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 March 31, 2004
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.)
20374 Seneca Meadows Parkway, Germantown, MD 20876
(Address of Principal Executive Offices)
(240) 912-1800
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: 43,447,393 shares of Common Stock
($.001 par value) as of May 10, 2004.
Transitional small business disclosure format: Yes [ ] No [x]
TELKONET, INC.
QUARTERLY REPORT ON FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDING MARCH 31, 2004
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
March 31, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Losses:
Three Months Ended March 31, 2004 and 2003 4
Condensed Consolidated Statement of Stockholders'
Equity January 1, 2004 through March 31, 2004 5
Condensed Consolidated Statements of Cash Flows:
Three Months Ended March 31, 2004 and 2003 6 - 7
Notes to Unaudited Condensed Consolidated Financial
Information:
March 31, 2004 8 - 17
Item 2. Management's Discussion and Analysis 18 - 23
Item 3. Controls and Procedures 23 - 24
PART II. OTHER INFORMATION 24
Item 1. Legal Proceedings 24 - 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25 - 26
2
Item 1. Financial Statements (Unaudited)
TELKONET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
March 31, 2004 December 31, 2003
-------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,084,703 $ 5,177,918
Accounts Receivable: trade and other, net of allowance for doubtful
accounts of $7,000 and $0 at March 31, 2004 and December 31, 2003,
respectively 120,226 58,196
Inventory, net 703,845 608,516
Prepaid expenses and deposits 198,949 107,991
------------- -------------
Total current assets 21,107,723 5,952,621
PROPERTY AND EQUIPMENT, AT COST:
Furniture and equipment, at cost 213,929 191,248
Less: accumulated depreciation 77,175 67,687
------------- -------------
Total property and equipment, net 136,754 123,561
EQUIPMENT UNDER OPERATING LEASES, AT COST:
Telecommunications and related equipment, at cost 58,073 33,888
Less: accumulated depreciation 8,986 3,485
------------- -------------
Total equipment under operating leases, net 49,087 30,403
OTHER ASSETS:
Deposits 70,000 70,000
------------- -------------
TOTAL ASSETS $ 21,363,564 $ 6,176,585
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 521,071 $ 629,852
Customer deposits 39,799 11,199
Capital leases 6,333 15,000
------------- -------------
Total current liabilities 567,203 656,051
LONGTERM LIABILITIES:
Convertible debentures, net of discounts - including related parties
(Note B) 113,880 143,205
Senior notes payable (Note C) 450,000 2,989,000
------------- -------------
Total long term liabilities 563,880 3,132,205
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001 per share; 15,000,000 shares
authorized; none issued at March 31, 2004 and December 31, 2003 (Note E) -- --
Common stock, par value $.001 per share; 100,000,000 shares authorized;
43,227,643 and 30,689,522 shares issued and outstanding at March 31,
2004 and December 31, 2003, respectively (Note E) 43,228 30,690
Additional paid-in-capital 36,342,827 16,474,251
Accumulated deficit (16,153,574) (14,116,612)
------------- -------------
Stockholders' equity 20,232,481 2,388,329
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,363,564 $ 6,176,585
============= =============
See accompanying footnotes to the unaudited condensed
consolidated financial information
3
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(UNAUDITED)
For The Three Months Ended March 31,
2004 2003
------------ ------------
Net Revenues $ 140,099 $ --
Cost of Sales 134,404 --
------------ ------------
Gross Profit 5,695 --
Costs and Expenses:
Research and Development 432,715 314,728
Selling, General and Administrative 1,354,191 520,122
Non-Employee Stock Options (Note D) 213,541 219,020
Depreciation and Amortization 14,990 33,544
------------ ------------
Total Operating Expense 2,015,437 1,087,414
Loss from Operations (2,009,742) (1,087,414)
Other Income (Expenses)
Interest Income 18,880 --
Interest Expense (46,100) (353,329)
------------ ------------
Total Other Income (Expenses) (27,220) (353,329)
Loss Before Provision for Income Taxes (2,036,962) (1,440,743)
Provision for Income Tax -- --
------------ ------------
Net Loss $(2,036,962) $(1,440,743)
============ ============
Loss per common share (basic and assuming
dilution) $ (0.09) $ (0.09)
============ ============
Weighted average common shares outstanding 22,171,554 15,721,131
See accompanying footnotes to the unaudited condensed
consolidated financial information
4
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 2004 TO MARCH 31, 2004
(UNAUDITED)
Preferred Common Additional Common
Preferred Stock Common Stock Paid in Stock Accumulated
Shares Amount Shares Amount Capital Subscription Deficit Total
------ ------ ---------- --------- ------------ ------------ ------------- -------------
BALANCE AT JANUARY 1, 2004 -- $ -- 30,689,522 $ 30,690 $ 16,474,251 -- $(14,116,612) $ 2,388,329
Shares issued for employee stock
options exercised at approximately
$1.04 per share -- -- 233,333 233 241,600 -- -- 241,833
Shares issued in exchange for
non-employee options exercised
at $1.00 per share -- -- 55,833 56 55,777 -- -- 55,833
Shares issued to consultants in
exchange for services rendered at
approximately $3.06 per share -- -- 25,000 25 76,475 -- -- 76,500
Shares issued for senior note
conversion at $2.10 per share -- -- 1,209,038 1,209 2,537,791 -- -- 2,539,000
Shares issued in connection with
private placement at $2.00 per
share, net of costs -- -- 6,387,600 6,388 12,720,455 -- -- 12,726,843
Shares issued to consultants for
warrants exercised at $2.54 per
share -- -- 37,500 38 95,212 -- -- 95,250
Shares issued to noteholders for
warrants exercised at $1.00 per
share -- -- 3,844,950 3,845 3,841,105 -- -- 3,844,950
Shares issued to noteholders for
cashless warrants exercised -- -- 203,751 203 (203) -- -- --
Shares issued for cashless
exercise of underwriter warrants -- -- 165,116 165 (165) -- -- --
Shares issued in exchange for
convertible debentures at $0.50
per share -- -- 124,000 124 61,876 -- -- 62,000
Shares issued in exchange for
convertible debentures at $0.55
per share -- -- 200,001 200 109,800 -- -- 110,000
Shares issued in exchange for
accrued interest on convertible
debentures -- -- 42,999 43 23,233 -- -- 23,276
Shares issued to employees in
exchange for services at
approximately $2.97 per share -- -- 9,000 9 26,744 -- -- 26,753
Write-off of beneficial conversion
features and warrants attached to
convertible debentures in connection
with conversion of Debenture-1 and
Series B debentures -- -- -- -- (134,665) -- -- (134,665)
Stock option granted to consultants
in exchange for services rendered -- -- -- -- 213,541 -- -- 213,541
Net Loss -- -- -- -- -- -- (2,036,962) (2,036,962)
------ ------ ---------- --------- ------------ ------------ ------------- -------------
BALANCE AT MARCH 31, 2004 -- $ -- 43,227,643 $ 43,228 $ 36,342,827 $ -- $(16,153,574) $ 20,232,481
====== ====== ========== ========= ============ ============ ============= =============
See accompanying footnotes to the unaudited condensed
consolidated financial information
5
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Three Months Ended March 31,
------------------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from operating activities $ (2,036,962) $ (1,440,743)
Adjustments to reconcile net loss from operations to cash used in
operating activities
Amortization of debt discount - beneficial conversion feature of
convertible debentures 5,472 251,722
Amortization of debt discount - value of warrants attached to
convertible debentures 2,538 33,672
