TELKONET INC - Quarter Report: 2006 March (Form 10-Q)

 

 

 

 

 

 

 

 

 

 

Utah	87-0627421
(State of Incorporation)	(IRS Employer Identification No.)

 

 

 

 

 

 

 

 

 

 

 

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
March 31, 2006 and December 31, 2005	3
Condensed Consolidated Statements of Operations:
Three Months Ended March 31, 2006 and 2005	4
Condensed Consolidated Statement of Stockholders’ Equity
January 1, 2006 through March 31, 2006	5
Condensed Consolidated Statements of Cash Flows:
Three Months Ended March 31, 2006 and 2005	6-7
Notes to Unaudited Condensed Consolidated Financial Information:
March 31, 2006	8-21
Item 2. Management’s Discussion and Analysis	21-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	29
Item 4. Controls and Procedures	29
PART II. OTHER INFORMATION	29
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3. Defaults Upon Senior Securities	29
Item 4. Submission of Matters to a Vote of Security Holders	30
Item 5. Other Information	30
Item 6. Exhibits	30-32

 

 

 

 

		(Unaudited)
		March 31, 2006			December 31, 2005
ASSETS
Current Assets:
Cash and cash equivalents		$	3,528,171		$	8,422,079
Restricted certificate of deposit			10,000,000			10,000,000
Accounts Receivable: net of allowance for doubtful accounts of $40,000 and $30,000 at March 31, 2006 and December 31, 2005, respectively			472,186			119,191
Inventory			1,318,079			1,475,806
Prepaid expenses and deposits			613,248			360,880
Total current assets			15,931,684			20,377,956
Property and Equipment:
Furniture and equipment, at cost			1,610,853			1,041,137
Less: accumulated depreciation			397,198			323,667
Total property and equipment, net			1,213,655			717,470
Equipment under Operating Leases:
Capitalized equipment, at cost			1,544,306			789,099
Less: accumulated depreciation			178,419			124,669
Total equipment under operating leases, net			1,365,887			664,430
Other Assets:
Long-term investments			231,044			231,000
Intangible assets, net of accumulated amortization of $59,167 and $0 at March 31, 2006 and December 31, 2005, respectively			2,404,760			-
Financing costs, net of accumulated amortization of $173,724 and $73,499 at March 31, 2006 and December 31, 2005, respectively			1,045,686			1,145,911
Goodwill			1,077,767			-
Deposits and other			221,285			154,216
Total other assets			4,980,542			1,531,127
TOTAL ASSETS		$	23,491,768		$	23,290,983
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued liabilities		$	2,706,548		$	1,821,872
Senior notes payable			100,000			100,000
Senior convertible notes, net of discounts			7,500,000			6,250,000
Deferred revenue			156,892			59,020
Note payable under subsidiary acquisition			900,000			-
Customer deposits and other			24,981			86,257
Total current liabilities			11,388,421			8,317,149
Long Term Liabilities:
Senior convertible notes, net of discounts			7,478,050			9,616,521
Deferred lease liability			48,024			42,317
Total long term liabilities			7,526,074			9,658,838
Commitments and Contingencies			-			-
Minority Interest			-			-
Stockholders’ Equity :
Preferred stock, par value $.001 per share; 15,000,000 shares authorized; none issued and outstanding at March 31, 2006 and December 31, 2005			-			-
Common stock, par value $.001 per share; 100,000,000 shares authorized; 46,692,326 and 45,765,171 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively			46,692			45,765
Additional paid-in-capital			51,765,256			48,256,784
Accumulated deficit			(47,234,675	)		(42,987,553	)
Stockholders’ equity			4,577,273			5,314,996
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	23,491,768		$	23,290,983

 

 

 

 

