<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 2000
Commission file number 333-47986
TELKONET, INC.
(Name of Small Business Issuer in Its Charter)
Utah 87-0627421
(State of Incorporation) (IRS Employer Identification No.)
902 A Commerce Road Annapolis, Maryland 21401
(Address of Principal Executive Offices)
(410) 897-5900
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 21,775,345 shares of Common Stock
($.001 par value) as of November 14, 2000.
Transitional small business disclosure format: Yes No x
--- ---
<PAGE>
TELKONET, INC.
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending September 30, 2000
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Losses:
Three Months Ended September 30, 2000
November 3, 1999 (Date of Inception) through
September 30, 2000
Consolidated Balance Sheet:
September 30, 2000
Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 2000
November 3, 1999 (Date of Inception) through
September 30, 2000
Notes to Consolidated Financial Statements:
September 30, 2000
Item 2. Plan of Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
Item 1. Financial Statements (Unaudited)
TELKONET, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF LOSSES
(Unaudited)
<CAPTION>
For the Period
November 3, 1999
Three months ended Nine Months Ended (Date of Inception) to
September 30, 2000 September 30, 2000 September 30, 2000
------------------ ------------------ ------------------
<S> <C> <C> <C>
Costs and expenses:
General and administrative $ 220,563 $ 567,659 $ 567,659
Depreciation and amortization 3,034 13,266 13,266
Interest expense 5,604 13,168 13,168
------------- ------------- -------------
Total costs and expenses 229,201 594,093 594,093
Loss before taxes (229,201) (594,093) (594,093)
Provision for income taxes - - -
------------- ------------- -------------
Net loss $ (229,201) $ (594,093) $ (594,093)
============= ============= =============
Loss per common share $ (0.01) $ (0.03) $ (0.03)
(basic and assuming dilution) ============= ============= =============
Weighted average shares outstanding (restated):
Basic and diluted 21,775,345 21,775,345 21,775,345
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
TELKONET, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
September 30, 2000
------------------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 66,490
Marketable securities, at cost
(market value, $ 425,100) 444,632
---------
Total current assets 511,122
Property and equipment, net 63,922
---------
Total Assets $575,044
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 185,516
Note payable 235,000
---------
Total current liabilities 420,516
Stockholders' equity:
Common stock, par value, $.001 per share;
100,000,000 authorized; 21,775,345 issued at
September 30, 2000 21,775
Additional paid-in-capital 726,846
Accumulated deficit
Deficit accumulated during development stage (594,093)
---------
Total stockholders' equity 154,527
---------
Total Liabilities and Stockholder's equity $575,044
=========
The accompanying notes are an integral part of these financial statements
<PAGE>
<TABLE>
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Period
For the nine months November 3, 1999
ended (Date of Inception) to
September 30, 2000 September 30, 2000
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from development stage operations $(594,093) $(594,093)
Adjustments to reconcile net loss from development stage
operations to cash used for operating activities:
Common Stock issued in connection
with acquisition 21,775 21,775
Depreciation and amortization 13,538 13,538
(Increase) decrease in:
Marketable securities (444,632) (444,632)
Prepaid and other
Accounts payable and accrued expenses 185,516 185,516
---------- ----------
Net cash used by operating activities (817,896) (817,896)
Cash flows used in investing activities:
Capital expenditures, net of disposals (77,460) (77,460)
Net cash used in investing activities
Cash flows provided by financing activities:
Proceeds from sale of common stock, net 726,846 726,846
Proceeds from loans from shareholders 235,000 235,000
---------- ----------
Net cash provided in financing activities 961,846 961,846
Net increase (decrease) in cash and cash equivalents 66,490 66,490
Cash and cash equivalents at beginning of period - -
---------- ----------
Cash and cash equivalents at end of period $ 66,490 $ 66,490
========== ==========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest 13,168 13,168
Common Stock issued in connection with acquisition 21,775 21,775
Income taxes paid - -
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
TELKONET, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
---------------------------------------
General
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB, and therefore, do not
include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results from developmental stage operations for the nine-month period ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. The unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated June 30, 2000 financial statements and footnotes thereto included
in the Company's SEC Form 8-K dated August 30, 2000.
The Registrant began operations on November 3, 1999, and accordingly, income
statements and statements of cash flows for the comparable periods of the
preceding fiscal years have not been presented.
NOTE B-BUSINESS COMBINATION
---------------------------
On August 25, 2000, Telkonet Communications, Inc. ("TCI") completed an Agreement
and Plan of Reorganization ("Agreement") with Comstock Coal Company, Inc.
("Comstock") in a transaction accounted for using the purchase method of
accounting. The total purchase price and carrying value of net assets acquired
of the Comstock was $ 1. From Comstock's inception, until the date of the
merger, Comstock was an inactive corporation with no assets and liabilities. As
a result of the acquisition, there was a change in control of the public entity.
