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, 2003
Commission file number 000-27305
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: 30,235,189 shares of Common Stock
($.001 par value) as of November 12, 2003.
Transitional small business disclosure format: Yes [ ] No [X]
TELKONET, INC.
QUARTERLY REPORT ON FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDING SEPTEMBER 30, 2003
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
September 30, 2003 and December 31, 2002 4
Condensed Consolidated Statements of Losses:
Three Months Ended September 30, 2003 and 2002
Nine Months Ended September 30, 2003 and 2002
November 3, 1999 (Date of Inception) through
September 30, 2003 5
Consolidated Statement of Stockholders' Equity
(Deficiency) November 3, 1999 (Date of Inception)
through September 30, 2003 6 - 9
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 2003 and 2002
November 3, 1999 (Date of Inception) through
September 30, 2003 10 - 11
Notes to Unaudited Condensed Consolidated Financial
Information: September 30, 2003 12 - 22
Item 2. Management's Discussion and Analysis 23 - 26
Item 3. Controls and Procedures 26
PART II. OTHER INFORMATION 26
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
3
Item 1. Financial Statements (Unaudited)
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
September 30, 2003 December 31, 2002
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,807,358 $ 18,827
Accounts Receivable 3,847 --
Other receivable -- 1,550
Inventory, net 606,294 39,790
Prepaid expenses and deposits 54,746 4,625
------------- -------------
Total current assets 7,472,245 64,792
PROPERTY AND EQUIPMENT:
Furniture and equipment, at cost 172,526 73,215
Less: accumulated depreciation 63,016 35,252
------------- -------------
109,510 37,963
OTHER ASSETS
Financing costs, less accumulated amortization of $10,743 and
$101,692 at September 30, 2003 and December 31, 2002,
respectively (Note B) 20,343 192,600
------------- -------------
$ 7,602,098 $ 295,355
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 630,301 $ 518,865
Notes payable -- 310,000
Capital leases 33,569 --
Due to shareholders 7,500 130,330
------------- -------------
Total current liabilities 671,370 959,195
Convertible debentures, net of discounts - including related
parties (Note B) 123,362 862,682
Senior notes payable (Note C) 2,989,000 --
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, par value $.001 per share; 15,000,000 shares
authorized; none issued at September 30, 2003 and December 31,
2002 (Note E) -- --
Common stock, par value $.001 per share; 100,000,000 shares
authorized; 30,275,189 and 15,721,131 shares issued and
outstanding at September 30, 2003 and December 31, 2002,
respectively (Note E) 30,275 15,721
Additional paid-in-capital 15,696,536 4,916,433
Accumulated deficit during development stage (11,908,445) (6,458,676)
------------- -------------
Stockholders' equity (Deficiency) 3,818,366 (1,526,522)
------------- -------------
$ 7,602,098 $ 295,355
============= =============
See accompanying footnotes to the unaudited condensed consolidated financial information
4
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(UNAUDITED)
For the period from
November 3, 1999
(date of inception)
For The Three Months Ended For The Nine Months Ended through
September 30, September 30, September 30, 2003
2002 (As Restated - 2002 (As Restated ------------------
2003 Note F) 2003 Note F) (As Restated Note F)
---- ------- ---- -------------- --------------------
Net Revenues $ 13,848 $ -- $ 13,848 $ -- $ 13,848
Cost of Sales 4,216 -- 4,216 -- 4,216
------------- ------------- ------------- ------------- -------------
Gross Profit 9,632 -- 9,632 -- 9,632
Costs and Expenses:
Research and Development 367,374 340,888 964,924 943,171 3,377,395
Selling, General and Administrative 1,030,794 311,222 2,724,591 895,283 5,391,712
Non-Employee Stock Options (Note D) 188,988 -- 475,892 -- 939,942
Depreciation and Amortization 18,704 21,930 100,838 93,126 237,782
------------- ------------- ------------- ------------- -------------
Total Operating Expense 1,605,860 674,040 4,266,245 1,931,580 9,946,831
Loss from Operations (1,596,228) (674,040) (4,256,613) (1,931,580) (9,937,199)
Other Income (Expense) -- 996 -- 996 4,579
Interest Income (Expense) (393,825) (231,568) (1,193,156) (449,162) (1,975,825)
Provision for Income Tax -- -- -- -- --
------------- ------------- ------------- ------------- -------------
(393,825) (230,572) (1,193,156) (448,166) (1,971,246)
Net Loss $ (1,990,053) $ (904,612) $ (5,449,769) $ (2,379,746) $(11,908,445)
============= ============= ============= ============= =============
Loss per common share (basic and
assuming dilution) $ (0.09) $ (0.05) $ (0.31) $ (0.14) $ (0.73)
============= ============= ============= ============= =============
Weighted average common shares
outstanding 20,962,065 16,692,841 17,521,860 17,005,847 16,320,512
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, 2003
(UNAUDITED)
Deficit
Accumulated
Preferred Common Additional Common During
Preferred Stock Common Stock Paid in Stock Development
Shares Amount Shares 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
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, 2003 (UNAUDITED)
Deficit
Accumulated
Preferred Additional Common During
Preferred Stock Common Common Paid in Stock Development
Shares Amount 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 - -- -- -- 237,035 -- -- 237,035
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 - -- -- -- 85,818 -- -- 85,818
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
25,000 warrants issued in September 2001,
valued at $0.30 per warrant in exchange
for services - -- -- -- 7,380 -- -- 7,380
95,000 warrants issued in October 2001,
valued at $ 0.21 per warrant, in exchange
for services - -- -- -- 19,558 -- -- 19,558
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
Beneficial conversion feature of
convertible debentures (Note B) - -- -- -- 837,874 -- -- 837,874
Value of warrants attached to convertible
debentures (Note B) - -- -- -- 77,254 -- -- 77,254
Net loss - -- -- -- -- -- (1,716,495) (1,716,495)
------ -------- ------------ ------------ ------------ ------- ------------ ------------
BALANCE AT DECEMBER 31, 2001 (AS
RESTATED- NOTE F) - $ -- 22,115,371 $ 22,115 $ 2,244,033 $ -- $(2,680,188) $ (414,040)
====== ======== ============ ============ ============ ======= ============ ============
See accompanying footnotes to the unaudited condensed consolidated financial information
7
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, 2003 (UNAUDITED)
Deficit
Accumulated
Preferred Common Additional Common During
Preferred Stock Common Stock Paid in Stock Development
Shares Amount Shares Amount Capital Subscription Stage Total
BALANCE FORWARD - $ -- 22,115,371 $ 22,115 $ 2,244,033 $ -- $(2,680,188) $ (414,040)
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 - -- 5,250,000 5,250 (5,250) -- -- --
Shares canceled in March 2002 in
connection with capital restructure - -- (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 47,857 -- -- 47,905
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 - -- 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 80,158 -- -- 80,238
Shares issued in June 2002, for
warrants exercised at $.41, in
connection with original
private placement - -- 189,327 189 77,720 -- -- 77,909
Shares issued in July 2002, for
warrants exercised at $ .40, 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 - -- 1,000,000 1,000 999,000 -- -- 1,000,000
Shares issued in August 2002, for
warrants exercised at $.43, in
connection with original private
placement - -- 542,500 543 232,459 -- -- 233,002
Shares issued in August 2002, for
warrants exercised at $.40, in
connection with original
private placement - -- 193,302 193 77,127 -- -- 77,320
Shares issued in October 2002, for
warrants exercised at $.40, in
connection with original private
placement - -- 77,048 77 30,896 -- -- 30,973