Stock options and warrants issued in exchange for services rendered
(Note D) 213,541 219,020
Common stock issued in exchange for services rendered (Note E) 103,253 --
Common stock issued in exchange for conversion of interest (Note B) 23,276 --
Depreciation and amortization 14,990 33,544
(Increase) decrease in:
Accounts receivable (62,030) --
Inventory (95,329) (236,150)
Prepaid expenses and deposits (62,358) (96,232)
Accounts payable and accrued expenses, net (108,781) 52,180
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (2,002,390) (1,182,987)
CASH FLOWS FROM INVESTING ACTIVITIES:
Costs of equipment under operating leases (24,186) --
Purchase of property and equipment, net (22,681) (6,539)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (46,867) (6,539)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of costs (Note E) 12,726,843 --
Proceeds from (repayments of) stockholder advances -- (132,830)
Proceeds from issuance of convertible debentures, net of costs (Note B) -- 2,027,100
Repayment of loans -- (60,000)
Proceeds from exercise of warrants attached to notes payable (Note E) 3,940,200 --
Proceeds from exercise of employee and non-employee stock options and
warrants 297,666 --
Payment of capital leases (8,667) --
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,956,042 1,834,270
NET INCREASE IN CASH AND EQUIVALENTS 14,906,785 644,744
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 5,177,918 18,827
------------- -------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 20,084,703 $ 663,571
============= =============
See accompanying footnotes to the unaudited condensed
consolidated financial information
6
TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Three Months Ended March 31,
------------------------------------
2004 2003
---- ----
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ 72,941 $ 4,163
Income taxes paid - -
Non-cash transactions:
Issuance of stock options and warrants in exchange for services
rendered 213,541 219,020
Issuance of stock warrants in exchange for financing costs - 87,217
Common stock issued for services rendered 103,253 -
Common stock issued in exchange for interest 23,276 -
Common stock issued in exchange for conversion of Senior Notes 2,539,000 -
Common stock issued in exchange for convertible debentures 172,000 -
Write-off of beneficial conversion feature of conversion of debenture 134,134 -
Write-off of value of warrants attached to debenture in connection
with conversion 531 -
Beneficial conversion feature on convertible debentures - 1,761,675
Value of warrants attached to convertible debentures - 265,425
See accompanying footnotes to the unaudited condensed
consolidated financial information
7
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2004
(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 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 three-month period ended March
31, 2004, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2004. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated December 31, 2003
financial statements and footnotes thereto included in the Company's Form 10-KSB
for the year ended December 31, 2003.
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 was a
"development stage enterprise" (as defined in statement of Financial Accounting
Standards No. 7) in prior periods until December 31, 2003. The Company is
engaged in the business of developing, producing and marketing 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
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, 2003 and for
the subsequent periods.
8
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2004
(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
March 31, 2004,
2004 2003
---- ----
Net loss - as reported $(2,036,962) $(1,440,743)
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) (1,466,590) (161,935)
------------ ------------
Net loss - Pro Forma $(3,503,552) $(1,602,678)
Net loss attributable to common stockholders - Pro
forma $(3,503,552) $(1,602,678)
Basic (and assuming dilution) loss per share - as
reported $ (0.09) $ (0.09)
Basic (and assuming dilution) loss per share - Pro
forma $ (0.16) $ (0.10)
Revenue Recognition
-------------------
For revenue from product sales, the Company recognizes revenue in accordance
with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required.
For equipment under lease, revenue is recognized over the lease term for
operating lease and rental contracts. All of the Company's leases are accounted
for as operating leases. At the inception of the lease, no lease revenue is
recognized and the leased equipment, together with the initial direct costs of
installation and support are capitalized, appear on the balance sheet as
"Equipment Under Operating Leases". The capitalized cost of this equipment is
depreciated from two to three years, on a straight-line, basis down to the
Company's original estimate of the projected value of the equipment at the end
of the scheduled lease term (the "Residual"). Monthly lease payments are
recognized as rental income.
9
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2004
(UNAUDITED)
NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE
A summary of convertible promissory notes payable at March 31, 2004 and December
31, 2003 is as follows:
March 31, 2004 December 31, 2003
-------------- -----------------
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 $ -- $ 62,000
Debt Discount - beneficial conversion feature, net of
accumulated amortization of $0 and $41,411 at March
31, 2004 and December 31, 2003, respectively -- (24,718)
Debt Discount - value attributable to warrants
attached to notes, net of accumulated amortization of
$0 and $3,605 at March 31, 2004 and December 31,
2003, respectively -- (2,116)
---------- ----------
-- 35,166
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 210,000 320,000
Debt Discount - beneficial conversion feature, net of
accumulated amortization of $32,832 and $75,426 at
March 31, 2004 and December 31, 2003, respectively (65,659) (180,546)
Debt Discount - value attributable to warrants
attached to notes, net of accumulated amortization of
$15,228 and $13,194 at March 31, 2004 and December
31, 2003, respectively (30,461) (31,415)
---------- ----------
113,880 108,039
---------- ----------
Total $ 113,880 $ 143,205
---------- ----------
Less: current portion -- --
---------- ----------
$ 113,880 $ 143,205
========== ==========
10
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2004
(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 due and
payable 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 00-27"), 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 due and payable 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 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 EITF
00-27, 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.
11
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2004
(UNAUDITED)
NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (CONTINUED)
Series B Debentures
-------------------
In 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 due and payable 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 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 EITF
00-27 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 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 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 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 EITF 00-27, 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.
12
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2004
(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 $8,010 and $285,394 for the
three months ended March 31, 2004 and 2003, respectively.