		For The Three Months Ended March 31,
		2006			2005
Revenues, net:
Product		$	1,549,975		$	129,273
Rental			393,937			116,915
Total Revenue			1,943,912			246,188
Cost of Sales:
Product			983,651			90,982
Rental			311,919			66,408
Total Cost of Sales			1,295,570			157,390
Gross Profit			648,342			88,798
Costs and Expenses:
Research and Development			432,569			447,925
Selling, General and Administrative			3,092,043			2,399,960
Non-Employee Stock Options and Warrants			277,344			292,925
Employee Stock Based Compensation			376,281			-
Depreciation and Amortization			119,227			39,303
Total Operating Expense			4,297,464			3,180,113
Loss from Operations			(3,649,122	)		(3,091,315	)
Other Income (Expenses): Interest Income			102,684			37,937
Interest Expense			(720,253	)		(31,165	)
Total Other Income (Expenses)			(617,569	)		6,772
Loss Before Provision for Income Taxes			(4,266,691	)		(3,084,543	)
Provision for Income Taxes			-			-
Loss Before Minority Interest			(4,266,691	)		(3,084,543	)
Minority Interest			19,569			-
Net Loss		$	(4,247,122	)	$	(3,084,543	)
Loss per common share (basic and assuming dilution)		$	(0.09	)	$	(0.07	)
Weighted average common shares outstanding			46,187,202			44,604,389

 

 

 

 

		Preferred Shares			Preferred Stock Amount			Common Shares			Common Stock Amount			Additional Paid in Capital			Accumulated Deficit			Total
Balance at January 1, 2006			-			-			45,765,171		$	45,765		$	48,256,784		$	(42,987,553)		$	5,314,996
Shares issued for employee stock options exercised at approximately $2.07 per share			-			-			436,898			437			904,229			-			904,666
Shares issued in exchange for non-employee options exercised at $1.00 per share			-			-			25,837			26			25,811			-			25,837
Shares issued in exchange for warrants exercised at $1.00 per share			-			-			44,000			44			43,956			-			44,000
Issuance of shares for purchase of subsidiary			-			-			400,000			400			1,799,600			-			1,800,000
Shares issued in exchange for services rendered at approximately $3.98 per share			-			-			20,420			20			81,251			-			81,271
Stock-based compensation expense related to employee stock options			-			-			-			-			376,281			-			376,281
Stock options and warrants granted to consultants in exchange for services rendered			-			-			-			-			277,344			-			277,344
Net Loss			-			-			-			-			-			(4,247,122	)		(4,247,122	)
Balance at March 31, 2006			-		$	-			46,692,326		$	46,692		$	51,765,256		$	(47,234,675	)	$	4,577,273

 

 

 

		For The Three Months Ended March 31,
		2006			2005
Cash Flows from Operating Activities:
Net loss from operating activities		$	(4,247,122	)	$	(3,084,543	)
Adjustments to reconcile net loss from operations to cash used in operating activities			-			-
Minority interest			(19,569	)		-
Amortization of financing costs			100,225			-
Amortization of debt discount - beneficial conversion feature of convertible debentures			121,586			5,712
Amortization of debt discount - value of warrants attached to convertible debentures			239,943			12,311
Stock options and warrants issued in exchange for services rendered			653,625			292,925
Common stock issued in exchange for services rendered			81,271			52,404
Depreciation, including depreciation of equipment under operating leases			215,537			76,130
Increase / decrease in:
Accounts receivable			(320,083	)		(29,899	)
Inventory			157,727			120,649
Prepaid expenses and deposits			2,220			(48,163	)
Customer deposits			(66,996	)		-
Accounts payable and accrued expenses			(155,536	)		34,132
Deferred revenue			97,963			-
Deferred lease liability			245			10,304
Net Cash (Used in) Operating Activities			(3,138,964	)		(2,558,038	)
Cash Flows from Investing Activities:
Costs of equipment under operating leases			(316,716	)		(214,885	)
Proceeds from sale of equipment under operating lease			340,130			-
Investment in MST			(1,017,822	)		-
Net cash acquired from MST			59,384			-
Investment in affiliate			(44	)		(50,000	)
Purchase of property and equipment, net			(134,704	)		(98,538	)
Net Cash (Used in) Investing Activities			(1,069,772	)		(363,423	)
Cash Flows from Financing Activities:
Repayment of convertible debentures			(1,250,000	)		-
Proceeds from exercise of stock options and warrants			974,503			286,257
Repayment of subsidiary loans			(409,675	)		-
Net Cash Provided by Financing Activities			(685,172	)		286,257
Net (Decrease) in Cash and Cash Equivalents			(4,893,908	)		(2,635,204	)
Cash and cash equivalents at the beginning of the period			8,422,079			11,838,702
Cash and cash equivalents at the end of the period		$	3,528,171		$	9,203,498