Shares issued in October 2002,
for warrants exercised at $0.50
per share in connection
with original private placement - -- 400,000 400 199,600 -- -- 200,000
Common stock subscription - -- -- -- -- (1,805,400) -- (1,805,400)
Return of founders shares in
connection with stock subscription - -- (1,805,400) (1,805) (1,803,595) 1,805,400 -- --
Stock based compensation for the
issuance of stock options to
consultants in exchange for
services - -- -- -- 452,459 -- -- 452,459
Stock based compensation for the
issuance of warrants to consultants
in exchange for services - -- -- -- 170,330 -- -- 170,330
Stock based compensation for the
issuance of warrants to consultants
in exchange for financing
costs - -- -- -- 86,474 -- -- 86,474
Beneficial conversion feature of
convertible debentures (Note B) - -- -- -- 840,877 -- -- 840,877
Value of warrants attached to
convertible debentures (Note B) - -- -- -- 124,677 -- -- 124,677
Net Loss - -- -- -- -- -- (3,778,488) (3,778,488)
------ ---------- ------------ --------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2002 - $ -- 15,721,131 $ 15,721 $ 4,916,433 $ -- $(6,458,676) $(1,526,522)
====== ========== ============ ========= ============ ============ ============ ============
See accompanying footnotes to the unaudited condensed consolidated financial information
8
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, 2003 (UNAUDITED)
Deficit
Accumulated
Preferred Common Additional Common During
Preferred Stock Common Stock Paid in Stock Development
Shares Amount Shares Amount Capital Subscription Stage Total
BALANCE FORWARD 15,721,131 $15,721 $ 4,916,433 -- $ (6,458,676) $(1,526,522)
Shares issued in April 2003
in exchange for convertible
debentures at $.50 per share -- -- 40,000 40 19,960 -- -- 20,000
Shares issued in April 2003
in exchange for services at
$1.54 per share -- -- 49,998 50 76,695 -- -- 76,745
Shares issued in June 2003 for
employee options exercised at
$1.00 per share (Note D) -- -- 83,333 83 83,250 -- -- 83,333
Shares issued in June 2003
for non-employee options
exercised at $1.00 per
share (Note D) -- -- 83,333 83 83,250 -- -- 83,333
Stock based compensation for
the issuance of warrants in
exchange for financing costs
(Note D) -- -- -- -- 87,217 -- -- 87,217
Beneficial conversion feature
of convertible debentures (Note B) -- -- -- -- 1,761,675 -- -- 1,761,675
Value of warrants attached to
convertible debentures (Note B) -- -- -- -- 265,425 -- -- 265,425
Shares issued in July 2003 for
warrants exercised at $.66 per
share, for services rendered -- -- 114,799 115 (115) -- -- --
Shares issued in July 2003 for
warrants exercised at $.53 per
share, for services rendered -- -- 64,052 64 (64) -- -- --
Shares issued in July 2003 for
220,000 warrants (attached to
convertible debentures) exercised
at $1.00 per share -- -- 143,648 144 (144) -- -- --
Shares issued in August 2003 in
exchange for convertible
debentures (Note B) -- -- 7,157,836 7,158 3,769,942 -- -- 3,777,100
Shares issued in August 2003 in
exchange for accrued interest on
convertible debentures (Note B) -- -- 511,143 511 272,114 -- -- 272,625
Shares issued in August 2003 for
non-employee options exercised at
$1.00 per share -- -- 83,333 83 83,250 -- -- 83,333
Shares purchased in August 2003
for cash at $2.00 per share, net
of costs -- -- 333 -- 666 -- -- 666
Shares issued in September 2003 for
warrants exercised at $1.00 -- -- 3,597,250 3,597 3,593,653 -- -- 3,597,250
Shares issued in September 2003 for
warrants exercised at $.50 -- -- 500,000 500 249,500 -- -- 250,000
Shares issued in September 2003 for
warrants exercised at $1.00, in
exchange for Senior Notes (Note C) -- -- 2,011,000 2,011 2,008,989 -- -- 2,011,000
Shares issued in September 2003 in
exchange for services at approximately
$2.50 per share -- -- 114,000 114 285,148 -- -- 285,262
Stock based compensation for the
issuance of stock options to consultants
in exchange for services (Note D) -- -- -- -- 475,892 -- -- 475,892
Stock based compensation for the
issuance of warrants to consultants in
exchange for services (Note D) -- -- 6,750 -- -- 6,750
Write-off of beneficial conversion
feature in connection with conversion
of Debenture-1 and Series B debentures
(Note B) -- -- -- -- (2,046,479) -- -- (2,046,479)
Write-off of value of warrants attached
to convertible debentures in
connection with conversion of
Debenture-1 and Series B
debentures (Note B) -- -- -- -- (296,470) -- -- (296,470)
Net Loss -- -- -- -- -- -- (5,449,769) (5,449,769)
-------- ------- ----------- ------- ------------ ----------- ------------ -----------
BALANCE AT SEPTEMBER 30, 2003 -- $ -- 30,275,189 $30,275 $ 15,696,536 $ -- $(11,908,445) $ 3,818,366
======== ======= =========== ======= ============ =========== ============ ===========
See accompanying footnotes to the unaudited condensed consolidated financial information
9
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the period from
Nine Months Ended September 30, November 3, 1999 (date
2002 (As Restated of inception) through
2003 - Note F) September 30, 2003
---- --------- ------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from development stage operations $ (5,449,769) $(2,379,746) $(11,908,445)
Adjustments to reconcile net loss from development stage
operations to cash used for operating activities
Amortization of debt discount - beneficial conversion feature of
convertible debentures 629,455 311,504 1,162,877
Amortization of debt discount - value of warrants attached to
convertible debentures 85,377 27,558 133,319
Stock options and warrants issued in exchange for services
rendered (Note D) 482,642 -- 1,438,504
Common stock issued in exchange for services rendered (Note E) 362,006 138,720 512,308
Common stock issued in exchange for conversion of interest (Note
B) 272,625 21,793 294,418
Impairment of property and equipment -- -- 39,287
Write-off of financing costs in connection with conversion of
convertible debentures (Note B) 186,400 -- 186,400
Depreciation and amortization 100,838 93,126 237,782
(Increase) decrease in:
Accounts receivable (2,297) (1,194) (3,847)
Inventory (566,504) (43,997) (606,294)
Prepaid expenses and deposits (50,120) (5,000) (54,746)
Accounts payable and accrued expenses, net 111,435 360,729 630,300
------------- ------------ -------------
NET CASH USED IN OPERATING ACTIVITIES (3,837,912) (1,476,507) (7,938,137)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of disposals (65,742) (15,638) (178,244)
------------- ------------ -------------
NET CASH USED IN INVESTING ACTIVITIES (65,742) (15,638) (178,244)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of costs (Note E) 666 621,495 1,751,890
Proceeds from (repayments of) stockholder advances (122,830) 5,238 7,500
Proceeds from issuance of convertible debentures, net of costs
(Note B) 2,027,100 715,407 4,067,100
Proceeds from issuance of senior notes, net of costs (Note C) 5,000,000 -- 5,000,000
Proceeds from exercise of warrants (Note E) 3,847,250 -- 3,847,250
Proceeds from exercise of stock options and warrants 249,999 -- 249,999
Proceeds from (repayments of) loans (310,000) 133,000 --
------------- ------------ -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,692,185 1,475,140 14,923,739
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS 6,788,531 (17,005) 6,807,358
Cash and cash equivalents at the beginning of the period 18,827 21,885 --
------------- ------------ -------------
Cash and cash equivalents at the end of the period $ 6,807,358 $ 4,880 $ 6,807,358
------------- ------------ -------------
See accompanying footnotes to the unaudited condensed consolidated financial information
10
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the period from
Nine Months Ended September 30, November 3, 1999 (date
2002 (As Restated of inception) through
2003 - Note F) September 30, 2003
---- --------- ------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ 33,105 $ 25,011 $ 58,070
Income taxes paid -- -- --
Non-cash transactions: -- -- --
