciation and amortization 97,114 23,609 162,751
Increase / decrease in:
Accounts receivable (1,194) -- (1,194)
Other receivable -- -- --
Inventory (43,997) -- (43,997)
Deposits (5,000) -- (9,625)
Accounts payable and accrued expenses, net 339,762 (107,694) 456,502
------------ ------------ ------------
NET CASH USED BY OPERATING ACTIVITIES (1,519,036) (1,122,405) (3,588,252)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures, net of disposals (15,638) (4,629) (70,588)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of costs 621,495 150,000 1,420,046
Advances from stockholders, net of repayments 25,974 87,500 33,474
Proceeds from issuance of convertible debentures, net of costs 737,200 903,000 1,677,200
Proceeds from loans 133,000 400,000 533,000
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,517,669 1,540,500 3,663,720
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (17,005) 413,466 4,880
Cash and cash equivalents at the beginning of the period 21,885 10,450 --
------------ ------------ ------------
Cash and cash equivalents at the end of the period $ 4,880 $ 423,916 $ 4,880
============ ============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ 25,011 $ -- $ 24,965
Income taxes paid -- -- --
Issuance of warrants for financing and interest -- -- 1,278,983
Issuance of warrants and options for services -- -- 333,072
Common stock issued for services 138,722 -- 150,302
Acquisition:
Assets Acquired -- -- 1
Accumulated Deficit -- -- 2,643
Liabilities Assumed -- -- (2,642)
------------ ------------ ------------
$ -- $ -- $ 1
------------ ------------ ------------
See accompanying footnotes to the unaudited condensed consolidated financial information
8
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
---------------------------------------
General
-------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB, and therefore, do not
include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results from developmental stage operations for the nine-month period ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2002. The unaudited consolidated
financial statements should be read in conjunction with the consolidated
December 31, 2001 financial statements and footnotes thereto included in the
Company's SEC Form 10-KSB dated February 14, 2002.
Basis of Presentation
---------------------
Telkonet, Inc. (the "Company"), formerly Comstock Coal Company, Inc., was formed
on November 3, 1999 under the laws of the state of Utah. The Company is a
development stage enterprise, as defined by Statement of Financial Accounting
Standards No. 7 ("SFAS No. 7") and is seeking to develop, produce and market
proprietary equipment enabling the transmission of voice and data over electric
utility lines. The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Telkonet Communications, Inc.
Significant inter-company transactions have been eliminated in consolidation.
Reclassification
----------------
Certain reclassifications have been made to conform to prior periods' data to
the current presentation. These reclassifications had no effect on reported
losses.
NOTE B - CAPITAL RESTRUCTURE
In January 2002, the Company re-organized its capital structure, whereby the
Company agreed to purchase 8,936,244 shares of the Company's common stock held
by the Founders and cancel certain vested options held by the Founders to
purchase the Company's common stock, in exchange for the issuance of newly
issued options to purchase 3,500,000 of the Company's common stock. The new
stock options expire in January 2012, and have an exercise price of $1.00 per
share.
RETURNED ADJUSTED RETURNED VESTED
FOUNDERS PRIOR SHARES SHARES SHARES OPTIONS OPTIONS
Dave Grimes 4,971,918 3,721,918 1,250,000 160,000 1,000,000
Peter Larson 1,455,285 705,285 750,000 200,000 1,000,000
Don Erat 2,861,348 2,361,348 500,000 - 500,000
Steve Sadle 5,647,695 2,147,695 3,500,000 200,000 1,000,000
------------ ------------ ------------ ------------ ------------
14,936,246 8,936,246 6,000,000 560,000 3,500,000
In connection with this transaction, the Company cancelled 13,480,961 shares of
previously issued common stock.
9
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE C - COMMON STOCK SUBSCRIPTION
----------------------------------
In connection with the stock options described in Note B, 2,000,000 shares of
common stock were issued to two of the Company's Founders in June and July 2002.
The Company also entered into four promissory notes with principal amounts of
$250,000 each and two promissory notes with principal amounts of $500,000 each
with the Founders to ensure payments for issued stock. The notes are due one
year from date of issuance. Interests will begin to accrue from and after the
maturity dates on any unpaid balances at an interest rate of 6%. As of September
30, 2002, the Company received $194,600 proceeds from the stock subscription.