 

 

 

		For The Three Months Ended March 31,
		2006			2005
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest		$	622,530		$	9,000
Income taxes paid			-			-
Non-cash transactions:
Note payable under subsidiary acquisition			900,000
Issuance of shares for purchase of subsidiary			1,800,000			-
Employee stock-based compensation			376,281
Issuance of stock options and warrants in exchange for services rendered			277,344			292,925
Common stock issued for services rendered			81,271			52,404
Acquisition of MST (Note B):
Assets acquired		$	4,120,600		$	-
Goodwill (including purchase price contingency)			6,477,767			-
Minority Interest			(19,569	)		-
Liabilities assumed			(1,460,976	)		-
Common stock issued			(1,800,000	)		-
Notes payable issued			(900,000	)		-
Purchase price contingency			(5,400,000	)		-
Direct acquisition costs			(117,822	)		-
Cash paid for acquisition		$	(900,000	)	$	-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

		March 31, 2006			December 31, 2005
Raw Materials		$	603,751		$	598,335
Finished Goods			714,328			877,471
		$	1,318,079		$	1,475,806

 

 

 

 

 

BPL Global, Ltd.

 

 

 

 

		Gross Carrying Amount			Accumulated Amortization			Net			Residual Value			Weighted Average Amortization Period (Years)
Amortized Identifiable tangible Assets:
Subscriber lists		$	2,463,927		$	(59,167	)		2,404,760		$	-			8.0
Total Amortized Identifiable Intangible Assets			2,463,927			(59,167	)		2,404,760			-
Unamortized Identifiable Intangible Assets:			None
Total		$	2,463,927		$	(59,167	)	$	2,404,760		$	-

 

 

 

 

 

 

 

		2006			2005
Senior Convertible Notes payable (“Convertible Senior Notes”), accrue interest at 7.25% per annum and provide for equal monthly principal installments beginning March 1, 2006. Maturity date is in October 2008. 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 $5.00 per share at any time.		$	18,750,000		$	20,000,000
Debt Discount - beneficial conversion feature, net of accumulated amortization of $210,749 and $89,163 at March 31, 2006 and December 31, 2005, respectively.			(1,268,551	)		(1,390,137	)
Debt Discount - value attributable to warrants attached to notes, net of accumulated amortization of $415,901 and $175,958 at March 31, 2006 and December 31, 2005, respectively.			(2,503,399	)		(2,743,342	)
Total		$	14,978,050		$	15,866,521
Less: current portion			(7,500,000	)		(6,250,000	)
		$	7,478,050		$	9,616,521

 

 

Fiscal Year		Amount
2006		$	7,500,000
2007			7,500,000
2008			3,750,000
		$	18,750,000

 

 

 

 

 

 

 

 

		Options Outstanding						Options Exercisable
Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$ 1.00 - $1.99		5,706,630		6.72		$ 1.00		5,670,102		$ 1.00
$ 2.00 - $2.99		1,399,550		7.87		$ 2.42		814,450		$ 2.36
$ 3.00 - $3.99		1,656,500		8.78		$ 3.32		527,167		$ 3.41
$ 4.00 - $4.99		185,000		9.36		$ 4.45		26,000		$ 4.52
$ 5.00 - $5.99		240,000		9.16		$ 5.25		49,750		$ 5.17
		9,187,680		7.38		$ 1.82		7,087,469		$ 1.38

 

		Number of Shares			Weighted Average Price Per Share
Outstanding at January 1, 2004			8,293,000		$	1.19
Granted			2,108,000			3.06
Exercised			(540,399	)		1.08
Cancelled or expired			(245,834	)		1.74
Outstanding at December 31, 2004			9,614,767		$	1.61
Granted			1,325,000			3.97
Exercised			(415,989	)		1.18
Cancelled or expired			(372,700	)		3.74
Outstanding at December 31, 2005			10,151,078		$	1.85
Granted			30,000			3.45
Exercised (Note J)			(436,898	)		2.07
Cancelled or expired			(556,500	)		2.29
Outstanding at March 31, 2006			9,187,680		$	1.82

 

 

 

 

 

 