Issuance of stock options and warrants in exchange for services
rendered 482,642 -- 1,438,504
Issuance of stock warrants in exchange for financing costs 87,217 -- 173,691
Common stock issued for services rendered 362,006 138,720 512,308
Common stock issued in exchange for interest 272,625 21,793 294,418
Common stock issued in exchange for conversion of convertible
debenture 3,797,100 -- 3,797,100
Common stock issued in exchange for Senior Note 2,011,000 -- 2,011,000
Notes payable issued in connection with capital lease, net of
repayments 33,569 -- 33,569
Beneficial conversion feature on convertible debentures 1,761,675 693,018 3,440,426
Value of warrants attached to convertible debentures 265,425 56,082 467,356
Acquisition:
Assets Acquired -- -- 1
Accumulated Deficit -- -- 2,643
Liabilities Assumed -- -- (2,642)
----------- --------- ------------
$ -- $ -- $ 1
----------- --------- ------------
See accompanying footnotes to the unaudited condensed consolidated financial information
11
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
---------------------------------------
General
-------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB. 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.
Accordingly, the results from operations for the nine-month period ended
September 30, 2003, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003. The unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated December 31, 2002 financial statements and footnotes thereto
included in the Company's SEC Form 10-KSB for the year ended December 31, 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 7") and is seeking to develop, produce and market
proprietary equipment enabling the transmission of voice and data over electric
utility lines. From its inception through the date of these financial
statements, the Company has recognized minimal revenues and has incurred
significant operating expenses.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Telkonet Communications, Inc. Significant
intercompany transactions have been eliminated in consolidation.
Reclassification
----------------
Certain reclassifications have been made to conform prior periods' data to the
current presentation. These reclassifications had no effect on reported losses.
Concentrations of Credit Risk
-----------------------------
Financial instruments and related items, which potentially subject the Company
to concentrations of credit risk, consist primarily of cash and cash
equivalents. The Company places its cash and temporary cash investments with
credit quality institutions. At times, such investments may be in excess of the
FDIC insurance limit.
Stock Based Compensation
------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended December 31, 2002 and for
the subsequent periods.
12
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Stock Based Compensation (Continued)
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note D):
For the three months ended For the nine months ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss - as reported $(1,990,053) $(904,612) $(5,449,769) $(2,379,746)
Add: Total stock based employee compensation expense
as reported under intrinsic value method (APB. No 25) -- -- -- --
Deduct: Total stock based employee compensation
expense as reported under fair value based method
(SFAS No. 123) (1,053,747) (52,708) (2,344,881) (158,124)
------------ ---------- ------------ ------------
Net loss - Pro Forma $(3,043,800) $(957,320) $(7,794,650) $(2,537,870)
Net loss attributable to common stockholders - Pro
forma $(3,043,800) $(957,320) $(7,794,650) $(2,537,870)
Basic (and assuming dilution) loss per share - as
reported $ (0.09) $ (0.05) $ (0.31) $ (0.14)
Basic (and assuming dilution) loss per share - Pro
forma $ (0.15) $ (0.06) $ (0.44) $ (0.15)
New Accounting Pronouncements
-----------------------------
In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS 149 amends SFAS No. 133 to provide clarification on the
financial accounting and reporting of derivative instruments and hedging
activities and requires that contracts with similar characteristics be accounted
for on a comparable basis. The provisions of SFAS 149 are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 will not
have a material impact on the Company's results of operations or financial
position.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS 150 will not have a material impact on the Company's
results of operations or financial position.
13
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE
A summary of convertible promissory notes payable at September 30, 2003 and
December 31, 2002 is as follows:
September 30, December 31,
2003 2002
---- ----
Convertible notes payable ("Debenture-1"), in
quarterly installments of interest only at 8% per
annum, unsecured and due three years from the date
of the note with the latest maturity May 2005;
Noteholder has the option to convert unpaid note
principal together with accrued and unpaid interest
to the Company's common stock at a rate of $.50 per
share six months after issuance $ 72,000 $ 1,689,100
Debt Discount - beneficial conversion feature, net
of accumulated amortization of $35,972 and $531,858
at September 30, 2003 and December 31, 2002,
respectively (30,157) (999,034)
Debt Discount - value attributable to warrants
attached to notes, net of accumulated amortization
of $3,132 and $47,216 at September 30, 2003 and
December 31, 2002, respectively (2,589) (86,120)
------------ ------------
39,254 603,946
Convertible notes payable ("Series B Debenture"),
in quarterly installments of interest only at 8%
per annum, unsecured and due three years from the
date of the note with the latest maturity February
2006; Noteholder has the option to convert unpaid
note principal together with accrued and unpaid
interest to the Company's common stock at a rate of
$.55 per share six months after issuance 320,000 472,900
Debt Discount - beneficial conversion feature, net
of accumulated amortization of $55,058 and $1,564
at September 30, 2003 and December 31, 2002,
respectively (200,914) (146,295)
Debt Discount - value attributable to warrants
attached to notes, net of accumulated amortization
of $9,631 and $726 at September 30, 2003 and
December 31, 2002, respectively (34,978) (67,869)
------------ ------------
84,108 258,736
------------ ------------
Total $ 123,362 $ 862,682
------------ ------------
Less: current portion -- --
------------ ------------
$ 123,362 $ 862,682
============ ============
14
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (CONTINUED)
Convertible Debentures
----------------------
During the year ended December 31, 2001, the Company issued convertible
promissory notes (the "Debenture-1") to Company officers, shareholders, and
sophisticated investors in exchange for $940,000, exclusive of placement costs
and fees. The Debenture-1 accrues interest at 8% per annum and is payable and
due three years from the date of the note with the latest maturity date of
November 2004. Noteholder has the option to convert any unpaid note principal
together with accrued and unpaid interest to the Company's common stock at a
rate of $.50 per share six months after issuance. In accordance with EMERGING
ISSUES TASK FORCE ISSUE 98-5, ACCOUNTING FOR CONVERTIBLE SECURITIES WITH A
BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIOS
("EITF 98-5"), the Company recognized an imbedded beneficial conversion feature
present in the Debenture-1 note. The Company allocated a portion of the proceeds
equal to the intrinsic value of that feature to additional paid in capital. The
Company recognized and measured an aggregate of $837,874 of the proceeds, which
is equal to the intrinsic value of the imbedded beneficial conversion feature,
to additional paid in capital and a discount against the Debenture-1. The debt
discount attributed to the beneficial conversion feature is amortized over the
Debenture-1's maturity period (three years) as interest expense.