Item 2. Management's Plan of Operation
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this Report.
Description of the Company
--------------------------
Telkonet is a high technology systems application developer with a primary focus
on high speed Internet distribution over the electrical power lines for the
commercial and the multi-dwelling residential markets. Telkonet believes that
through extensive research and development, it has refined a business model that
will provide marketable Internet services across a wide spectrum of commercial
and business end users.
Telkonet has designed and constructed its third generation of power line
communication products to provide high speed Internet access to office
buildings, hotels, schools, shopping malls, commercial buildings, and
multi-dwelling units. These products provide connectivity over the existing
electrical wiring and do not require the addition of costly wiring, or major
disruption to business activity.
In many situations the Telkonet system can be implemented more quickly and less
expensively than adding dedicated wiring or installing wireless systems.
Telkonet believes that utilizing the power line to deliver Internet and
telephone connectivity for the commercial and the multi-dwelling residential
markets creates a significant and definitive niche market opportunity for
Telkonet. Telkonet's solutions overcome many of the difficulties associated with
power-line communications that historically have prevented the achievement of
high data transmission rates.
Telkonet is now at a point in its business development cycle at which the system
requirements and hardware have been developed, and the Company is ready to bring
to market its suite of PlugFast products for high-speed Internet access.
As Internet access becomes a more critical tool, the demand for higher access
speeds has triggered the growth of broadband solutions, and as these roll out,
the desire for access to these emerging broadband networks provides
opportunities for Telkonet. The built-in dial-up modems that have become a part
of most new PCs are not suitable for higher speed connections. Hardwired network
connections with high construction costs and disruption of the workplace, or
complex wireless networks which have coverage and security issues are the only
solutions available today.
The Telkonet PlugFast family of Internet access products provides a viable and
cost effective alternative to the challenges of hard-wired and wireless local
area networks (LANs). This solution set is comprised of two products, the
PLUGFAST GATEWAY and the PLUGFAST TERMINAL.
The Telkonet PlugFast Gateway and Terminal are aimed at multi-user applications
such as residential apartment complexes, hotels and motels, and a variety of
small and medium sized businesses. High-speed Internet connections are becoming
widely available and providers are anxious to sell these connections to their
new and existing customers. Several companies now specialize in providing T1
access and most telephone companies now offer DSL products.
10
Providers are also offering connectivity through Microwave networks, 2-way
Satellite, Fiber and Cable connections. However, these products share in the
same problem: getting the access to where the customers want it.
The Telkonet solution interfaces to the backbone of the Internet by taking the
signal from any of these broadband sources and, through the Telkonet PlugFast
Gateway, distributing access to the Internet to the ultimate user over the
existing electrical wiring in the building. With the Telkonet PlugFast Gateway
in place, access is provided by simply plugging the user's Telkonet PlugFast
Terminal into the nearest standard electrical outlet. Any existing electrical
outlet in the structure can provide immediate access to the Internet via a
Telkonet PlugFast Terminal. Moving the location of a PC, server, or printer is
accomplished by simply moving the PlugFast Terminal to another electrical
outlet. No additional wiring is required and changes can be made quickly and
easily.
The Telkonet PlugFast Gateway provides the connection to the incoming broadband
signal (DSL, TL, Satellite, Cable Modem) and the Telkonet PlugFast Terminal
connects to a user device. Many PCs, each equipped with one Telkonet PlugFast
Terminal, can communicate amongst themselves and can share a single broadband
resource via the Telkonet PlugFast Gateway.
Telkonet has applied for patents that cover its unique technology, and intends
to utilize recently announced advancements in transmission speeds to build next
generation devices for field tests and marketing demonstrations.
Telkonet will continue to identify, design and develop enhancements to its core
technologies that will provide additional functionality, diversification of
application and desirability for current and future users.
Forward Looking Statements
--------------------------
CERTAIN STATEMENTS INCLUDED HEREIN OR INCORPORATED BY REFERENCE CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT"). TELKONET DESIRES TO TAKE
ADVANTAGE OF CERTAIN "SAFE HARBOR" PROVISIONS OF THE REFORM ACT AND IS INCLUDING
THIS SPECIAL NOTE TO ENABLE THE COMPANY TO DO SO. FORWARD-LOOKING STATEMENTS
INCLUDED OR INCORPORATED BY REFERENCE IN THIS PART INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE THE COMPANY'S ACTUAL
RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER
MATERIALLY FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD LOOKING STATEMENTS.
Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------
Operations
----------
Telkonet, transitioning from a development stage company to an active growth and
acquisition stage company has generated initial revenues from operations.
Telkonet may experience fluctuations in operating results in future periods due
to a variety of factors including, but not limited to, market acceptance of the
Internet and power line communication technologies as a medium for customers to
purchase the Telkonet's products, Telkonet's ability to acquire and deliver high
quality products at a price lower than currently available to consumers,
Telkonet's ability to obtain additional financing in a timely manner and on
terms favorable to the Telkonet, Telkonet's ability to successfully attract
customers at a steady rate and maintain customer satisfaction, Telkonet
promotions, branding and sales programs, the amount and timing of operating
costs and capital expenditures relating to the expansion of the Telkonet's
business, operations and infrastructure and the implementation of marketing
programs, key agreements and strategic alliances, the number of products offered
by the Telkonet, the number of returns experienced by the Telkonet, and general
economic conditions specific to the Internet, power-line communications, and the
communications industry.
Revenues
--------
Telkonet generated revenues of $2,856 from operations from its inception.
Telkonet believes it will begin earning revenues from operations within the next
twelve months as it transitions from a development stage company to that of an
active growth and acquisition stage company.
11
Costs and expenses
------------------
>From its inception on November 3, 1999 through September 30, 2002, Telkonet has
incurred operating expenses of $5,016,529. These expenses were associated
principally with compensation to employees, product development costs and
professional services. During the third quarter of 2002, Telkonet transitioned
it's focus on bringing their initial offering of powerline communication
products to the commercial and residential market, expenses increased by 87%
over the third quarter of 2001 due to an increase in manpower expense from the
further expansion of the core technical team, initial production costs for the
PlugFast powerline products, and the ramp-up and increase in sales and marketing
activities.
Liquidity and Capital Resources
-------------------------------
To date the Company has generated minimum sales revenues, has incurred expenses,
and has sustained losses. As a result of the Telkonet's operating losses from
its inception through September 30, 2002, Telkonet generated a cash flow deficit
of $3,588,252 from operating activities. The Company's current liabilities
exceeded its current assets by $963,280 as of September 30, 2002. For the period
from inception through September 30, 2002, the Company has accumulated losses of
$5,014,276. Consequently, its operations are subject to all risks inherent in
the establishment of a new business enterprise.
While Telkonet has raised capital to meet its working capital and financing
needs in the past, additional financing is required in order to meet the
Telkonet's current and projected cash flow deficits from operations and
development. Telkonet is seeking financing in the form of equity investment in
order to provide the necessary working capital. Telkonet currently has no
commitments for financing. There are no assurances Telkonet will be successful
in raising the funds required.
The Company's independent certified public accountants have stated in their
report included in the Company's December 31, 2001 Form 10-KSB, that the Company
has incurred operating losses in the last two years, and that the Company is
dependent upon management's ability to develop profitable operations. These
factors among others may raise substantial doubt about the Company's ability to
continue as a going concern.
Product Research and Development
--------------------------------
Company-sponsored research and development costs related to both present and
future products are expended in the period incurred. Total expenditures on
research and product development for the third quarter of 2002 were $91,334
compared to $208,321 for the third quarter of 2001.
Acquisition or Disposition of Plant and Equipment
-------------------------------------------------
Telkonet does not anticipate the sale of any significant property, plant or
equipment during the next twelve months. Telkonet does not anticipate the
acquisition of any significant property, plant or equipment during the next 12
months, other than computer equipment and peripherals used in the Telkonet's
day-to-day operations.
Number of Employees
-------------------
During the period ended September 30, 2002, the Company had 12 employees. In
order for the Company to attract and retain quality personnel, the Company
anticipates it will continue to offer competitive salaries to current and future
employees. As the Company continues to expand, the Company will incur additional
costs for personnel. This projected increase in personnel is dependent upon the
Company generating revenues and obtaining sources of financing. There are no
assurances the Company will be successful in raising the funds required or
generating revenues sufficient to fund the projected increase in the number of
employees.