During the year ended December 31, 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 year ended December
31, 2003, the Company issued an aggregate of 7,217,836 shares of common stock in
connection with the conversion of $1,627,100 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 525,403 shares of common
stock in exchange for accrued interest of $195,148 and $85,586 for Debenture 1
and Series B Debentures, respectively. During the quarter ended March 31, 2004,
the Company issued an aggregate of 324,001 shares of common stock in connection
with the conversion of $62,000 aggregate principal amount of the Debenture-1 and
$110,000 aggregate principal amount of the Series B Debentures. The Company also
issued an aggregate of 42,999 shares of common stock in exchange for accrued
interest of $23,276 for Debenture 1 and Series B Debentures (see Note E).
In connection with the conversion of Debenture-1 and Series B Debentures, the
Company wrote off the unamortized 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, as of December 31, 2003, and an
additional $134,134 and $531, respectively, during the period ended March 31,
2004.
NOTE C - SENIOR NOTES PAYABLE
In the second quarter of 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 aggregate value of the Senior Notes
outstanding as of December 31, 2003, including accrued but unpaid interest, was
$2,989,000.
In January 2004, certain note holders elected to convert $2,539,000 of their
senior notes into Company restricted shares of common stock at a conversion
price of $2.10 per share. The remaining outstanding senior notes as of March 31,
2004 after the conversion is $450,000.
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.
13
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2004
(UNAUDITED)
NOTE D - STOCK OPTIONS AND WARRANTS (CONTINUED)
Employee Stock Options (Continued)
----------------------------------
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 6,449,000 8.54 $ 1.00 3,158,102 $1.00
$1.98 20,000 9.75 $ 1.98 3,333 $1.98
$2.00 80,000 9.50 $ 2.00 26,667 $2.00
$2.35 465,000 9.15 $ 2.35 119,583 $2.35
$2.46 5,000 9.75 $ 2.46 - $2.46
$2.48 2,000 9.75 $ 2.48 - $2.48
$2.53 350,000 9.50 $ 2.53 - $2.53
$2.59 50,000 9.75 $ 2.59 - $2.59
$2.62 820,000 9.44 $ 2.62 136,667 $2.62
$2.89 10,000 9.70 $ 2.89 - $2.89
$3.06 7,000 9.00 $ 3.06 1,750 $3.06
$3.43 25,000 9.18 $ 3.43 6,250 $3.43
$3.68 20,000 9.27 $ 3.68 5,000 $3.68
---------------- ---- ------ ----------- -----
8,303,000 8.73 $ 1.28 3,457,352 $1.13
================ ==== ====== =========== =====
Transactions involving stock options issued to employees are summarized as
follows:
Weighted Average
Number of Shares Price Per Share
---------------- ---------------
Outstanding at January 1, 2002 1,055,000 $ 1.00
Granted 3,335,000 1.00
Exercised (1,000,000) 1.00
Canceled or expired (1,440,000) 1.00
----------- ---------
Outstanding at December 31, 2002 (as restated) 1,950,000 1.00
----------- ---------
Granted 7,202,333 1.22
Exercised (109,333) 1.01
Canceled or expired (750,000) 1.00
----------- ---------
Outstanding at December 31, 2003 8,293,000 $ 1.19
----------- ---------
Granted 410,000 2.55
Exercised (233,333) 1.04
Canceled or expired (166,667) 1.30
----------- ---------
Outstanding at March 31, 2004 8,303,000 $ 1.28
=========== =========
The weighted-average fair value of stock options granted to employees during the
period ended March 31, 2004 and 2003 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
2004 2003
---- ----
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 1.00% 1.25%
Expected stock price volatility 32% 26%
Expected dividend payout - -
Expected option life-years (a) 10 10
(a)The expected option life is based on contractual expiration dates.
14
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2004
(UNAUDITED)
NOTE D - STOCK OPTIONS AND WARRANTS (CONTINUED)
Employee Stock Options (Continued)
----------------------------------
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 $(3,503,552) and $(0.16) for the three
months ended March 31, 2004 and $(1,602,678) and $(0.10) for the three months
ended March 31, 2003, 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 Weighted Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
$ 1.00 3,211,667 8.68 $ 1.00 2,622,084 $ 1.00
Transactions involving options issued to non-employees are summarized as
follows:
Weighted Average
Number of Shares Price Per Share
----------------- ---------------
Outstanding at January 1, 2002 246,502 $ 0.70
Granted 2,455,000 1.00
Exercised (1,146,502) .96
Canceled or expired -- --
----------- ---------
Outstanding at December 31, 2002 1,555,000 1.00
----------- ---------
Granted 1,900,000 1.00
Exercised (187,500) 0.96
Canceled or expired -- --
----------- ---------
Outstanding at December 31, 2003 3,267,500 $ 1.00
----------- ---------
Granted -- --
Exercised (55,833) 1.00
Canceled or expired -- --
----------- ---------
Outstanding at March 31, 2004 3,211,667 $ 1.00
=========== =========
The estimated value of the non-employee stock options vested during the period
ended March 31, 2004 was determined using the Black-Scholes option pricing model
and the following assumptions: contractual term of 10 years, a risk free
interest rate of 1.00%, a dividend yield of 0% and volatility of 32%. The amount
of the expense charged to operations in connection with granting the options was
$213,541 and $219,020 during the period ended March 31, 2004 and 2003,
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.
15
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2004
(UNAUDITED)
NOTE D - STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants (Continued)
--------------------
Warrants Outstanding Warrants Exercisable
-------------------- --------------------
Weighted Average Weighted Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
$ 1.00 789,400 1.59 $ 1.00 789,400 $ 1.00
$ 2.54 12,500 2.17 $ 2.54 12,500 $ 2.54
$ 2.97 35,000 2.17 $ 2.97 35,000 $ 2.97
---------------- ---- --------- -------- ---------
836,900 1.62 $ 1.11 836,900 $ 1.11
================ ==== ========= ======== =========
Transactions involving warrants are summarized as follows:
Weighted Average
Number of Shares Price Per Share
---------------- ---------------
Outstanding at January 1, 2002 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 (6,963,770) 0.92
Canceled or expired -- --
----------- ---------
Outstanding at December 31, 2003 5,159,490 $ 1.01
----------- ---------
Granted -- --
Exercised (4,322,590) .99
Canceled or expired -- --
----------- ---------
Outstanding at March 31, 2004 836,900 $ 1.11
=========== =========
The Company did not grant any compensatory warrants to non-employees during the
period ended March 31, 2004 and all previously granted warrants were fully
vested at the grant date. Accordingly, no expense was charged to operations for
the period ended March 31, 2004. The Company capitalized financing costs of
$87,217 for compensatory warrants granted in connection with placement of
convertible debentures during the period ended March 31, 2003. The financing
cost was amortized over the life of the convertible debentures and all
unamortized financing cost was expensed upon the conversion of the convertible
debentures during the year ended December 31, 2003.