In connection with the placement of the Debenture-1 notes, the Company issued
non-detachable warrants granting the holders the right to acquire 940,000 shares
of the Company's common stock at $1.00 per share. In accordance with EMERGING
ISSUES TASK FORCE ISSUE 00-27, APPLICATION OF ISSUE NO. 98-5 TO CERTAIN
CONVERTIBLE INSTRUMENTS ("EITF - 0027"), the Company recognized the value
attributable to the warrants in the amount of $77,254 to additional paid in
capital and a discount against the Debenture-1. The Company valued the warrants
in accordance with EITF 00-27 using the Black-Scholes pricing model and the
following assumptions: contractual terms of 3 years, an average risk free
interest rate of 1.25%, a dividend yield of 0%, and volatility of 26%. The debt
discount attributed to the value of the warrants issued is amortized over the
Debenture-1's maturity period (three years) as interest expense.
During the year ended December 31, 2002, the Company issued the Debenture-1 to
Company officers, shareholders, and sophisticated investors in exchange for
$749,100, exclusive of placement costs and fees. The Debenture-1 accrues
interest at 8% per annum and is payable and due three years from the date of the
note with the latest maturity date of May 2005. Noteholders have the option to
convert any unpaid note principal together with accrued and unpaid interest to
the Company's common stock at a rate of $.50 per share six months after
issuance.
In accordance with EMERGING ISSUES TASK FORCE ISSUE 98-5, ACCOUNTING FOR
CONVERTIBLE SECURITIES WITH A BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY
ADJUSTABLE CONVERSION RATIOS ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Debenture-1 note. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid in capital. The Company recognized and measured an aggregate
of $693,018 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid in capital and a
discount against the Debenture-1. The debt discount attributed to the beneficial
conversion feature is amortized over the Debenture-1's maturity period (three
years) as interest expense.
In connection with the placement of the Debenture-1 notes in 2002, the Company
issued non-detachable warrants granting the holders the right to acquire 749,100
shares of the Company's common stock at $1.00 per share. In accordance with
EMERGING ISSUES TASK FORCE ISSUE 00-27, APPLICATION OF ISSUE NO. 98-5 TO CERTAIN
CONVERTIBLE INSTRUMENTS ("EITF -0027"), the Company recognized the value
attributable to the warrants in the amount of $56,082 to additional paid in
capital and a discount against the Debenture-1. The Company valued the warrants
in accordance with EITF 00-27 using the Black-Scholes pricing model and the
following assumptions: contractual terms of 3 years, an average risk free
interest rate of 1.67%, a dividend yield of 0%, and volatility of 26%. The debt
discount attributed to the value of the warrants issued is amortized over the
Debenture-1's maturity period (three years) as interest expense.
15
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (CONTINUED)
Series B Debentures
-------------------
In October and December 2002, the Company issued convertible promissory notes
(the "Series B Debentures") to Company officers, shareholders, and sophisticated
investors in exchange for $472,900, exclusive of placement costs and fees .The
Series B Debentures accrue interest at 8% per annum and are payable and due
three years from the date of the note with the latest maturity date of December
2005. Noteholders have the option to convert any unpaid note principal together
with accrued and unpaid interest to the Company's common stock at a rate of $.55
per share six months after issuance.
In accordance with EMERGING ISSUES TASK FORCE ISSUE 98-5, ACCOUNTING FOR
CONVERTIBLE SECURITIES WITH A BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY
ADJUSTABLE CONVERSION RATIOS ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Series B Debenture note. The
Company allocated a portion of the proceeds equal to the intrinsic value of that
feature to additional paid in capital. The Company recognized and measured an
aggregate of $147,859 of the proceeds, which is equal to the intrinsic value of
the imbedded beneficial conversion feature, to additional paid in capital and a
discount against the Series B Debentures. The debt discount attributed to the
beneficial conversion feature is amortized over the Series B Debentures maturity
period (three years) as interest expense.
In connection with the placement of the Series B Debentures in 2002, the Company
issued non-detachable warrants granting the holders the right to acquire 472,900
shares of the Company's common stock at $1.00 per share. In accordance with
Emerging Issues Task Force Issue 00-27, Application of Issue no. 98-5 to Certain
Convertible Instruments ("EITF -0027"), the Company recognized the value
attributable to the warrants in the amount of $68,595 to additional paid in
capital and a discount against the Series B Debentures. The Company valued the
warrants in accordance with EITF 00-27 using the Black-Scholes pricing model and
the following assumptions: contractual terms of 3 years, an average risk free
interest rate of 1.67%, a dividend yield of 0%, and volatility of 26%. The debt
discount attributed to the value of the warrants issued is amortized over the
Series B Debentures maturity period (three years) as interest expense.
In January and February 2003, the Company issued convertible Series B Debentures
to Company officers, shareholders, and sophisticated investors in exchange for
$2,027,100, exclusive of placement costs and fees. The Series B Debentures
accrue interest at 8% per annum and are payable and due three years from the
date of the note with the latest maturity date of February 2006. Noteholders
have the option to convert any unpaid note principal together with accrued and
unpaid interest to the Company's common stock at a rate of $.55 per share six
months after issuance.
In accordance with EMERGING ISSUES TASK FORCE ISSUE 98-5, ACCOUNTING FOR
CONVERTIBLE SECURITIES WITH A BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY
ADJUSTABLE CONVERSION RATIOS ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Series B Debenture note. The
Company allocated a portion of the proceeds equal to the intrinsic value of that
feature to additional paid in capital. The Company recognized and measured an
aggregate of $1,761,675 of the proceeds, which is equal to the intrinsic value
of the imbedded beneficial conversion feature, to additional paid in capital and
a discount against the Series B Debentures. The debt discount attributed to the
beneficial conversion feature is amortized over the Series B Debentures maturity
period (three years) as interest expense.
In connection with the placement of the Series B Debenture notes in January and
February 2003, the Company issued non-detachable warrants granting the holders
the right to acquire 2,027,100 shares of the Company's common stock at $1.00 per
share. In accordance with EMERGING ISSUES TASK FORCE ISSUE 00-27, APPLICATION OF
ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS ("EITF -0027"), the Company
recognized the value attributable to the warrants in the amount of $265,425 to
additional paid in capital and a discount against the Series B Debentures. The
Company valued the warrants in accordance with EITF 00-27 using the
Black-Scholes pricing model and the following assumptions: contractual terms of
3 years, an average risk free interest rate of 1.25%, a dividend yield of 0%,
and volatility of 26%. The debt discount attributed to the value of the warrants
issued is amortized over the Series B Debentures maturity period (three years)
as interest expense.