Subsequent to the date of the merger, Comstock Coal Company, Inc. changed its
name to Telkonet, Inc. ("Company"), with Telkonet Communications, Inc. becoming
a wholly owned subsidiary of the Company.
Effective with the Agreement, all previously outstanding common stock, preferred
stock, options and warrants owned by former Comstock stockholders were exchanged
for an aggregate of 1,980,000 shares of Telkonet Communications, Inc.'s common
stock. The value of the stock that was issued was the historical cost of
Comstock's net tangible assets, which did not differ materially from their fair
value. The results of operations subsequent to the date of acquisition are
included in the Company's consolidated statement of losses. In accordance with
Accounting Principles Opinion No. 16, Telkonet Communications, Inc. is the
acquiring entity.
<PAGE>
TELKONET , INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE B-BUSINESS COMBINATION (Continued)
---------------------------------------
The total purchase price and carrying value of net assets acquired of Comstock
was $ 1. The net assets acquired were as follows:
Net assets $ 1
Accumulated deficit 2,643
Net liabilities (2,642)
-------
$ 1
=======
In accordance with Statement of Position No. 98-5, the Company expensed, as
organization costs, in the three months ended September 30, 2000, $ 1,980, which
represents the excess of the purchase price of Comstock over the net assets
acquired.
NOTE C- BASIS OF PRESENTATION
-----------------------------
Telkonet Communications, Inc., a wholly-owned subsidiary of Telkonet, Inc.,
formerly Comstock Coal Company, Inc., was formed on November 3, 1999 under the
laws of the state of Delaware. Telkonet Communications, Inc. is a development
stage enterprise, as defined by Statement of Financial Accounting Standards No.
7 ("SFAS No. 7") and is seeking to develop, produce and market proprietary
equipment enabling the transmission of voice and data over electric utility
lines. From its inception through the date of these financial statements the
Telkonet Communications, Inc. has recognized no revenues and has incurred
significant operating expenses.
The consolidated financial statements include the accounts of the Company, and
its wholly owned subsidiary, Telkonet Communications, Inc. Significant
intercompany transactions have been eliminated in consolidation.
<PAGE>
Item 2. Management's Plan of Operation
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this Report.
Description of Company
----------------------
The Company was formed to develop applications for emerging power-line carrier
technologies. The Company believes that the power line represents an attractive
opportunity to deliver telephony and Internet connectivity to consumers in
developing countries and businesses around the world. Because the power line is
the most ubiquitous wired network in the home, service providers and consumers
avoid the expense, time and inconvenience of installing new wiring. Also, power
line connectivity is easy to use. Consumers can achieve reliable, secure
communications simply by plugging our devices into electrical outlets.
Furthermore, many of the difficulties associated with power-line communications
that historically have prevented the achievement of high data transmission rates
would be overcome with TCI's proprietary solution. TCI's proprietary solutions
would bring cost-effective communication services where the telecommunication
backbone infrastructure is not mature and service is not readily available.
The Company has applied for patents that cover its unique technology, and
intends to utilize recently announced advancements in transmission speeds to
build next generation devices for field tests and marketing demonstrations.
TCI's technology would be licensed or sold to strategic customers and partners
with vertical markets where TCI's products and services would satisfy demand for
communication services. TCI has developed working prototypes for two products
designed to provide telephony services and Internet connectivity through
transmission over existing power line networks.
Telephony Product
The first product combines digital signaling equipment to deliver telephony
services to end users via existing standard power-line infrastructure. The TCI
telephony solution uses hybrid system and voice-over-Internet-protocol (VOIP)
equipment. The telephony product uses the existing power lines as the carrier
from the transformer to the home or business. The central office of the Public
Service Telephone Network provides the wide band (E1 Line) to each transformer
for interconnectivity to the TCI power line carrier telephony system. This
approach greatly reduces the cost and time required to bring telecommunication
services to geographic locations that do not have such services.
Internet Product
The second proprietary product provides Internet connectivity via
geosynchronous satellite, or alternative medium, to a very small aperture
terminal (VSAT) and then distributes the Internet service along power lines
connected to end users. Use of the power line substantially improves the cost
effectiveness of this Internet delivery system, and avoids the traditional per
minute telecom charges that are incurred in geographic locations such as Europe.
Interfacing TCI's solution to the backbone of the Internet and bypassing the
telephone system avoid these per minute charges. By taking the Internet signal
to the satellite and downloading the signal to a Vsat terminal for distribution
purposes, the TCI proprietary solution unburdens the telephone system and
provides cost savings to end users and service providers.