NOTE E - CAPITAL STOCK
The Company has authorized 15,000,000 shares of preferred stock, par value $.001
per share. As of March 31, 2004 and December 31, 2003, 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 March 31, 2004 and
December 31, 2003, the Company had 43,227,643 and 30,689,522 shares of common
stock issued and outstanding, respectively.
The Company issued 233,333 shares of common stock for an aggregate purchase
price of $241,833 to certain employees upon exercise of employee stock options
at approximately $1.04 per share. Additionally, the Company issued 55,833 shares
of common stock for an aggregate purchase price of $55,833 to consultants upon
exercise of non-employee stock options at $1.00 per share.
16
TELKONET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2004
(UNAUDITED)
NOTE E - CAPITAL STOCK
The Company issued 25,000 shares of common stock, having an aggregate fair
market value of $76,500, to a consultant in exchange for services rendered,
which approximated the fair value of the shares issued during the period
services were completed and rendered.
The Company issued an aggregate of 1,209,038 of restricted shares of common
stock upon the election of certain senior note holders (see Note B) to convert
their senior notes into equity at a conversion price of $2.10 per share.
The Company issued 6,387,600 shares of its common stock for an aggregate
purchase price of $12,726,843, net of costs and fees.
The Company issued an aggregate of 3,844,950 shares of common stock upon the
exercise of warrants at approximately $1.00 per share and an aggregate of
203,751 shares of common stock in exchange for 253,203 outstanding warrants.
The Company issued an aggregate of 165,116 shares of common stock in exchange
for 195,204 outstanding warrants. Additionally, the Company issued an aggregate
of 37,500 shares of common stock to consultants pursuant to warrants exercised
at $2.54 per share.
The Company issued 324,001 shares of common stock in connection with the
conversion of $62,000 aggregate principal amount of the Debenture-1 and $110,000
aggregate principal amount of the Series B Debentures. The Company also issued
an aggregate of 42,999 shares of common stock in exchange for accrued interest
of $23,276 for Debenture 1 and Series B Debentures.
The Company issued an aggregate of 9,000 shares of common stock to employees in
exchange for $26,753 of services rendered, which approximated the fair value of
the shares issued during the period services were completed and rendered.
Compensation costs of $26,753 were charged to operations.
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 - INVENTORIES
Inventories are stated at the lower of cost or market determined by the
first-in, first-out (FIFO) method. Inventories primarily consist of Gateways,
iBridges and Couplers, which are the significant components of the Telkonet
solution. Components of inventories as of March 31, 2004 and December 31, 2003
are as follows:
2004 2003
---- ----
Raw Materials $ 249,690 $ 374,794
Finished Goods 454,155 233,722
------------ ------------
$ 703,845 $ 608,516
============ ============
17
Item 2. Management's Discussion and Analysis
The following should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto, included elsewhere within this Report.
Description of the Company
--------------------------
The Company was formed in 1999 to develop products for use in the powerline
communications (PLC) industry. PLC products use existing electrical wiring in
commercial buildings and residences to carry high speed data communications
signals, including the Internet. Since the Company's formation, it has worked on
the development and marketing of its PLC technology.
The Company's PLC technology, the "PlugPlus(TM)" product suite, consists of
three separate components, the Gateway, the Coupler and the iBridge. The
Gateway, the hub of the PlugPlus(TM) product suite, is a modular, self-contained
unit that accepts data from an existing network on one port and distributes it
via a second port. The Gateway integrates a communications processor that runs a
series of proprietary applications under Linux. The signal generated by the
Gateway can be directly coupled into low voltage wiring via the Coupler, which
interfaces directly between the Gateway and the building's electrical panel.
Multi-panel buildings typically require multiple Couplers, which are connected
to the Gateway via inexpensive coaxial cable and concentrated using standard
radio frequency splitters. A suite of software applications running on the
Gateway can perform communications functions or system management functions. The
iBridge serves as the user's network access device and connects to a user's
personal computer through a standard Ethernet cable. The iBridge's AC line cord
serves as its power source as well as its network interface. The Company also
offers the eXtender, a fourth optional device, as part of its PlugPlus(TM)
product suite. The eXtender is used to extend the reach of the Gateway in larger
buildings or campus environments.
The PlugPlus(TM) product suite delivers data to the user at speeds in excess of
7 Mega bits per second (Mbps), with burst speeds of 12.6 Mbps. The PlugPlus(TM)
product suite is installed by connecting an incoming broadband signal (DSL, TL,
satellite or cable modem) into the Gateway and connecting the Gateway to a
building's electrical panel using one or more Couplers. Once installed, the
Gateway distributes the high-speed Internet signal throughout the entire
existing network of electrical wires within the building. The user may access a
high-speed Internet signal by plugging the iBridge into any electrical outlet
and connecting a personal computer to the iBridge using the computer's built-in
Ethernet port. Multiple personal computers connected to the iBridge can
communicate with one another and can share a single broadband resource via the
Gateway.
In September 2002, the Company confirmed through an independent, Federal
Communications Commission (FCC) certified testing lab that its PLC product line
meets the FCC technical requirements for Class A digital devices. In June 2003,
the Company confirmed that its PLC product line also meets the requirements for
Class B digital devices. As a result, no further testing of these products is
required and the devices may be manufactured and marketed for commercial or
residential use. The FCC permits the operation of unlicensed digital devices
that radiate radio frequency emissions if the manufacturer complies with certain
equipment authorization procedures, technical requirements, marketing
restrictions and product labeling requirements.
The Company has applied for patents that cover its unique technology and has
utilized the recently announced advancements in transmission speeds to build its
next generation of products that will be launched into the hospitality market.
The Company 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. The Company intends
to protect this intellectual property by filing additional patent applications.
In September 2003, the Company received approval from the U.S. Patent and
Trademark Office for its "Method and Apparatus for Providing Telephonic
Communication Services" patent. Notwithstanding the issuance of this patent,
there can be no assurance that any of the Company 's current or future patent
applications will be granted, or, if granted, that such patents will provide
necessary protection for the Company's technology or its product offerings, or
be of commercial benefit to the Company.