		Options Outstanding						Options Exercisable
Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighed Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$ 1.00		1,815,937		6.09		$ 1.00		1,815,937		$ 1.00

 

		Number of Shares			Weighted Average Price Per Share
Outstanding at January 1, 2004			3,267,500		$	1.00
Granted			60,000			3.45
Exercised			(328,331	)		1.00
Canceled or expired			(1,000,000	)		1.00
Outstanding at December 31, 2004			1,999,169		$	1.07
Granted			15,000			3.45
Exercised			(172,395	)		2.07
Canceled or expired			-			-
Outstanding at December 31, 2005			1,841,774		$	1.00
Granted			-			-
Exercised (Note J)			(25,837	)		1.00
Canceled or expired			-			-
Outstanding at March 31, 2006			1,815,937		$	1.00

 

 

 

 

		Warrants Outstanding						Warrants Exercisable
Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighed Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$ 1.00		137,500		0.22		$ 1.00		137,500		$ 1.00
$ 2.97		35,000		0.14		$ 2.97		35,000		$ 2.97
$ 5.00		1,100,000		4.16		$ 5.00		1,100,000		$ 5.00
		1,272,500		3.57		$ 4.51		1,272,500		$ 4.51

 

		Number of Shares			Weighted Average Price Per Share
Outstanding at January 1, 2004		5,159,490			$1.01
Granted			-			-
Exercised			(4,468,590	)		0.99
Canceled or expired			(115,000	)		1.00
Outstanding at December 31, 2004			575,900		$	1.12
Granted			1,040,000			4.85
Exercised			(371,900	)		1.00
Canceled or expired			(14,000	)		1.00
Outstanding at December 31, 2005			1,230,000		$	4.31
Granted			100,000			5.00
Exercised (Note J)			(44,000	)		1.00
Canceled or expired			(13,500	)		1.00
Outstanding at March 31, 2006			1,272,500		$	4.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Revenues

 

The Company’s revenue consists of direct product sales and a recurring (lease) model including two months activity of MST from date of acquisition through March 31, 2006 in the commercial, government and international markets. The table below outlines product versus recurring (lease) revenues for comparable periods:

 

	Three months Ended
	March 31, 2006		March 31, 2005		Variance
Product	$1,549,975	80%	$129,273	53%	$1,420,702	1099%
Recurring (lease)	393,937	20%	116,915	47%	277,022	237%
Total	$1,943,912	100%	$246,188	100%	$1,697,724	690%

Product revenue

 

Product revenue principally arises from the sale of iBridges and other Telkonet iWire System^TM components directly to customers. Revenues to date have been principally derived from the Commercial (Hospitality and Multi-Dwelling) and International business units. The Company anticipates continued growth in Commercial and International product revenue in the Value Added Reseller purchase programs. The Company expanded its international sales and marketing efforts upon receiving its European certification (CE) in March 2005. The Company expanded its sales and marketing efforts in the government sector in connection with the receipt of the FIPS 140-2 certification received in July 2005.

In the three months ended March 31, 2006, the Company consummated a non-recourse sale of certain rental contract agreements and the related capitalized equipment which were accounted for as operating leases with Hospitality Leasing Corporation. The remaining rental income payments of the contracts were valued at approximately $1,168,000 including the customer support component of approximately $357,000 which the Company will retain and continue to receive monthly customer support payments over the remaining average unexpired lease term of 37 months. In the period ending March 31, 2006, the Company recognized revenue of approximately $683,000 for the sale, calculated based on the present value of total unpaid rental payments, and expensed the associated capitalized equipment cost, net of depreciation, of approximately $340,000 and expensed associated taxes of approximately $64,000.

 

Recurring revenue

 

The increase in rental (lease) revenue was primarily due to the increase in non-cancelable leases. Accordingly, revenues associated with these leases are recognized ratably over a three to five year lease term. Revenues to be recognized under these non-cancelable leases (backlog) was approximately $1,121,000. The weighted average remaining lease term was approximately 35 months as of March 31, 2006. The associated unamortized capitalized costs in connection with these leases was approximately $294,000 or 26% of revenue backlog.