<PAGE>
Forward Looking Statements
--------------------------
This Form 10-QSB contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements included
herein that address activities, events or developments that the Company expects,
believes, estimates, plans, intends, projects or anticipates will or may occur
in the future, are forward-looking statements. Actual events may differ
materially from those anticipated in the forward-looking statements. Important
risks that may cause such a difference include: general domestic and
international economic business conditions, increased competition in the
Company's markets and products. Other factors may include, availability and
terms of capital, and/or increases in operating and supply costs. Market
acceptance of existing and new products, rapid technological changes,
availability of qualified personnel also could be factors. Changes in the
Corporation's business strategies and development plans and changes in
government regulation could adversely affect the Company. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate.
There can be no assurance that the forward-looking statements included in this
filing will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Corporation
that the objectives and expectations of the Company would be achieved.
Plan of Operation
-----------------
The Company is still in the development stage and is yet to earn revenues from
operations. The Company may experience fluctuations in operating results in
future periods due to a variety of factors including, but not limited to, market
acceptance of the Internet and power line communication technologies as a medium
for customers to purchase the Company's products, the Company's ability to
acquire and deliver high quality products at a price lower than currently
available to consumers, the Company's ability to obtain additional financing in
a timely manner and on terms favorable to the Company, the Company's ability to
successfully attract customers at a steady rate and maintain customer
satisfaction, Company promotions, branding and sales programs, the amount and
timing of operating costs and capital expenditures relating to the expansion of
the Company's business, operations and infrastructure and the implementation of
marketing programs, key agreements and strategic alliances, the number of
products offered by the Company, the number of returns experienced by the
Company, and general economic conditions specific to the Internet, power-line
communications, and the communications industry.
<PAGE>
Revenues
--------
The Company generated no revenues from operations form its inception. The
Company believes it will begin earning revenues from operations within the next
twelve months as it transitions from a development stage company to that of an
active growth and acquisition stage company.
On October 3, 2000 the Company entered into a Sales/Marketing Agreement with
Medical Advisory Systems, Inc. (MAS) (AMEX:DOC) that provides for MAS to perform
international business development, marketing (including demographic analysis),
and sales/support services for the Company's products and services through an
international network of call centers owned by CORIS Group International of
Paris, France. Through its agreement with CORIS, MAS will market the Company's
power-line technology in up to 38 countries located on six continents. This
geographic focus would include all the former Soviet Republics in Eastern Europe
where the need for basic telephony exists for most rural citizens. Also, MAS
would provide legal, business, regulatory and technical consulting for countries
targeted by the Company where MAS is positioned. MAS would make introductions
with other potential partners for the Company for the purpose of increasing the
scope and deployment of its power-line technology. The Company would reimburse
MAS for all costs associated with pursuing the agreed upon services plus an
administrative fee for sales contracts that are successfully completed on behalf
of the Company.
Costs and expenses
------------------
>From its inception on November 3, 1999 through September 30, 2000, the Company
has not generated any revenues. The Company has incurred expenses of $594,093
during this period. These expenses were associated principally with compensation
to employees, product development costs and professional services.
Liquidity and Capital Resources
-------------------------------
As of September 30, 2000, the Registrant had working capital of $ 90,606. As a
result of the Company's operating losses from its inception through September
30, 2000, the Registrant generated a cash flow deficit of $817,896 from
operating activities. Cash flows used in investing activities was $77,460 during
the period November 3, 1999 through September 30, 2000. The Company met its cash
requirements during this period through the private placement of $ 726,846 of
the Company's common stock and loan proceeds of $ 235,000.
While the Company has raised capital to meet its working capital and financing
needs in the past, additional financing is required in order to meet the
Company's current and projected cash flow deficits from operations and
development. The Company is seeking financing in the form of equity in order to
provide the necessary working capital. The Company currently has no commitments
for financing. There are no assurances the Company will be successful in raising
the funds required.
<PAGE>
Product Research and Development
--------------------------------
Company-sponsored research and development costs related to both present and
future products are expended in the period incurred. Total expenditures on
research and product development for the period November 3, 1999 (date of
inception) through September 30, 2000 were approximately $ 60,000.
In order to support the development of the Company's technologies, the Company
and Ocala, Florida-based Intellon Corporation signed a letter of intent on
October 16, 2000 that set forth the basic terms upon which they will commence
negotiation of a definitive agreement, within 60 days for Telkonet to engage
Intellon to support development of the technologies of Telkonet. The effort will
start as soon as the parties have agreed to the timing, scope and the conditions
of the testing plan, which will first characterize the transmission environment,
then model the expected network performance and finally evaluate performance
their 14 Mbit/sec PowerPacket technology. For the work to be performed by
Intellon during the Testing Phase, Telkonet will make fixed monthly payments
plus a completion payment of 100,000 shares of common stock of Telkonet, Inc.
which may be issued without registration under applicable securities law.
Telkonet will provide piggyback registration rights.