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
18
"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
----------
Revenues
--------
In the year ended December 31, 2003, the Company emerged from its development
stage of operations. During the three months ended March 31, 2004, the Company's
revenues increased by $60,288 or 76% over the prior quarter, primarily due to
the commercial release of the iBridge in December 2003. Additionally, revenue
attributable to contracts signed pending installation (backlog) for the three
months ended March 31, 2004 was approximately $125,000. The Company's management
continues to believe that 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 three months ended March 31,
2004, the Company renewed its endorsed vendor agreement with Choice Hotels
International and increased its participation at trade shows. During the three
months ended March 31, 2004, the Company also entered into co-marketing
arrangements with three national and two regional Value Added Reseller partners,
pursuant to which these partners have agreed to promote the Company's products
to the partners' customers. Management believes that these co-marketing
arrangements will enhance the Company's internal sales efforts in both the U.S.
and Canadian markets.
Costs and expenses
------------------
Overall expenses increased for the three months ended March 31, 2004 over the
comparable period in 2003 by $928,023 or 85%. The increase is principally due to
an increase in payroll and related costs for development, sales and marketing
and administrative functions, costs associated with non-employee stock options
issued in connection with services rendered and costs associated with the
American Stock Exchange listing.
Liquidity and Capital Resources
-------------------------------
As of March 31, 2004, the Company's current assets exceeded current liabilities
by $20,540,520. Of the total current assets of $21,107,723, cash represented
$20,084,703 of this amount as of March 31, 2004.
While the Company believes it has sufficient capital to meet its working capital
requirements for the next twelve months, additional financing may be required in
order to meet growth opportunities in financing and/or investing activities. If
additional capital is required and the Company is not successful in generating
sufficient liquidity from operations or in raising sufficient capital resources
on terms acceptable to the Company, this could have a material adverse effect on
the Company's business, results of operations, liquidity and financial
condition.
During the three months ended March 31, 2004, the Company filed a S-3
Registration Statement with the Securities and Exchange Commission to register
15,560,495 shares of its common stock. These shares were issued primarily in
conjunction with the conversion of $2,539,000 Senior Notes into common stock at
$2.10 per share in January 2004, a $12.8 million private placement closed in
February 2004 and the conversion of debentures and exercise of warrants in March
2004. The registration statement was declared effective by the SEC on April 21,
2004.
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 months ended March 31, 2004 increased over the comparable period in 2003
by $117,987 or 37.5%. This increase was primarily related to an increase in
salaries and related costs associated with the addition of two full-time
employees.
19
Selling, General and Administrative
-----------------------------------
Selling, general and administrative expenses increased for the three months
ended March 31, 2004 over the comparable period in 2003 by $834,069 or 160%. The
increase is related to an increase in payroll and associated cost for
management, sales and marketing resources, one-time costs associated with
American Stock Exchange application fees, and increased legal and accounting
fees associated with the Form S-3 Registration Statement.
Acquisition or Disposition of Plant and Equipment
-------------------------------------------------
During the three months ended March 31, 2004, the Company purchased $22,681 of
fixed assets, which consisted primarily of leasehold improvements and computer
equipment. Additional costs of approximately $250,000 associated with an office
build-out, including the purchase of office furnishings, is expected during the
second quarter. The Company does not anticipate the sale or purchase of any
significant property, plant or equipment during the next twelve months, other
than purchases of leasehold improvements, computer equipment and peripherals to
be used in the Company's day-to-day operations.
Number of Employees
-------------------
As of March 31, 2004, the Company had 30 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.
Trends, Risks and Uncertainties
-------------------------------
The Company 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 the Company has
identified all possible risks that might arise. Investors should carefully
consider all such risk factors in evaluating the Company's financial outlook.
TELKONET RECENTLY EMERGED FROM ITS DEVELOPMENT STAGE AND HAS NO OPERATING
HISTORY ON WHICH TO BASE AN EVALUATION OF ITS CURRENT BUSINESS AND FUTURE
PROSPECTS.
The Company recently emerged from its development stage. As a result,
it has no operating history upon which to base an evaluation of its current
business and future prospects. The Company has not generated substantial
revenues since its inception. Because of the Company's lack of an operating
history, management has limited insight into trends that may emerge and could
materially adversely affect the Company's business. Prospective investors should
consider the risks and difficulties the Company may encounter in its new and
rapidly evolving market, especially given the Company's lack of operating
history. These risks include the Company's ability to:
o market the PlugPlus(TM)product suite;
o build a customer base;
o generate revenues;
o compete favorably in a highly competitive market;
o access sufficient capital to support growth;
o recruit and retain qualified employees;
o introduce new products and services; and
o build technology and support systems.
THE COMPANY HAS A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT AND
EXPECTS TO CONTINUE TO INCUR LOSSES FOR THE FORESEEABLE FUTURE.
Since inception through March 31, 2004, the Company has incurred
cumulative losses of $16,153,574 and has never generated enough funds through
operations to support its business. The Company expects to continue to incur
substantial operating losses through 2004. The Company's losses to date have
resulted principally from:
o research and development costs relating to the development of
the PlugPlus(TM)product suite;
20
o costs and expenses associated with manufacturing, distribution
and marketing of the Company's products;
o general and administrative costs relating to the Company's
operations; and
o interest expense related to the Company's indebtedness.
The Company is currently unprofitable and may never become profitable.
Since inception, the Company has funded its research and development activities
primarily from private placements of equity and debt securities, a bank loan and
short term loans from certain of its executive officers. As a result of its
substantial research and development expenditures and limited product revenues,
the Company has incurred substantial net losses. The Company's ability to
achieve profitability will depend primarily on its ability to successfully
commercialize the PlugPlus(TM) product suite.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS COULD HAVE A NEGATIVE EFFECT ON THE
PRICE OF THE COMPANY'S COMMON STOCK.
The Company's operating results may fluctuate significantly in the
future as a result of a variety of factors, most of which are outside the
Company's control, including:
o the level of use of the Internet;
o the demand for high-tech goods;
o the amount and timing of capital expenditures and other costs
relating to the expansion of the Company's operations;
o price competition or pricing changes in the industry;
o technical difficulties or system downtime;
o economic conditions specific to the internet and
communications industry; and
o general economic conditions.
The Company's quarterly results may also be significantly impacted by
certain accounting treatment of acquisitions, financing transactions or other
matters. Such accounting treatment could have a material impact on the Company's
results of operations and have a negative impact on the price of the Company's
common stock.
THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS OWN A SUBSTANTIAL PERCENTAGE OF
THE COMPANY'S ISSUED AND OUTSTANDING COMMON STOCK. THEIR OWNERSHIP COULD ALLOW
THEM TO EXERCISE SIGNIFICANT CONTROL OVER CORPORATE DECISIONS.
As of March 31, 2004, the Company's officers and directors owned 24.6%
of the Company's issued and outstanding common stock. This means that the
Company's officers and directors, as a group, exercise significant control over
matters upon which the Company's stockholders may vote, including the selection
of the Board of Directors, mergers, acquisitions and other significant corporate
transactions.