Trends, Risks and Uncertainties
-------------------------------
Telkonet has sought to identify what it believes to be the most significant
risks to its business, but cannot predict whether or to what extent any of such
risks may be realized nor can there be any assurances that Telkonet has
identified all possible risks that might arise. Investors should carefully
consider all of such risk factors before making an investment decision with
respect to the Company's stock. Telkonet's prospects must be evaluated with a
view to the risks encountered by a company in an early stage of development,
particularly in light of the uncertainties relating to the new and evolving
power line modulation and transmission technologies. Telkonet will be incurring
costs to develop, introduce and enhance its products, to establish marketing
relationships, to acquire and develop products that will compliment each other
and to build an administrative organization. To the extent that such expenses
are not subsequently followed by commensurate revenues, Telkonet's business,
results of operations and financial condition will be materially adversely
12
affected. There can be no assurance that Telkonet will be able to generate
sufficient revenues from the sale of their first product and other product
candidates. Telkonet expects negative cash flow from operations to continue for
the next 6 months as it continues to develop and market its business. Telkonet
will be required to sell additional equity or debt securities. The sale of
additional equity or convertible debt securities will result in additional
dilution to Telkonet's stockholders.
Potential fluctuations in quarterly operating results
-----------------------------------------------------
Telkonet's quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, most of which are outside Telkonet's
control, including: the level of use of the Internet; the demand for high-tech
goods; trends in broadband service provisioning, the amount and timing of
capital expenditures and other costs relating to the expansion of the Telkonet's
operations; price competition or pricing changes in the industry; technical
difficulties; general economic conditions, and economic conditions specific to
the Internet and communications industry.
Limited public market, possible volatility of share price
---------------------------------------------------------
Telkonet's common stock is currently quoted on the NASD OTC Bulletin Board under
the ticker symbol TLKO.OB. As of September 30, 2002, there were approximately
17,049,483 shares of common stock outstanding. There can be no assurance that a
trading market will be sustained in the future. Factors such as, but not limited
to, technological innovations, new products, acquisitions or strategic alliances
entered into by Telkonet or its competitors, failure to meet securities
analysts' expectations, government regulatory action, patent or proprietary
rights developments, and market conditions for technology stocks in general
could have a material effect on the volatility of the Telkonet's stock price.
Item 3. Controls and Procedures.
(a) On September 30, 2002, we made an evaluation of our disclosure controls and
procedures. In our opinion, the disclosure controls and procedures are adequate
because the systems of controls and procedures are designed to assure, among
other items, that 1) recorded transactions are valid; 2) valid transactions are
recorded; and 3) transactions are recorded in the proper period in a timely
manner to produce financial statements which present fairly the financial
condition, results of operations and cash flows for the respective periods being
presented. Moreover, the evaluation did not reveal any significant deficiencies
or material weaknesses in our disclosure controls and procedures.
(b) There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls since the last
evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
(a) None
(b) None
(c) In July 2002, the Company issued an aggregate of 1,000,000
shares of registered common stock in exchange for previously issued options with
an exercise price of $1.00 per share to two Company officers in exchange for a
$1,000,000 note receivable. The options were issued pursuant to an employee
stock option plan filed on SEC Form S-8 on April 17, 2002.
In the third quarter 2002, the Company issued 777,772 shares of its restricted
common stock in exchange for previously issued warrants with an exercise price
from $.402-$.403 per share to accredited investors in exchange for $327,193.
These issuances were considered exempt by reason of Section 4(2) of the
Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None
13
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Description
--- -----------
99.1 Certification of J. Gregory Fowler Pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).
99.2 Certification of Stephen Sadle Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).
(b) Reports on Form 8-K filed during the three months ended
September 30, 2002.
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Telkonet, Inc.
Registrant
November 14, 2002 By: /s/ J. Gregory Fowler
----------------- -------------------------------------
Date J. Gregory Fowler
President and Chief Executive Officer
14
CERTIFICATIONS
I, J. Gregory Fowler, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Telkonet, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14 for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions, with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ J. Gregory Fowler
-------------------------------------
J. Gregory Fowler
President and Chief Executive Officer
15
CERTIFICATIONS
I, STEPHEN SADLE, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Telkonet, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14 for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions, with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ STEPHEN SADLE
------------------------
STEPHEN SADLE
Chief Operating Officer
16