fyi
November 08, 2004
Stocklemon Reports On Telkonet Inc. (Amex: TKO)
There is currently a lot of excitement in the internet business about distributing broadband via power lines. This technology enables electric utility companies to add broadband service to compete with DSL and cable in large areas of the country, some of which are not served by DSL or cable TV. These technologies are often referred to as "'last-mile'" solutions".
There is a misconception that this emerging "last-mile" powerline technology could somehow benefit Telkonet in particular. Telkonet has not made the claim, but they have done nothing to clarify it either, they've just let ill-informed "pundits" do the talking. Stocklemon believes that Telkonet is a stock promotion that has been used to line the pockets of its insiders without ever undertaking any meaningful R & D or developing any revenues.
Shares outstanding: Over 44.7 million
Market Cap- $165.5 million
Revenues To Date (5 years)- $412,000
A History Of Stock Promotion
The first time we visited Telkonet, their stock was being promoted by a notorious boiler room called International Media Solutions, based in Orlando, Florida. stocklemon.com
Since the report, the SEC has brought securities fraud charges against International Media Solutions and its founders Kermit Silva and Yolanda Valazquez. stocklemon.com
Telkonet then moved on to hire Jody Janson as their Investor Relations. Interestingly enough, Mr. Janson was banned by the NASD for not cooperating in an investigation in which he paid stockbrokers in cash to buy stock.
216.239.57.104;
As testified in the NASD complaint, “Janson’s firm would pay an average of 10-15 percent on any sales of securities it promoted.”
Then Telkonet hired CEOcast.com to help promote its stock. The last time Stocklemon wrote about CEOcast is when they were promoting World Information Technologies. stocklemon.com
Two months later, the SEC halted the shares of World Information Technologies. Interestingly enough, the CEO of CEOcast is one Michael Wachs. Mr. Wachs had wire and bank fraud charges brought against him by the Federal Reserve
federalreserve.gov
Old Habits are Hard To Break
According to Telkonet’s recent filings,
“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. “
750,000 shares to Aware Capital Consultants…who are they?????????
STOCK PROMOTERS
Either the company has lied in their filings and is paying stock for stock promotion or they have a stock promoter doing business development for them for an ASTRONOMICAL SUM….either way it is bad news. The president of Aware Capital Consultants is a man named Jeffrey O. Friedland. Ironically enough, Mr. Friedland was sanctioned earlier this year by the FCC for sending out JUNK FAXES:
hraunfoss.fcc.gov
The other stocks that Aware is associated with are ZKID (.34 cents on the OTC) and MKOS (.49 cents on the OTC)
Another 250,000 shares to Scarborogh Ltd. Scarborough is an offshore hedge fund based in Bermuda. Why did the company give them close to a $1 million in stock for consulting? The other stocks that Scarborough are involved in are: CDKN ($1 on the OTC with no volume) and FNT (.13 cents on the AMEX)
C’MON TELKONET…..YOU DIDN’T TELL US THAT
Telkonet likes to base much of its credibility on the credentials of its Chairman, Warren Pete Musser, the former Chairman of Safeguard Scientifics. All of the filings list Mr. Musser’s resume as a pinnacle of excellence to which other executives should be envious, yet they fail to mention one MAJOR fact.
Mr. Musser was sued by his shareholders at Safeguard Scientific for securities fraud, as he borrowed money from the company to pay his margin calls in his stock accounts.
bizjournals.com
Mr. Musser signed a loan agreement with Safeguard for $26.5 million and according to the last 10k filed by Safeguard,
“The loan bears interest at the default annual rate of 9% and became payable on a limited basis on January 1, 2003. Safeguard sent Mr. Musser a demand notice in January 2003 and, when no payment was received, a default notice. In conjunction with the original loan, Mr. Musser granted the Company security interests in securities and real estate as collateral. Based on the information available to us, the Company also concluded that Mr. Musser may not have sufficient personal assets to satisfy the outstanding balance due under the loan when the loan becomes full recourse against Mr. Musser on April 30, 2006”
Mr Musser also had his stay at Safeguard marred by his related party transactions.
According to the Philadelphia Business Journal, “Safeguard disclosed in a Securities and Exchange Commission filing that a business run by Musser's wife was in default on a $2.1 million loan that Safeguard made to it in 1998”
bizjournals.com
BUT HERE IS THE BEST
Musser borrowed $14 million on his Nantucket Vacation home from Tyco’s Dennis Kozlowski and Mark Swarz, while he was on the board of directors of one of their subsidiaries.
bizjournals.com
Corporate Governance
On March 5, 2004 Mr. Musser agreed to serve on the audit committee. As stated in the SEC filings, “The Company's Board of Directors has determined that Mr. Musser is both a "financial expert" and "independent" as such terms are defined under the relevant provisions of the Securities Act of 1933 and Securities Exchange Act of 1934.”
Indepenent???
The same filings state.
“In January 2003, options to purchase the following number of shares were granted to the following non-employee directors of Telkonet under the Stock Incentive Plan: David Grimes (900,000 shares) and Warren Musser (2,000,000 shares). These options entitle the holder to purchase shares of Telkonet common stock at $1.00 per share and vest ratably over twelve quarters beginning January1, 2003.”
Mr. Musser is also receiving a consulting fee ($100k a year) and 8% of the debenture sales he refers in.
How Good is the Product?