FURTHER ISSUANCES OF EQUITY SECURITIES MAY BE DILUTIVE TO CURRENT STOCKHOLDERS.
Although the funds raised in the Company's debenture offerings, the
note offering and the private placement of common stock are being used for
general working capital purposes, it is likely that the Company will be required
to seek additional capital in the future. This capital funding could involve one
or more types of equity securities, including convertible debt, common or
convertible preferred stock and warrants to acquire common or preferred stock.
Such equity securities could be issued at or below the then-prevailing market
price for the Company's common stock. Any issuance of additional shares of the
Company's common stock will be dilutive to existing stockholders and could
adversely affect the market price of the Company's common stock.
THE EXERCISE OF OPTIONS AND WARRANTS OUTSTANDING AND AVAILABLE FOR ISSUANCE MAY
ADVERSELY AFFECT THE MARKET PRICE OF THE COMPANY'S COMMON STOCK.
As of March 31, 2004, the Company had outstanding employee options to
purchase a total of 8,303,000 shares of common stock at exercise prices ranging
from $1.00 to $3.68 per share, with a weighted average exercise price of $1.28.
As of March 31, 2004, the Company had outstanding non-employee options to
purchase a total of 3,211,667 shares of common stock at exercise prices of $1.00
per share. As of March 31, 2004, the Company had warrants outstanding to
21
purchase a total of 836,900 shares of common stock at exercise prices ranging
from $1.00 to $2.97 per share, with a weighted average exercise price of $1.62.
In addition, as of March 31, 2004, the Company had 1,252,832 additional shares
of common stock which may be issued in the future under the Telkonet, Inc. Stock
Incentive Plan. The exercise of outstanding options and warrants and the sale in
the public market of the shares purchased upon such exercise will be dilutive to
existing stockholders and could adversely affect the market price of the
Company's common stock.
THE POWERLINE COMMUNICATIONS INDUSTRY IS INTENSELY COMPETITIVE AND RAPIDLY
EVOLVING.
The Company operates in a highly competitive, quickly changing
environment, and the Company's future success will depend on its ability to
develop and introduce new products and product enhancements that achieve broad
market acceptance in commercial and governmental sectors. The Company will also
need to respond effectively to new product announcements by its competitors by
quickly introducing competitive products.
Delays in product development and introduction could result in:
o loss of or delay in revenue and loss of market share;
o negative publicity and damage to the Company's reputation and
brand; and
o decline in the average selling price of the Company's
products.
GOVERNMENT REGULATION OF THE COMPANY'S PRODUCTS COULD IMPAIR THE COMPANY'S
ABILITY TO SELL SUCH PRODUCTS IN CERTAIN MARKETS.
FCC rules permit the operation of unlicensed digital devices that
radiate radio frequency emissions if the manufacturer complies with certain
equipment authorization procedures, technical requirements, marketing
restrictions and product labeling requirements. Differing technical requirements
apply to "Class A" devices intended for use in commercial settings, and "Class
B" devices intended for residential use to which more stringent standards apply.
An independent, FCC-certified testing lab has verified that the Company's
PlugPlus(TM) product suite complies with the FCC technical requirements for
Class A and Class B digital devices. No further testing of these devices is
required and the devices may be manufactured and marketed for commercial and
residential use. Additional devices designed by the Company for commercial and
residential use will be subject to the FCC rules for unlicensed digital devices.
Moreover, if in the future, the FCC changes its technical requirements for
unlicensed digital devices, further testing and/or modifications of devices may
be necessary. Failure to comply with any FCC technical requirements could impair
the Company's ability to sell its products in certain markets and could have a
negative impact on its business and results of operations.
PRODUCTS SOLD BY THE COMPANY'S COMPETITORS COULD BECOME MORE POPULAR THAN THE
COMPANY'S PRODUCTS OR RENDER THE COMPANY'S PRODUCTS OBSOLETE.
The market for powerline communications products is highly competitive.
Although the Company is presently the only company marketing PLC products to the
commercial segment, Linksys Group, Inc. and Netgear, Inc. offer similar PLC
solutions for the residential market. There can be no assurance that Linksys
Group, Netgear or any other company will not develop PLC products that compete
with the Company's products in the future. These potential competitors have
longer operating histories, greater name recognition and substantially greater
financial, technical, sales, marketing and other resources. These potential
competitors may, among other things, undertake more extensive marketing
campaigns, adopt more aggressive pricing policies, obtain more favorable pricing
from suppliers and manufacturers and exert more influence on the sales channel
than the Company can. As a result, the Company may not be able to compete
successfully with these potential competitors and these potential competitors
may develop or market technologies and products that are more widely accepted
than those being developed by the Company or that would render the Company's
products obsolete or noncompetitive. The Company anticipates that potential
competitors will also intensify their efforts to penetrate the Company's target
markets. These potential competitors may have more advanced technology, more
extensive distribution channels, stronger brand names, bigger promotional
budgets and larger customer bases than the Company does. These companies could
devote more capital resources to develop, manufacture and market competing
products than the Company could. If any of these companies are successful in
competing against the Company, its sales could decline, its margins could be
negatively impacted, and the Company could lose market share, any of which could
seriously harm the Company's business and results of operations.
THE FAILURE OF THE INTERNET TO CONTINUE AS AN ACCEPTED MEDIUM FOR BUSINESS
COMMERCE COULD HAVE A NEGATIVE IMPACT ON THE COMPANY'S RESULTS OF OPERATIONS.
The Company's long-term viability is substantially dependent upon the
continued widespread acceptance and use of the Internet as a medium for business
commerce. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users. There can be no assurance
that the Internet infrastructure will continue to be able to support the demands
22
placed on it by this continued growth. In addition, delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity or increased governmental regulation could slow or stop the growth of
the Internet as a viable medium for business commerce. Moreover, critical issues
concerning the commercial use of the Internet (including security, reliability,
accessibility and quality of service) remain unresolved and may adversely affect
the growth of Internet use or the attractiveness of its use for business
commerce. The failure of the necessary infrastructure to further develop in a
timely manner or the failure of the Internet to continue to develop rapidly as a
valid medium for business would have a negative impact on the Company's results
of operations.
FAILURE OF THE COMPANY'S SERVICES AND PRODUCTS TO BE SUCCESSFUL IN THE
MARKETPLACE COULD HAVE A NEGATIVE EFFECT ON THE COMPANY'S RESULTS OF OPERATIONS.