16
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (CONTINUED)
The Company amortized the Debenture 1 and the Series B Debenture debt discount
attributed to the beneficial conversion feature and the value of the attached
warrants and recorded non-cash interest expense of $714,832 and $339,061 for the
nine months ended September 30, 2003 and 2002, respectively.
During the quarter ended September 30, 2003, the Debenture-1 noteholders
demanded registration of that number of common shares of the Company sufficient
to cover the conversion of their debentures and exercise of the attached
warrants. Accordingly, the Company notified the Series B Debenture noteholders,
Senior noteholders (Note C) and warrant holders with piggy-back registration
rights of their right to participate in the registration. During the quarter
ended September 30, 2003, the Company issued an aggregate of 7,157,836 shares of
common stock in connection with the conversion of $1,597,100 aggregate principal
amount of the Debenture-1 and $2,180,000 aggregate principal amount of the
Series B Debentures. The Company also issued an aggregate of 511,143 shares of
common stock in exchange for accrued interest of $187,039 and $85,586 for
Debenture 1 and Series B Debentures respectively.
In connection with the conversion of Debenture-1 and Series B Debentures, the
Company wrote off the un-amortized debt discount attributed to the beneficial
conversion feature and the value of the attached warrants in the amount of
$2,046,479 and $296,470, respectively. Un-amortized financing cost of $186,400
in connection with issuance of Debenture-1 and Series B Debenture was charged to
operation during the quarter ended September 30, 2003.
NOTE C - SENIOR NOTES PAYABLE
In April, May and June 2003, the Company issued Senior Notes to Company
officers, shareholders, and sophisticated investors in exchange for $5,000,000,
exclusive of placement costs and fees. The Senior Notes are denominated in units
of $100,000, accrue interest at 8% per annum and are due three years from the
date of issuance with the latest maturity date of June 2006. Attached to each
Senior Note are warrants to purchase 125,000 shares of common stock. The
warrants have a three-year contractual life and are exercisable immediately
after the issuance of the Senior Note at an exercise price of $1.00 per share.
The Senior Notes are secured by a first priority security interest in all
intellectual property assets of the Company. The Company plans to use the
proceeds from the Senior Notes for expansion of sales, marketing and strategic
partnership programs, building required infrastructure and for working capital.
In September 2003, certain Senior noteholders elected to surrender their Senior
Note as consideration for the exercise of warrants to purchase shares of common
stock of the Company. The Company issued an aggregate of 2,011,000 restricted
shares of common stock for warrants exercised at $1.00 per share, in exchange
for $2,011,000 of Senior Notes. The outstanding balance on the Senior Notes as
of September 30, 2003 is $2,989,000.
NOTE D - STOCK OPTIONS AND WARRANTS
Employee Stock Options
----------------------
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company under a non-qualified employee stock option plan.
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average Weighted Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
$1.00 6,775,000 8.09 $1.00 2,301,185 $1.00
$1.51 200,000 9.50 $1.51 33,334 $1.51
$2.35 465,000 9.50 $2.35 77,501 $2.35
$3.43 25,000 9.50 $3.43 4,166 $3.43
---------------- ---- ----- --------- -----
7,465,000 9.02 $1.11 2,416,186 $1.05
================ ==== ===== ========= =====
17
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE D - STOCK OPTIONS AND WARRANTS (CONTINUED)
Employee Stock Options (Continued)
----------------------------------
Transactions involving stock options issued to employees are summarized as
follows:
Weighted Average
Number of Shares Price Per Share
---------------- ---------------
Outstanding at January 1, 2001 840,000 --
Granted 215,000 $ 1.00
Exercised -- --
Canceled or expired -- --
----------- ----------
Outstanding at December 31, 2001 1,055,000 1.00
----------- ----------
Granted 2,835,000 1.00
Exercised (1,000,000) 1.00
Canceled or expired (1,440,000) 1.00
----------- ----------
Outstanding at December 31, 2002 1,450,000 $ 1.00
----------- ----------
Granted 6,098,333 1.11
Exercised (83,333) 1.00
Canceled or expired -- --
----------- ----------
Outstanding at September 30, 2003 7,465,000 $ 1.11
=========== ==========
The weighted-average fair value of stock options granted to employees during the
period ended September 30, 2003 and 2002 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
2003 2002
---- ----
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 1.02% 1.67%
Expected stock price volatility 26% 26%
Expected dividend payout - -
Expected option life-years (a) 10 10
(a)The expected option life is based on contractual expiration dates.
If the Company recognized compensation cost for the non-qualified employee stock
option plan in accordance with SFAS No. 123, the Company's pro forma net loss
and net loss per share would have been $(7,794,650) and $(0.44) for the nine
months ended September 30, 2003 and $(2,537,870) and $(0.15) for the nine months
ended September 30, 2002, respectively.
Non-Employee Stock Options
--------------------------
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to the
Company consultants. These options were granted in lieu of cash compensation for
services performed.
Options Outstanding Options Exercisable
Weighted Average Weighed Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
$ 1.00 2,788,334 8.93 $ 1.00 1,715,417 $ 1.00
18
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE D - STOCK OPTIONS AND WARRANTS (CONTINUED)
Non-Employee Stock Options (Continued)
--------------------------------------
Transactions involving options issued to non-employees are summarized as
follows:
Weighted Average
Number of Shares Price Per Share
---------------- ---------------
Outstanding at January 1, 2001 246,502 $ 0.70
Granted - -
Exercised - -
Canceled or expired - -
----------- -------------
Outstanding at December 31, 2001 246,502 0.70
----------- -------------
Granted 2,455,000 1.00
Exercised (1,146,502) 0.96
Canceled or expired - -
----------- -------------
Outstanding at December 31, 2002 1,555,000 $ 1.00
----------- -------------
Granted 1,400,000 1.00
Exercised (166,666) 1.00
Canceled or expired - -
----------- -------------
Outstanding at September 30, 2003 2,788,334 $ 1.00
=========== =============
The estimated value of the options granted to consultants during the period
ended September 30, 2003 was determined using the Black-Scholes option pricing
model and the following assumptions: contractual term of 10 years, a risk free
interest rate of 1.02%, a dividend yield of 0% and volatility of 26%. The amount
of the expense charged to operations in connection with granting the options was
$475,892 and $0 during the period ended September 30, 2003 and 2002,
respectively.
Warrants
--------
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
non-employees of the Company. These warrants were granted in lieu of cash
compensation for services performed or financing expenses and in connection with
placement of convertible debentures.