 

Cost of Sales

 

	Three months Ended
	March 31, 2006		March 31, 2005		Variance
Product	$983,651	63%	$90,982	70%	$892,669	981%
Recurring (lease)	311,919	79%	66,408	57%	245,511	370%
Total	$1,295,570	67%	$157,390	64%	$1,138,180	723%

Product Costs

 

Product cost primarily includes Telkonet iWire System^TM product suite equipment cost and installation labor. The related product cost in connection with the non-recourse sale of approximately $1,168,000 of rental contract agreements amounted to approximately $340,000 of previously capitalized equipment cost and other related cost.

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Rental (lease) Costs

Lease Cost primarily represents the amortization of the capitalized costs which are amortized over the lease term and include Telkonet equipment, installation labor and customer support. This increase compared to the prior year quarter is commensurate with the increase in leases.

 

Gross Profit

 

	Three months Ended
	March 31, 2006		March 31, 2005		Variance
Product	$566,406	37%	$38,291	30%	$528,115	1379%
Recurring (lease)	82,018	21%	50,507	43%	31,511	62%
Total	$648,424	33%	$88,798	36%	$559,626	630%

Product Costs

Gross profit associated with product revenues for the three months ended March 31, 2006 improved over the prior year primarily as a result of reduction of equipment costs and of improved installation processes, including upfront site surveys and standardized training.

Rental (lease) Costs

Gross profit associated with rental (lease) revenue decreased as a result of the build-out of the customer support services infrastructure to support future requirements.

 

Operating Expenses

	Three months Ended
	March 31, 2006		March 31, 2005		Variance
Total	$4,297,464		$3,180,113		$1,117,351	35%

Overall expenses increased for the three months ended March 31, 2006 over the comparable period in 2005 by $1,117,351 or 35%. This increase was principally due to salary and travel costs related to increased sales and marketing functions and office rent, as well as approximately $376,000 of employee stock options expense charged to operations upon adoption of SFAS 123R on January 1, 2006. The number of employees increased from 61 at March 31, 2005 to 86 at March 31, 2006, including 19 acquired in the MST acquisition in January 2006.

Product Research and Development

 

	Three months Ended
	March 31, 2006		March 31, 2005		Variance
Total	$432,569		$447,925		$(15,356)	(3%)

 

Research and development costs related to both present and future products are expensed in the period incurred. Total expenses for the three months ended March 31, 2006 decreased compared to the prior year quarter by $15,356 or 3%. This decrease was primarily related to the company maintaining staff levels and completing the CE certifications in the prior year quarter.

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Selling, General and Administrative

	Three months Ended
	March 31, 2006		March 31, 2005		Variance
Total	$3,092,043		$2,399,960,		$692,083	29%

Selling, general and administrative expenses increased for the three months ended March 31, 2006 over the comparable prior year quarter by $692,083 or 29%. This increase is related to an increase in payroll and associated costs for sales and marketing resources, advertising, trade shows, and office rent and related facility costs.

 

Liquidity and Capital Resources

 

The Company’s current assets exceeded current liabilities as of March 31, 2006 and December 31, 2005 by $4,543,263 and $12,060,807, respectively. Of the total current assets as of March 31, 2006 of $15,531,684 and as of December 31, 2005 of $20,377,956, cash represented $3,528,171 and $8,422,079, respectively, and Restricted Certificate of Deposit represented $10,000,000 of the current assets as of March 31, 2006 and December 31, 2005.

 

In 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 remaining outstanding senior note at March 31, 2006 was $100,000 which matures on June 15, 2006.

 