Since the Company is just emerging from its development stage, it does
not know with any certainty whether its services and/or products will be
accepted within the business marketplace. If the Company's services and/or
products prove to be unsuccessful within the marketplace, or if the Company
fails to attain market acceptance, it could have a negative effect on the
Company's results of operations.
THE COMPANY MAY NOT BE ABLE TO OBTAIN PATENTS, WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON ITS BUSINESS.
The Company's ability to compete effectively in the powerline
technology industry will depend on its success in acquiring suitable patent
protection. The Company currently has several patents pending. The Company also
intends to file additional patent applications that it deems to be economically
beneficial. If the Company is not successful in obtaining patents, it will have
limited protection against those who might copy its technology. As a result, the
failure to obtain patents could negatively impact the Company's business and
results of operations.
INFRINGEMENT BY THIRD PARTIES ON THE COMPANY'S PROPRIETARY TECHNOLOGY AND
DEVELOPMENT OF SUBSTANTIALLY EQUIVALENT PROPRIETARY TECHNOLOGY BY THE COMPANY'S
COMPETITORS COULD NEGATIVELY IMPACT THE COMPANY'S BUSINESS.
The Company's success depends partly on its ability to maintain patent
and trade secret protection, to obtain future patents and licenses, and to
operate without infringing on the proprietary rights of third parties. There can
be no assurance that the measures the Company has taken to protect its
intellectual property, including those integrated to its PlugPlus(TM) product
suite, will prevent misappropriation or circumvention. In addition, there can be
no assurance that any patent application, when filed, will result in an issued
patent, or that the Company's existing patents, or any patents that may be
issued in the future, will provide the Company with significant protection
against competitors. Moreover, there can be no assurance that any patents issued
to, or licensed by, the Company will not be infringed upon or circumvented by
others. Infringement by third parties on the Company's proprietary technology
could negatively impact its business. Moreover, litigation to establish the
validity of patents, to assert infringement claims against others, and to defend
against patent infringement claims can be expensive and time-consuming, even if
the outcome is in the Company's favor. The Company also relies to a lesser
extent on unpatented proprietary technology, and no assurance can be given that
others will not independently develop substantially equivalent proprietary
information, techniques or processes or that the Company can meaningfully
protect its rights to such unpatented proprietary technology. Development of
substantially equivalent technology by the Company's competitors could
negatively impact its business.
THE COMPANY DEPENDS ON A SMALL TEAM OF SENIOR MANAGEMENT, AND IT MAY HAVE
DIFFICULTY ATTRACTING AND RETAINING ADDITIONAL PERSONNEL.
The Company's future success will depend in large part upon the
continued services and performance of senior management and other key personnel.
If the Company loses the services of any member of its senior management team,
its overall operations could be materially and adversely affected. In addition,
the Company's future success will depend on its ability to identify, attract,
hire, train, retain and motivate other highly skilled technical, managerial,
marketing, purchasing and customer service personnel when they are needed.
Competition for these individuals is intense. The Company cannot ensure that it
will be able to successfully attract, integrate or retain sufficiently qualified
personnel when the need arises. Any failure to attract and retain the necessary
technical, managerial, marketing, purchasing and customer service personnel
could have a negative effect on the Company's financial condition and results of
operations.
Item 3. Controls and Procedures.
As of March 31, 2004, the Company 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 the
23
Company's disclosure controls and procedures are effective in timely alerting
them to material information required to be included in the Company's periodic
filings with the U.S. Securities and Exchange Commission. There were no
significant changes in the Company'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
the Company 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 the Company, through its agents, promised to undertake a registration of
the Company's common stock and thereby allow the plaintiffs to exercise
piggy-back registration rights under a registration rights agreement. The action
seeks damages from the Company in unspecified amounts. On February 23, 2004, the
litigation was settled by the parties under the terms of a Settlement and
Release Agreement, pursuant to which the parties agreed to release each other
and execute a Lockup Agreement providing that the plaintiffs' shares of the
Company's common stock may only be sold ratably over a ten (10) month period,
and the Company agreed to accept an opinion of plaintiffs' counsel that
plaintiffs' shares of the Company's common stock may be sold under Rule 144
promulgated under the Securities Act of 1933. Under the terms of the settlement
neither party was required to make any monetary payments.
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities.
On January 26, 2004, the Company issued 1,209,048 shares of its common stock to
holders of its Senior Notes in exchange for forgiveness of approximately
$2,500,000 aggregate outstanding principal amount on such Senior Notes.
On February 18, 2004, the Company completed a private offering of its common
stock resulting in net proceeds to the Company of approximately $12.8 million.
The Company sold 6,387,600 shares of its common stock in the private offering at
a price equal to the average closing price per share over the 30 trading days
ending February 5, 2004, discounted by 18.0%. CDC Securities, Inc. acted as the
Company's placement agent in the transaction. CDC Securities is an indirect
subsidiary of the French bank CDC IXIS. CDC Securities received a commission
equal to $1,264,745 in exchange for acting as placement agent in this offering.
On February 27, 2004, the Company issued an aggregate of 165,116 shares of
common stock upon cashless exercise of 195,204 outstanding warrants at $1.00 per
share.
On March 2, 2004, the Company issued an aggregate of 25,000 shares of common
stock to CEOcast, Inc. as consideration for certain investor relations and
consulting services.
On March 11, 2004, the Company issued an aggregate of 37,500 shares of common
stock upon exercise of warrants at $2.54 per share.
On March 12, 2004, the Company agreed to issue an aggregate of 250,000 shares of
its common stock to Scarborough, Ltd. and 750,000 shares of its common stock to
Aware Capital Consultants, Inc. for their services as finders with respect to
certain proposed transactions between the Company and Leviton Manufacturing
Company, Inc. The issuance of these shares was subject to the approval of the
Company's Board of Directors, which was obtained on April 20, 2004. Pursuant to
the agreement with Scarborough, Ltd., the Company has agreed to the immediate
release of 137,500 shares of the common stock and the deposit into escrow of the
remaining shares, which remaining shares shall be released quarterly to
Scarborough, Ltd. in accordance with a schedule set forth in the agreement.
Pursuant to the agreement with Aware Capital Consultants, Inc., the Company has
agreed to the immediate release of 162,500 shares of the common stock and the
deposit into escrow of the remaining shares, which remaining shares shall be
released quarterly to Aware Capital Consultants, Inc. in accordance with a
schedule set forth in the agreement.
During the three months ended March 31, 2004, the Company issued 3,844,950
shares of common stock upon the exercise of warrants at approximately $1.00 per
share. The Company also issued an aggregate of 203,751 shares of common stock
upon cashless exercise of 253,203 outstanding warrants which were exerciseable
at $1.00 per share.