Warrants Outstanding Warrants Exercisable
Weighted Average Weighed Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
$ .50 315,000 7.75 $ .50 315,000 $ .50
$ .53 279,080 2.75 $ .53 279,080 $ .53
$ .66 80,000 2.75 $ .66 80,000 $ .66
$ 1.00 6,903,661 2.75 $ 1.00 6,903,661 $ 1.00
$ 2.54 50,000 2.75 $ 2.54 8,334 $ 2.54
$ 2.97 35,000 2.75 $ 2.97 5,834 $ 2.97
--------- ---- --------- ----- ---------
7,662,741 3.09 $ 0.98 7,662,741 $ 0.98
========= ==== ========= ========= =========
19
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE D - STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants (Continued)
--------------------
Transactions involving warrants are summarized as follows:
Weighted Average
Number of Shares Price Per Share
Outstanding at January 1, 2001 1,210,572 $ 1.00
Granted 3,528,665 0.67
Exercised -- --
Canceled or expired (1,210,572) 1.00
---------- ---------
Outstanding at December 31, 2001 3,528,665 $ 0.67
---------- ---------
Granted 1,667,460 0.87
Exercised (1,650,675) 0.51
Canceled or expired (13,990) 1.00
---------- ---------
Outstanding at December 31, 2002 3,531,460 $ 0.84
---------- ---------
Granted 8,591,800 1.01
Exercised (4,460,519) 1.00
Canceled or expired -- --
---------- ---------
Outstanding at September 30, 2003 7,662,741 $ 0.98
========== =========
The estimated value of the compensatory warrants granted to non-employees in
exchange for services and financing expenses during the period ended September
30, 2003 was determined using the Black-Scholes pricing model and the following
assumptions: contractual term of 3 to 8 years, a risk free interest rate of
1.02%, a dividend yield of 0% and volatility of 26%. The amount of the expense
charged to operations for compensatory warrants granted in exchange for services
was $6,750 and $0 during the period ended September 30, 2003 and 2002,
respectively. The Company also capitalized financing costs of $87,217 and $0 for
compensatory warrants granted in connection with placement of convertible
debentures for the period ended September 30, 2003 and 2002, respectively. The
financing cost was amortized over the life (three years) of the convertible
debenture.
NOTE E - CAPITAL STOCK
The Company has authorized 15,000,000 shares of preferred stock, par value $.001
per share. As of September 30, 2003 and December 31, 2002, the Company has no
preferred stock issued and outstanding. The Company has authorized 100,000,000
shares of common stock, par value $.001 per share. As of September 30, 2003 and
December 31, 2002, the Company had 30,275,189 and 15,721,131 shares of common
stock authorized issued and outstanding, respectively.
In April 2003, the Company issued 40,000 shares of common stock at $0.50 per
share to one of its convertible debenture holders in exchange for the
forgiveness of $20,000 of the Debenture-1 principal amount due to the
noteholder.
In April 2003, the Company issued 49,998 shares of common stock at approximately
$1.54 per share to consultants for services rendered, which approximated the
fair value of the shares issued during the period the services were completed
and rendered. Compensation costs of $76,745 were charged to operations.
In June 2003, the Company issued 83,333 shares of common stock for an aggregate
purchase price of $83,333 to an employee upon exercise of employee stock options
at $1.00 per share. Additionally, the Company issued 83,333 shares of common
stock for an aggregate purchase price of $83,333 to a consultant upon exercise
of non-employee stock options at $1.00 per share.
20
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE E - CAPITAL STOCK (CONTINUED)
In July 2003, the Company issued an aggregate of 178,851 shares of common stock
to consultants upon exercise of warrants at $0.66 and $0.53 per share.
Additionally, the Company issued an aggregate of 143,648 shares of common stock
to its convertible debenture holders upon exercise of warrants at $1.00 per
share.
In August 2003, the Company issued an aggregate of 7,668,979 shares of common
stock to its convertible debenture holders upon conversion of $3,777,100 of debt
and $272,625 of accrued interest (see Note B). The Company also issued 83,333
shares of common stock to an consultant, for non-employee stock options
exercised at $1.00 per share. Additionally, the Company issued 333 shares of
common stock for $666, net of costs and fees.
In September 2003, the Company issued an aggregate of 3,597,250 and 500,000
shares of common stock upon the exercise of warrants at $1.00 and $0.50 per
share, respectively. The Company issued an aggregate of 2,011,000 restricted
shares of common stock upon the exercise of warrants exerciseable at $1.00 per
share, in exchange for $2,011,000 of Senior Notes (see Note C). The Company also
issued an aggregate of 114,000 shares at an average price per share of $2.50 to
consultants for services rendered, which approximated the fair value of the
shares issued during the period the services were completed and rendered.
Share amounts presented in the consolidated balance sheets and consolidated
statements of stockholders' equity reflect the actual share amounts outstanding
for each period presented.
NOTE F - RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated its financial statements for the year ended December
31, 2001 and for the period ended September 30, 2002 to correct the following
errors in the financial statements previously filed:
o For the year ended December 31, 2001, the Company erroneously
recorded the Black-Scholes value of the 940,000 warrants
attached to its convertible debentures as an asset (financing
cost), and amortized over the maturity period (three year) of
the note.
o For the year ended December 31, 2001, the Company erroneously
recorded the beneficial conversion feature of its convertible
debentures as an asset (financing cost) and the beneficial
conversion feature was erroneously amortized over six-months
(from the issuance of the note to the earliest conversion
date).
o For the year ended December 31, 2001, the Company erroneously
recorded impairment of property and equipment as research and
development expense.
o For the period ended September 30, 2002, the Company
erroneously failed to record and amortize the beneficial
conversion feature of its convertible debentures and value of
warrants attached to the convertible debentures.
The net effect of the correction of these errors was to:
o Decrease the Company's reported net loss for the year ended
December 31, 2001 by $289,645 from $(2,006,140) to
$(1,716,495). Increase the Company's reported net loss for the
period September 30, 2002 by $335,303 from $(2,044,443) to
$(2,379,746).
o Decrease the loss per share for the year ended December 31,
2001 by $.01 from $(.09) to $(.08) per share. Increase the
loss per share for the period ended September 30, 2002 by $.02
from $(.12) to $(.14) per share.
o Increase the deficiency accumulated during the development
stage from November 3, 1999 to September 30, 2002, by $45,659
from $(5,014,276) to $(5,059,935).
o Decrease other assets (financing costs) as of September 30,
2002, by $497,288 from $600,625 to $103,337.
o Increase debt discount as of September 30, 2002, by $1,223,838
from $0 to $1,223,838.
o Increase additional paid in capital as of September 30, 2002,
by $771,977 from $4,791,838 to $5,563,815.
21
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE G - SUBSEQUENT EVENTS
Subsequent to the date of the financial statements, a Director/Shareholder, and
an Officer/Director/Shareholder exercised warrants of 315,000 and 11,667 at an
exercise price of $.50 and $1.00, respectively. Additionally, stock options were
exercised by a non-employee and employee for 20,833 and 10,000 respectively, at
an exercise price of $1.00. The proforma balance sheet below represents the
effect of the exercise of warrants and options as if it had occurred as of
September 30, 2003.