In October 2005, the Company completed an offering of convertible senior notes (the “Notes”) in the aggregate principal amount of $20 million. The capital raised in the Note offering is being used for general working capital purposes. The Notes bear interest at a rate of 7.25%, payable in cash, and call for monthly principal installments beginning March 1, 2006. The maturity date is 3 years from the date of issuance of the Notes. The Noteholders are entitled, at any time, to convert any portion of the outstanding and unpaid Conversion Amount into shares of Company common stock. At the option of the Company, the principal payments may be paid either in cash or in common stock. Upon conversion into common stock, the value of the stock will be determined by the lower of $5 or 92.5% of the average recent market price. The Company has also agreed to issue one million warrants to the Noteholders exercisable for five years at $5 per share. At any time after six months, should the stock trade at or above $8.75 for 20 of 30 consecutive trading days, the Company can cause a mandatory redemption and conversion to shares at $5 per share. At any time, the Company can pre-pay the notes with cash or common stock. If the Company elects to use common stock to pre-pay the Notes, the price of the common stock shall be deemed to be the lower of $5 or 92.5% of the average recent market price. Should the Company pre-pay the Notes other than by mandatory conversion, the Company must issue additional warrants to the Noteholders covering 65% of the amount pre-paid at a strike price of $5 per share. In addition to standard financial covenants, the Company has agreed to maintain a letter of credit in favor of the Noteholders equal to $10 million. Once the Note declines below $15 million, the balance on the letter of credit is reduced by $.50 for every $1 amortized. The Company also has covenanted to maintain minimum revenue of $9 million through 2006, measured quarterly. The Company was in compliance with this covenant as of March 31, 2006. During the three months ended March 31, 2006, the Company made debt service payments of $1,872,530 consisting of a total of $1,250,000 of principal due on March 1, 2006 and April 1, 2006 and interest of $620,530 for the period of October 27, 2005 through March 31, 2006.

 

On January 31, 2006, the Company, acquired a 90% interest in Microwave Satellite Technologies, Inc. (“MST”) from Frank Matarazzo, the sole stockholder of MST in exchange for $1.8 million in cash and 1.6 million unregistered shares of the Company’s common stock for an aggregate purchase price of $9,000,000. The cash portion of the purchase price was payable in two installments, $900,000 at closing and $900,000 payable in January 2007. The stock portion is payable from shares held in escrow, 400,000 shares at closing and the remaining 1,200,000 “purchase price contingency” shares issued based on the achievement of 3,300 “Triple Play” subscribers over a three year period. In the event the Company’s common stock price is below $4.50 per share upon issuance of the shares from escrow, a pro rata adjustment in the number of shares will be required to support the aggregate consideration of $5.4 million.

 

During the three months ended March 31, 2006, the Company received $930,530 from the exercise of employee and non-employee stock options and $44,000 from exercise of warrants.

 

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Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.

 

Off Balance Sheet Arrangements

In October 2005, the Company entered into an irrevocable letter of credit with a bank for $10 million as collateral for the $20 million Senior Convertible Notes. A $10 million Certificate of Deposit is pledged as collateral for the irrevocable letter of credit agreement. The letter of credit is automatically renewable annually as required in the loan covenant. As of March 31, 2006, the $10 million Restricted Certificate of Deposit is recorded in the accompanying consolidated balance sheet as a current asset.

 

Acquisition or Disposition of Property and Equipment

 

During the three months ended March 31, 2006, fixed assets increased by $134,704 or 9.1% which related to equipment purchased during the period. Additionally, the Company acquired $435,011 of fixed assets related to the acquisition of MST. The Company does not anticipate the sale or purchase of any significant property, plant or equipment during the next twelve months, other than computer equipment and peripherals to be used in the Company’s day-to-day operations.

 

MST, which was acquired by the Company in January 2006, presently leases 12,600 square feet of commercial office space in Hawthorne, New Jersey for its office and warehouse spaces. This lease will expire in April 2010.

 

Number of Employees

 

As of May 1, 2006, the Company had eighty-two (82) full time employees.

 

Disclosure of Contractual Obligations

 

	Payment Due by Period
Contractual obligations	Total	Less than 1 year	1-3 years	3-5 years	More than 5 years
Long-Term Debt Obligations	$18,750,000	$7,500,000	$11,250,000	-	-
Capital Lease Obligations	-	-	-	-	-
Operating Lease Obligations	$1,570,289	$485,903	$727,226	$357,160	-
Purchase Obligations	-	-	-	-	-
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet Under GAAP	-	-	-	-	-
Total	$20,320,289	$7,985,903	$11,977,226	$357,160	-

 

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Short Term Investments

 

We held no marketable securities as of March 31, 2006. Our excess cash is held in money market accounts with a bank and a brokerage firm, both of which are nationally ranked, top tier firms with an average return of approximately 300 basis points. The certificate of deposit, which is restricted and currently held as collateral for the Letter of Credit in connection with the $20 million senior convertible notes, accrues interest with an average return of approximately 400 basis points. Due to the conservative nature of our investment portfolio, an increase or decrease of 100 basis points in interest rates would not have a material effect on our results of operations or the fair value of our portfolio.