During the three months ending March 31, 2004, the Company agreed to issue 9,000
shares of common stock to Ronald W. Pickett, the Company's Chief Executive
Officer, pursuant to his employment agreement, dated January 30, 2004.
During the three months ended March 31, 2004, the Company issued an aggregate of
324,001 shares of common stock in connection with the conversion of $62,000
aggregate principal amount of the Debenture-1 and $110,000 aggregate principal
amount of the Series B Debentures. The Company also issued an aggregate of
42,999 shares of common stock in exchange for accrued interest of $23,276 for
Debenture 1 and Series B Debentures.
24
Each of the foregoing sales of securities was 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. Each of the
foregoing sales was made to one or more "accredited investors," as such term is
defined in the Securities Act of 1933.
During the three months ending March 31, 2004, the Company granted options to
purchase 410,000 shares of common stock to certain employees of the Company.
These options are exerciseable at prices ranging from $2.46 to $2.89 per share.
In addition, during the three months ended March 31, 2004, the Company issued
233,333 shares of common stock upon exercise of employee stock options at
exercise prices ranging from $1.00 to $1.30 and 55,833 shares of common stock
upon exercise of options held by non-employees at an exercise price of $1.00.
The options were issued pursuant to the Telkonet, Inc. Stock Incentive Plan. The
shares of common stock underlying the options have been registered with the
Securities and Exchange Commission on a Form S-8 Registration Statement.
Item 3. Defaults Upon Senior Securities.
None.
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
--- -----------
3.1 Articles of Incorporation of the Registrant (incorporated by reference
to our Form 8-K (No. 000-27305), filed on August 30, 2000 and our Form
S-8 (No. 333-47986), filed on October 16, 2000)
3.2 Bylaws of the Registrant (incorporated by reference to our Registration
Statement on Form S-1 (No. 333 108307), filed on August 28, 2003)
4.1 Form of Series A Convertible Debenture (incorporated by reference to
our Form 10-KSB (No. 000-27305), filed on March 31, 2003)
4.2 Form of Series A Non-Detachable Warrant (incorporated by reference to
our Form 10- KSB (No. 000-27305), filed on March 31, 2003)
4.3 Form of Series B Convertible Debenture (incorporated by reference to
our Form 10-KSB (No. 000-27305), filed on March 31, 2003)
4.4 Form of Series B Non-Detachable Warrant (incorporated by reference to
our Form 10- KSB (No. 000-27305), filed on March 31, 2003)
4.5 Form of Senior Note (incorporated by reference to our Registration
Statement on Form S-1 (No. 333-108307), filed on August 28, 2003)
4.6 Form of Non-Detachable Senior Note Warrant (incorporated by reference
to our Registration Statement on Form S-1 (No. 333-108307), filed on
August 28, 2003)
10.1 Amended and Restated Telkonet, Inc. Incentive Stock Option Plan
(incorporated by reference to our Registration Statement on Form S-8
(No. 333-412), filed on April 17, 2002)
10.2 Employment Agreement by and between Telkonet, Inc. and Peter Larson,
dated as of June 19, 2000 (incorporated by reference to our Form 8-K
(No. 000-27305), filed on August 30, 2000)
10.3 Employment Agreement by and between Telkonet, Inc. and Stephen L.
Sadle, dated as of June 19, 2000 (incorporated by reference to our Form
8-K (No. 000-27305), filed on August 30, 2000)
10.4 Amendment to Employment Agreement by and between Telkonet, Inc. and
Stephen L. Sadle, dated as of April 24, 2002 (incorporated by reference
to our Registration Statement on Form S-1 (No. 333-108307), filed on
August 28, 2003)
10.5 Employment Agreement by and between Telkonet, Inc. and Stephen L.
Sadle, dated as of January 18, 2003 (incorporated by reference to our
Registration Statement on Form S-1 (No. 333-108307), filed on August
28, 2003)
10.6 Employment Agreement by and between Telkonet, Inc. and J. Gregory
Fowler, dated as of January 30, 2002 (incorporated by reference to our
Registration Statement on Form S-1 (No. 333-108307), filed on August
28, 2003)
25
10.7 Employment Agreement by and between Telkonet, Inc. and David S. Yaney,
dated as of February 15, 2002 (incorporated by reference to our
Registration Statement on Form S-1 (No. 333-108307), filed on August
28, 2003)
10.8 Employment Agreement by and between Telkonet, Inc. and Howard Lubert,
dated as of January 1, 2003 (incorporated by reference to our
Registration Statement on Form S-1 (No. 333-108307), filed on August
28, 2003)
10.9 Separation Agreement by and between Telkonet, Inc. and Howard Lubert,
dated as of June 16, 2003 (incorporated by reference to our
Registration Statement on Form S-1 (No. 333-108307), filed on August
28, 2003)
10.10 Employment Agreement by and between Telkonet, Inc. and Robert P. Crabb,
dated as of January 18, 2003 (incorporated by reference to our
Registration Statement on Form S-1 (No. 333-108307), filed on August
28, 2003)
10.11 Employment Agreement by and between Telkonet, Inc. and Ronald W.
Pickett, dated as of January 30, 2003 (incorporated by reference to our
Registration Statement on Form S-1 (No. 333-108307), filed on August
28, 2003)
10.12 Employment Agreement by and between Telkonet, Inc. and E. Barry Smith,
dated as of February 17, 2003 (incorporated by reference to our
Registration Statement on Form S-1 (No. 333-108307), filed on August
28, 2003)
24 Power of Attorney (incorporated by reference to our Registration
Statement on Form S-1 (No. 333-108307), filed on August 28, 2003)
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 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of E. Barry Smith pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K filed during the three months ended March 31,
2004.
i. On January 23, 2004, the Company filed a Current Report 8-K,
to report that certain holders of convertible debt chose to
convert such debt to common stock.
ii. On January 28, 2004, the Company filed a Current Report 8-K,
to report that the company will be listing on the American
Stock Exchange
iii. On February 26, 2004, the Company filed a Current Report 8-K,
to report the completion of a private offering of its common
stock.
iv. On March 19, 2004, the Company filed a Current Report 8-K, to
report the resignation of Daniel L. McGinnis from the Board of
Directors.
v. On March 19, 2004, the Company filed a Current Report 8-K, to
report the expansion by one seat and the resignation of Hugo
DeCesaris from the Board of Directors. The Board of Directors
appointed Dr. Thomas Hall and James L. Peeler to serve as
Directors.
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: May 14, 2004 By: /s/ Ronald W. Pickett
--------------------------- -----------------------
Ronald W. Pickett
Chief Executive Officer
26