It is the opinion of Stocklemon that Telkonet’s product is neither revolutionary nor groundbreaking. Telkonet distrutes an internet signal within a building using existing electrical circuit wiring. This basic technology has been available at low cost to consumers from many huge vendors such as Cisco (Linksys division) and Netgear for several years, but has been largely unpopular; it has been eclipsed by cheap and more convenient wireless technology.
Telkonet adopted this commodity product technology (The HomePlug standard powerline chipset is manufactured by Intellon, and is available to any vendor: see intellon.com )
To this it added a level of security software so a vendor like a hotel or ISP can "provision" the service - (basically, so you can't show up with your own modem and "plug in" for free). But it is the opinion of Stocklemon that there's nothing revolutionary and little disruptive about it.
This explains why Telkonet's overall R&D expense is so miniscule (less than $3 million in 5 years of operation) - they haven't invented anything new or consequential…just enough of a story to support an unending stream of PR's announcing "pilot projects" and "partnerships" ... enough to support a long running stock promotion. Note that the company has lost $21 mil. since its inception yet only spent $3 mil on Research and Development…..WHERE DID THE REST OF THE MONEY GO?
Misrepresenting the Truth To Investors
The company and its pundits have blamed their lack of revenue on the fact that they have just emerged from their development phase. THAT IS NOT TRUE. The company has had their product but has just not been able to sell it. The following is a reprint from a previous Stocklemon article, yet it shows that the company has attempted to sell this product, unsuccessfully, for years.
7/30/01 "Telkonet, Inc., has completed the initial product development phase of their proprietary communications system."
8/2/01 Peter Larson, President and CEO of Telkonet: "We will now move ahead quickly to apply our technologies across several vertical markets both in the United States and in Europe, where there is a very real need for our network solutions."
6/20/02 "Telkonet, Inc. announced today that the Company is poised for the 3rd Quarter 2002 launch of their PlugFast family of Internet access products, designed to address the market for office buildings, hotels, schools, shopping malls, and commercial buildings."
7/8/02 Mr. Stephen Sadle, Chief Operating Officer stated, "Telkonet has steadily gained momentum over the last quarter which should accelerate the launch our first powerline communications product offering into the market sooner than anticipated in the third quarter of this year driving earlier sales and profitability."
10/1/02 Mr. Greg Fowler, President & CEO, stated, "It is indeed a very exciting day for us here at Telkonet. Today we have officially launched our first product into the market. Further, we are participating in a major industry event, The Broadband Properties Summit, where we will be demonstrating the TA 1000 to prospective partners and customers." ... Mr. Steve Sadle, COO and founder, stated, "Given the strong interest in the TA 1000 from the residential marketplace, the release of the TA 1000 is a win-win for Telkonet and our partners and customers. We are shipping individual units and a bundled evaluation kit. The evaluation kit allows a potential partner or customer to begin testing our PLC technology now for a very reasonable price."
11/5/02 "Today we have unveiled the GW 2500, which is the cornerstone of our commercial solution."
1/22/03 Ronald W. Pickett, President, stated, "We have had excellent feed back from our potential hotel customers including Wilmington, North Carolina and Augusta, Georgia! Their guests are very pleased with the service and we have experienced great success with the installed systems."
3/4/03 "The Choice Hotels-Telkonet agreement is an initial two-year renewable contract, wherein Telkonet will become a Choice Endorsed Vendor offering Telkonet's "PlugPlusInternet" high-speed Internet access service to Choice Hotels U.S. franchisees. Ronald W. Pickett, President of Telkonet, stated, "Telkonet's 'PlugPlusInternet' product is perfect for hotel installation; in fact, in our business plan we refer to the hotel market as one of our 'Sweet Spots'."
5/21/03 "Last December we decided to commence product manufacturing and simultaneously go-to-market with the PlugPlusInternet(TM) high-speed Internet solution for hotels. We targeted late April/May for product availability and regulatory approval to coincide with a sales initiative that would result in actual installations in hotels by June. ...We are pleased to report success on both fronts. The product is regulatory compliant and in production in time for June installations and hundreds of hotels have requested contract proposals. We are moving forward to formalize contracts with hotels requesting our PlugPlusInternet(TM) solution." ...
7/14/03 "Telkonet, Inc. the Leader in Commercial Powerline Communications announced it is now receiving shipments of the company's regulatory compliant manufactured PlugPlusInternet products. Following six months of intensive effort, Telkonet is pleased to report that it is now producing their PlugPlus Gateway, Coupler and PlugPlus Modem
John Markman and The Street.com
Last week, John Markman did a story for TheStreet.com in which he discussed Telkonet. We believe this story was not researched properly and many mistakes were made. Notably, Telkonet was not reversed merged into an Amex shell three years ago, rather on January 24 of 2004, the company went from the OTC Bulletin Board to the AMEX. Instead of researching the technology, Mr. Markman’s due dilligence comes in the form of a phone call to a front desk clerk at the Quality Inn in Surprise, Arizona.
Markman then goes on to rave about management from Safeguard Scientifics, Internet Capital Group, and Digital Angel Corp. All of those three companies have one thing in common….THEY ARE NOT PROFITABLE.
Conclusion
Telkonet has become a longstanding stock promotion that shows no signs of success with or without a ruling by the FCC. The company’s business model has been nothing more than a three-year long parade of fluff press releases, unscrupulous stock promoters, chirping away against a backdrop of a steady stream of INSIDER SELLING (a lot of its cash was raised by debt converted into millions of shares at the price of 50c). Stocklemon believes that Telkonet has spent more than twice as much money promoting its stock as it has developing a product, and the marketplace will soon reflect its underlying fundamentals. Cautious Investing To All.
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