SUMMARY PROFORMA BALANCE SHEET
($000's) Unaudited Proforma Adjustments Proforma
9/30/03 Dr. Cr. 9/30/03
ASSETS:
Cash $6,807,358 $ 200,000 -- $7,007,358
Other current assets 664,887 -- -- 664,887
----------------------------------------------------------
Total current assets 7,472,245 200,000 -- 7,672,245
Other assets 129,853 -- -- 129,853
----------------------------------------------------------
Total Assets 7,602,098 $ 200,000 -- $7,802,098
==========================================================
LIABILITIES & SHAREHOLDER'S EQUITY
Current liabilities $ 671,369 -- -- $ 671,369
Convertible debentures - net of discounts 123,362 -- -- 123,362
Senior notes 2,989,000 2,989,000
Shareholder's equity 3,818,367 $ 200,000 4,018,367
----------------------------------------------------------
Total liabilities & shareholder's equity $7,602,098 -- $ 200,000 $7,802,098
==========================================================
Item 2. Management's Discussion and Analysis
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 that focuses
primarily on high-speed Internet distribution over the electrical power lines of
commercial buildings, hotels, multi-dwelling residential units, government
buildings and schools. Telkonet's 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 solution
can be implemented more quickly and less expensively than adding dedicated
wiring or installing wireless systems.
Since the Company's formation it has worked on the development of its commercial
grade high speed Internet access product solution. The Company has recently
commenced marketing its suite of PlugPlus 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.
22
The Telkonet PlugPlus 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 is comprised of three products, the PLUGPLUS
GATEWAY, PLUGPLUS COUPLER and the PLUGPLUS MODEM.
The Telkonet PlugPlus solution is aimed at multi-user applications such as
hotels/motels, residential apartment complexes, government, schools and a
variety of small and medium sized businesses. High-speed Internet connections
are becoming widely available and providers are focused on meeting the demands
of new and existing customers for high-speed Internet access. Several companies
now specialize in providing T1 access and most telephone companies now offer DSL
products. 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 with the backbone of the Internet by taking the
signal from any of these broadband sources and, through the Telkonet PlugPlus
Gateway, distributing access to the Internet to the end user over the existing
electrical wiring in the building. With the Telkonet PlugPlus Gateway in place,
access is provided by simply plugging the user's Telkonet PlugPlus Modem into
the nearest standard electrical outlet. Any existing electrical outlet in the
structure can provide immediate access to the Internet via a Telkonet PlugPlus
Modem. Moving the location of a PC, server, or printer is accomplished by simply
moving the PlugPlus Modem to another electrical outlet. No additional wiring is
required and changes can be made quickly and easily.
Telkonet has applied for patents that cover the unique technology integrated
into the PlugPlus family of products. The Company also continues 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 of the PlugPlus family of products.
Forward Looking Statements
--------------------------
This report may contain "forward-looking statements" which represent the
Company's expectations or beliefs, including, but not limited to, statements
concerning industry performance and the Company's results, operations,
performance, financial condition, plans, growth and strategies, which include,
without limitation, statements preceded or followed by or that include the words
"may," "will," "expect," "anticipate," "intend," "could," "estimate," or
"continue" or the negative or other variations thereof or comparable
terminology. Any statements contained in this report or the information
incorporated by reference that are not statements of historical fact may be
deemed to be forward-looking statements within the meaning of Section 27(A) of
the Securities Act of 1933 and Section 21(F) of the Securities Exchange Act of
1934. For such statements, the Company claims the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995. These statements by their nature involve substantial risks
and uncertainties, some of which are beyond the Company's control, and actual
results may differ materially depending on a variety of important factors, many
of which are also beyond the Company's control. You should not place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. The Company does not undertake any obligation to update or release
any revisions to these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events, except to the extent such updates and/or revisions are
required by applicable law.
Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------
Operations
----------
During the period ended September 30, 2003, Telkonet began its transition out of
its development stage with the launch of its PlugPlus product suite. 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, 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 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
Telkonet's business, operations and infrastructure and the implementation of
marketing programs, key agreements and strategic alliances, the number of
products offered by Telkonet, the number of returns experienced by Telkonet, and
general economic conditions specific to the Internet, power-line communications,
and the communications industry.
23
Revenues
--------
To date, Telkonet has not generated any significant revenues as it was emerging
from its development stage. Telkonet's management believes the Company will
begin earning revenues from operations within the next three to six months as a
result of the acceleration of its sales and marketing efforts. During the
quarter, the Company doubled its sales and marketing staff with the addition of
five industry experienced professionals. Also, with the participation in the
hospitality, multi-dwelling and government trade shows, development and
distribution of marketing collateral and targeted print and electronic
advertising, a high level of qualified leads have been generated. Additionally,
qualified Value Added Reseller partners have been added to promote our solution
to their customer base which will augment our internal sales effort in both the
U.S. and Canadian markets.
Costs and expenses
------------------
From its inception on November 3, 1999 through September 30, 2003, Telkonet has
incurred operating expenses of $9,946,831. These expenses were associated
principally with compensation to employees, product development costs,
professional services, sales and marketing and costs associated with
non-employee stock options.
Overall expenses increased for the three and nine months ended September 30 2003
over the comparable period in 2002 by $931,820 or 138% and $2,334,665 or 121%,
respectively. These increases are principally due to an increase in payroll and
related costs for development, sales and marketing and administrative functions,
and external costs associated with product development, pre-production costs for
the PlugPlus powerline products and costs associated with non-employee stock
options issued in connection with services rendered.
Liquidity and Capital Resources
-------------------------------
To date, Telkonet has not generated any significant revenues to offset its
development and organizational expenses. As a result of Telkonet's operating
losses from its inception through September 30, 2003, Telkonet generated a cash
flow deficit of $7,938,137 from operating activities. As of September 30, 2003,
Telkonet's current assets exceeded its current liabilities by $6,800,875. Of the
total current assets of $7,472,245, cash represented $6,807,358 of this amount
as of September 30, 2003. For the period from inception through September 30,
2003, Telkonet has accumulated losses of $11,908,445. Consequently, its
operations are subject to all risks inherent in the establishment of a new
business enterprise.
While Telkonet has raised sufficient capital to meet its working capital and
financing needs to date, additional financing may be required in order to meet
Telkonet's current and projected cash flow deficits from operations and
development during the next twelve months. Management belives it has sufficient
capital resources to meet projected cash flow deficits through the next twelve
months. However, if thereafter, we are not successful in generating sufficient
liquidity from operations or in raising sufficient capital resources on terms
acceptable to us, this could have a material adverse effect on our business,
results of operations, liquidity and financial condition.
During the period ended September 30, 2003, the Debenture-1 holders demanded
registration of shares of Telkonet common stock sufficient to cover conversion
of their debentures and exercise of the attached stock purchase warrants.
Following this demand for registration, Telkonet notified the Series B Debenture
holders, Senior Noteholders and warrant holders with piggy-back registration
rights of their right to participate in the registration. Approximately 11.7
million shares of Telkonet common stock were registered in this registration.
The registration statement was declared effective by the SEC on September 24,
2003.