 

Investments in Privately Held Companies

 

We have invested in privately held companies, which are in the startup or development stages. These investments are inherently risky because the markets for the technologies or products these companies are developing are typically in the early stages and may never materialize. As a result, we could lose our entire initial investment in these companies. In addition, we could also be required to hold our investment indefinitely, since there is presently no public market in the securities of these companies and none is expected to develop. These investments are carried at cost, which as of May 1, 2006 was $131,044 and $100,000 in BPL Global and Amperion, respectively, and at March 31, 2006, are recorded in other assets in the Consolidated Balance Sheets. During the year ended December 31, 2005, the Company determined that its investment in Amperion was impaired based upon forecasted discounted cash flow. Accordingly, the Company wrote-off 80%, or $400,000, of the carrying value of its investment through a charge to operations in the prior year.

 

Item 4.  Controls and Procedures.

 

As of March 31, 2006, the Company performed an evaluation, under the supervision and with the participation of management, including the Chief Executive and Chief Financial Officers, of the effectiveness of the design and operation of its disclosure controls and procedures as defined in Rules 13a - 15(e) or 15d - 15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive and Chief Financial Officers concluded that the 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 changes in the Company’s internal controls or in other factors that have materially affected, or are reasonable likely to materially affect, the Company’s internal controls subsequent to the date of the most recent evaluation.

 

PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

The Company has a history of operating losses and an accumulated deficit and expects to contnue to incur losses for the foreseeable future.

 

Since inception through March 31, 2006, the Company has incurred cumulative losses of $47,234,675 and has never generated enough funds through operations to support its business. The Company expects to continue to incur operating losses through 2006.  Additional capital will be required within the next sixty days in order to provide working capital requirements for the next twelve months. If 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.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

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Item 4.  Submission of Matters to a Vote of Security Holders.

 

None.

 

Item 5.  Other Information.

 

None.

 

Item 6.  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)

 

4.7	Senior Convertible Note by Telkonet, Inc. in favor of Portside Growth & Opportunity Fund (incorporated by reference to our Form 8-K (No. 000-27305), filed on October 31, 2005)

4.8	Senior Convertible Note by Telkonet, Inc. in favor of Kings Road Investments Ltd. (incorporated by reference to our Form 8-K (No. 000-27305), filed on October 31, 2005)

 

4.11	Warrant to Purchase Common Stock by Telkonet, Inc. in favor of Portside Growth & Opportunity Fund (incorporated by reference to our Form 8-K (No. 000-27305), filed on October 31, 2005)

4.12	Warrant to Purchase Common Stock by Telkonet, Inc. in favor of Kings Road Investments Ltd. (incorporated by reference to our Form 8-K (No. 000-27305), filed on October 31, 2005)

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 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

 

 

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10.3	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)

10.4	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)

10.5	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)

10.6	Securities Purchase Agreement by and among Telkonet, Inc., Kings Road Investments Ltd. and Portside Growth & Opportunity Fund, dated as of October 26, 2005 (incorporated by reference to our Form 8-K (No. 000-27305), filed on October 31, 2005)

 

10.7	Registration Rights Agreement by and among Telkonet, Inc., Kings Road Investments Ltd. and Portside Growth & Opportunity Fund, dated October 27, 2005 (incorporated by reference to our Form 8-K (No. 000-27305), filed on October 31, 2005)

 

10.8	Professional Services Agreement by and between Telkonet, Inc. and Seth D. Blumenfeld, dated July 1, 2005 (incorporated by reference to our Form 10-Q (No. 000-27305), filed November 9, 2005)
10.9	Employment Agreement by and between Telkonet, Inc. and Frank T. Matarazzo, dated as of February 1, 2006 (incorporated by reference to our Form 10-K (No. 000-27305), filed March 16, 2006)
10.10	MST Stock Purchase Agreement and Amendment (incorporated by reference to our Form 8-K/A (No. 000-27305), filed April 12, 2006)
14	Code of Ethics (incorporated by reference to our Form 10-KSB (No. 001-31972), filed March 30, 2004)

 

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.

 

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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 10, 2006	By:	/s/ Ronald W. Pickett
		Ronald W. Pickett Chief Exective Officer

 

 

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