If the Company determines that the 14 Mbit/sec PowerPacket technology can
economically be used or reasonably modified for use, Intellon agrees to assist
in this development through data sharing and participation in design reviews.
Upon successful completion of the testing and development phases, whether using
existing standard devices or specifically developed devices for Telkonet,
Telkonet and Intellon will enter a "Production Alliance" project'. All payments
made by Telkonet to Intellon during the Testing phase will be returned to
Telkonet in the form of a price reduction during the production phase, until the
sum of the price reductions equal the total testing payments.
THE COMPANY may apply for patents and/or copyrights on devices or solutions
developed by at its own expense. If the patent content implies major
contributions from the cooperation with Intellon employee involvement, the
application may be filed jointly on terms and conditions to be mutually agreed
upon.
Acquisition or Disposition of Plant and Equipment
-------------------------------------------------
The Company does anticipate the sale of any significant property, plant or
equipment during the next twelve months. The Company does not anticipate the
acquisition of any significant property, plant or equipment during the next 12
months, other than computer equipment and peripherals used in the Company's
day-to-day operations. The Company believes it has sufficient resources
available to meet these acquisition needs.
Number of Employees
-------------------
During the period ended September 30, 2000, the Company had five (5) 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. The Company anticipates increasing its employment base to ten (10) to
fifteen (15) employees during the next 12 months. As the Company continues to
expand, the Company will incur additional costs for personnel. This projected
increase in personnel is dependent upon the Company generating revenues and
obtaining sources of financing. There are no assurances the Company will be
successful in raising the funds required or generating revenues sufficient to
fund the projected increase in the number of employees.
<PAGE>
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 of such risk factors before making an investment decision with
respect to the Company's stock.
Limited operating history; Anticipated Losses; Uncertainly of Future Results.
-----------------------------------------------------------------------------
Telkonet, Inc. has only a limited operating history upon which an evaluation of
the Company and its prospects can be based. The Company's prospects must be
evaluated with a view to the risks encountered by a company in an early stage of
development, particularly in light of the uncertainties relating to the new and
evolving distribution methods with which the Company intends to operate and the
acceptance of the Company's business model. The Company will be incurring costs
to develop, introduce and enhance its interactive website, to establish
marketing relationships, to acquire and develop products that will compliment
each other and to build an administrative organization. To the extent that such
expenses are not subsequently followed by commensurate revenues, the Company's
business, results of operations and financial condition will be materially
adversely affected. There can be no assurance that the Company will be able to
generate sufficient revenues from the sale of their first product suite, and
other product candidates. The Company expects negative cash flow from operations
to continue for the next 12 months as it continues to develop and market its
business. If cash generated by operations is insufficient to satisfy the
Company's liquidity requirements, the Company may be required to sell additional
equity or debt securities. The sale of additional equity or convertible debt
securities would result in additional dilution to the Company's stockholders.
Potential fluctuations in quarterly operating results
-----------------------------------------------------
The Company's quarterly 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: the level of use of the Internet; the demand for
high-tech goods; seasonal trends in both Internet use, the amount and timing of
capital expenditures and other costs relating to the expansion of the Company's
Internet operations; price competition or pricing changes in the industry;
technical difficulties or system downtime; general economic conditions, and
economic conditions specific to the Internet and Communications Industry. The
Company's quarterly results may also be significantly impacted by the impact of
the accounting treatment of acquisitions, financing transactions or other
matters. Particularly at the Company's early stage of development, such
accounting treatment can have a material impact on the results for any quarter.
Due to the foregoing factors, among others, it is likely that the Company's
operating results will fall below the expectations of the Company or investors
in some future quarter.
<PAGE>
Limited public market, possible volatility of share price
---------------------------------------------------------
The Company's Common Stock is currently quoted on the NASD OTC Bulletin Board
under the ticker symbol TLKO.OB. As of September 30, 2000, there were
approximately 21,775,345 shares of Common Stock outstanding. There can be no
assurance that a trading market will be sustained in the future. Factors such
as, but not limited to, technological innovations, new products, acquisitions or
strategic alliances entered into by the Company or its competitors, failure to
meet security analysts' expectations, government regulatory action, patent or
proprietary rights developments, and market conditions for technology stocks in
general could have a material effect on the volatility of the Company's stock
price.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2 - Changes in Securities and Use of Proceeds
(a) None
(b) None
(c) None
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
27.1 Financial Data Schedule
<PAGE>
(b) Reports on Form 8-K filed during the three months
ended September 30, 2000.
On August 30 2000, the Company filed a Form 8-K
describing the Company's acquisition of Telkonet
Communications Inc., a Delaware corporation, and
the Company's subsequent reverse acquisition.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Telkonet, Inc.
Registrant
November 14, 2000 By: /S/ Peter Larson
------------------ --------------------------
Date L. Peter Larson
President and
Chief Executive Officer