In connection with the registration, certain Debenture-1 holders, Series B
Debenture holders and Senior Noteholders exercised their nondetachable stock
purchase warrants. Telkonet received approximately $3.8 million in cash as a
result of the exercise of warrants and converted approximately $6.3 million of
debt into equity as a result of the conversion of Debentures-1, Series B
Debentures and Senior Notes into shares of Telkonet common stock. Moreover, on
September 30, 2003, certain Senior Noteholders elected to use their Senior Notes
as consideration for the exercise of certain warrants held by them. As a result,
approximately $2.0 million of the Senior Note debt was converted to equity upon
exercise of the warrants and issuance of the underlying Telkonet common stock.
Telkonet's independent certified public accountants have stated in their report
included in Telkonet's December 31, 2002 Form 10-KSB, that Telkonet has incurred
operating losses in the last two years, and that Telkonet is dependent upon
management's ability to develop profitable operations. These factors, among
others, may raise substantial doubt about Telkonet's ability to continue as a
going concern.
24
Product Research and Development
--------------------------------
Company-sponsored research and development costs related to both present and
future products are expended in the period incurred. Total expenses for the
three and nine months ended September 30, 2003 increased over the comparable
period in 2002 by $26,486 or 7.8% and $21,753 or 2.3%, respectively. The
increase in the three and nine month periods was primarily related to a $20,000
employee relocation expense and an increase of one full-time equivalent
headcount.
Selling, General and Administrative
-----------------------------------
Selling, general and administrative expenses increased for the three and nine
months ended September 30, 2003 over the comparable period in 2002 by $719,572
or 231% and $1,829,308 or 204%, respectively. These increases were related to an
increase in payroll and associated cost for management, sales and marketing
resources, one-time costs associated with the Senior Note and Series B Debenture
fundraising, including commissions and public relations and employee separation
costs.
Acquisition or Disposition of Plant and Equipment
-------------------------------------------------
During the third quarter ended September 30, 2003, Telkonet purchased $11,064 of
fixed assets consisting primarily of computer 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 twelve months, other
than leasehold improvements, computer equipment and peripherals used in
Telkonet's day-to-day operations.
Number of Employees
-------------------
As of September 30, 2003, Telkonet had 23 employees. In order for Telkonet to
attract and retain quality personnel, Telkonet anticipates it will continue to
offer competitive salaries to current and future employees. As Telkonet
continues to expand, Telkonet will incur additional costs for personnel.
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 such risk factors before making an investment in Telkonet's common
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 affected. There
can be no assurance that Telkonet will be able to generate sufficient revenues
from the sale of its first product and other product candidates. Telkonet
expects negative cash flow from operations to continue for the next six 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 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.
25
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." As of September 30, 2003, there were approximately
30,275,189 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 Telkonet's stock price.
Item 3. Controls and Procedures.
As of September 30, 2003, Telkonet performed an evaluation, under the
supervision and with the participation of management, including Chief Executive
and Chief Financial Officer, of the effectiveness of the design and operation of
its disclosure controls and procedures as defined in rules 13a - 15(c) and 15d -
15(c) under the Securities Exchange Act of 1934, as amended. Based upon that
evaluation, the Chief Executive and Chief Financial Officer concluded that
Telkonet's disclosure controls and procedures are effective in timely alerting
them to material information required to be included in Telkont's periodic
filings with the U.S. Securities and Exchange Commission. There were no
significant changes in Telkonet's internal controls or in other factors that
could significantly affect these internal controls subsequent to the date of the
most recent evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 2003, Jenson Services, Inc. and James P. Doolin filed an action against
Telkonet in the Third Judicial District Court in and for Salt Lake County, State
of Utah. The action sets forth various counts all based on allegations that
Telkonet, through its agents, promised to undertake a registration of Telkonet
common stock and thereby allow the plaintiffs to exercise piggy-back
registration rights under a registration rights agreement. The action seeks
damages from Telkonet in unspecified amounts. Telkonet believes that the claims
of the plaintiffs are without merit, that it has meritorious defenses to such
claims, and Telkonet intends to defend itself against the plaintiffs' claims in
their entirety.
Item 2 - Changes in Securities
On July 3, 2003, Telkonet agreed to issue 5,000 shares of common stock to The
Research Works, Inc. as consideration for the preparation of a research report
by The Research Works, Inc.
On July 7, 2003, Telkonet agreed to issue 5,000 shares of common stock to
Market-Pulse Inc. as consideration for certain public relations services
provided by Market Pulse.
On July 21, 2003, Telkonet agreed to issue 17,000 shares of common stock to
CEOcast, Inc. as consideration for certain investor relations and consulting
services provided by CEOcast, Inc.
On August 26, 2003, Telkonet sold 333 shares of our common stock to H.E. and
Paula J. Fowler at a price of $2.00 per share.
Each of the transactions described in this Item 2 were effected in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933 and/or Rule 506 of Regulation D promulgated thereunder.
On September 23, 2003, the SEC declared effective the Company's registration
statement on Form S-1 for the registration of 11,714,503 shares of Telkonet
common stock that may be offered and sold from time to time by certain selling
stockholders listed in the registration statement. All net proceeds from the
sale of Telkonet common stock will go to the selling stockholders selling common
stock under the registration statement. The Company will not receive any
proceeds from the sale of Telkonet common stock sold by the selling
stockholders. The proceeds Telkonet receives from the exercise of warrants, the
underlying shares of Telkonet common stock of which are included in the
registration statement, will be used to expand sales and marketing efforts,
support strategic partnership programs, build required infrastructure and fund
working capital requirements.
26
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders ( the "Annual Meeting") on
September 4, 2003. At the Annual Meeting, the Company's stockholders elected
Warren V. Musser, Ronald W. Pickett, A. Hugo DeCesaris, David W. Grimes and
Stephen L. Sadle (collectively, the "Nominees") to the Company's Board of
Directors. The following lists the number of shares of common stock voted for
and against each of the Nominees.
Nominee Votes For Against
------- --------- -----------
Warren V. Musser 11,148,884 17,817
Ronald W. Pickett 11,149,284 17,417
A. Hugo DeCesaris 11,154,384 12,317
David W. Grimes 11,134,384 32,317
Stephen L. Sadle 11,154,186 12,515
The stockholders also voted at the Annual Meeting to approve stock option grants
to certain officers and directors of the Company. 8,873,702 shares of common
stock were voted in favor of and 58,712 shares of common stock were voted
against the approval of such stock option grants. There were 213,671 abstentions
and 2,020,616 broker non-votes with respect to such matter.
The stockholders also ratified at the Annual Meeting the appointment of Russell,
Bedford, Stefanou and Mirchandani, LLP as Telkonet's independent public
accountants for 2003. 11,113,050 shares of common stock were voted in favor of
and 11,869 shares of common stock were voted against the ratification of the
independent auditors. There were 41,782 abstentions and no broker non-votes with
respect to such matter.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Description
--- -----------
31.1 Certification of Ronald W. Pickett Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of E. Barry Smith Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Ronald W. Pickett Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of E. Barry Smith Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K filed during the three months ended September 30, 2003.
None
27
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
Date: November 13, 2003 By: /s/ Ronald W. Pickett
--------------------------- ----------------------
Ronald W. Pickett
President
28