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Good afternoon, and welcome to Telkonet's First Quarter Earnings Conference Call. As a reminder, today's conference is being recorded. Before I turn the call over to Jason Tienor, Telkonet's Chief Executive, I would like to read the following statements.
Certain statements included in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve a number of risks and uncertainties such as competitive factors, technological development, market demand, and the company's ability to obtain new contracts and accurately estimate net revenues due to variability in size, scopes and duration of projects and internal issues and the sponsoring client.
Further information on potential factors that could affect the company's financial results can be found in the company's registration statement and on its reports on Forms 8-K filed with the Securities and Exchange Commission. Telkonet is under no obligation to update items discussed today to reflect subsequent developments.
Lastly, I like to remind everyone that this call will be recorded, and will be made available for replay via a link available in the Investor Relations section of Telkonet's website at www.telkonet.com.
With that, I would now like to turn the call over to Jason Tienor, Telkonet's President and CEO, to discuss the results. Mr. Tienor, you may begin.
Thank you. Good afternoon and thank you for joining us for today’s 2018 first quarter earnings call. Since we just spoke a little over a month ago, we’ll be keeping this afternoon call brief and responding to any question you may have following the call.
Since 2018 represents the first full year of operations after the divestiture of our EthoStream division, we recognize and saw contrasts in quarterly revenue due solely to our remaining operations. While the first quarter filed historical seasonally within our EcoSmart sales, we were disappointed in our quarterly results for a number of reasons.
The new accounting standards that Gene will detail both increased our cost for the initial implementation, but also adversely impacted the revenue recognition attributed to our first quarter results. Also we witnessed several projects that have been delayed due to construction and season weather leading to a push in completing the projects themselves.
Finally we encountered strong headwinds in parts procurement as discussed in our previous earnings call. While this issue is not unique to Telkonet, since we are purchasing through the same channels and from the same manufacturers as part of larger organizations, due to our scale and frequency of shipments we tend to have less leverage and thus longer wait trends.
While the quarter did not provide the results we were striving for, we accomplished a number of milestones during the quarter in a number of areas. Through an enormous amount of time and effort, our lean accounting team was able to research, understand, plan and enact our implementation of ASU 606 account standard.
Regardless of size, all public companies have to roll out the new standard at the beginning of the year and Telkonet was no exception. Gene and team did an excellent job completing the Q1 earnings on time and accurately with the small staff available in addition to the regular responsibilities and obligations.
Telkonet’s sales and marketing development has continued to garner success in expanding market awareness through multiple in bound marketing campaigns across numerous markets. These efforts have assisted in providing traction for our partners as well, and continue to be reflected in the growth of our sales pipeline. With the release of Telkonet’s new dedicated website for EcoSmart and our IoT and intelligent automation solutions, we continue to drive increased interest directly through our sales channels as well.
With the addition of our gated content and industry blog we’ve been recognized as an industry thought leader and drive renewed interest in the direction of technology in our target markets and our leadership through innovation in this space.
Reinforcing these efforts, our engineering team has continued Telkonet’s technology leadership through continued new product and product iterative releases. We’ve also been moving rapidly to expand internationally through product certifications for international markets. We’ve worked extensively with international channel partners to understanding the needs and initiatives to ensure our offering meet the needs of these deployments. As part of this process we’ve been awarded the grant from the State of Wisconsin covering costs for part of these certifications.
We’ve also been moving quickly to expand third party integrations further than any other provided within our target markets, creating a vastly more comprehensive platform that available elsewhere. Due to these activities, we’ve become involved in several new significant opportunities based largely on our capabilities and broad compatibility of our platform. Our continued work in these opportunities is showing great promise and we have significant expectations from it for 2018 and moving forward.
As we move forward, we continue to stress revenue and profitability as our primary goal, while maintaining an eye towards this strategic growth. Through a continued review of all organic and strategic opportunities, the company and our broad are continuously evaluating the most successful avenues towards shareholder value creation. Continuous innovation, market penetration, industry expertise and expanding channel partnerships are the hallmark of our value creation and our efforts in the first quarter have centered on these initiatives. We look forward to sharing the success of these efforts and the opportunities they represent as we proceed through 2018.
With that, I’ll hand the call to Gene Mushrush, Telkonet’s CFO.
Thank you, Jason. Ladies and gentlemen good afternoon, and thank you for joining us. Today I’ll be summarizing our first quarter 2018 financial results.
For the quarters ended March 31, 2018 and 2017, Telkonet reported total revenues $1.6 million and $1.9 million respectively. Product revenues were $1.5 million, a decrease of 17% when compared to $1.8 million last year. Recurring revenues related to our customer support services remain relatively unchanged year-over-year. We posted gross profits of $551,000 compared to $875,000 for the same period prior year.
Gross margins of 34% represented a 12% decreased compared to prior year. Contributing factors were an increase in inventory reserves, an increased staffing for support services.
Operating expenses for the quarter ended March 31, 2018 decreased 20% to $1.7 million compared to $2.2 million for the same quarter prior year. Non-recurring expenses related to last year’s sale of the company’s wholly owned subsidiary EthoStream LLC were the primary reason for the decrease.
We incurred operating losses from continuing operations of $1.2 million and $1.3 million for the quarters ended March 31, 2018 and 2017 respectively. Income from discontinued operations was zero for the quarter ended March 31, 2018 compared to $572,000 last year. We reported negative adjusted EBITDA, a non-GAAP measure from continuing operations of $1.2 million and $871,000 for the quarters ended March 31, 2018 and 2017 respectively.
Effective January 1, 2018 the company adopted account standards Codification Topic 606, revenue from contracts with customers which supersedes nearly all legacy revenue recognition guidance. ASC 606 outlines a comprehensive five step revenue recognition model based on the principal that an entity should recognize revenue based when it satisfies its performance obligations by transferring control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for said goods and services.
The company adopted ASC 606 using a modified retrospective approach to all contracts not completed as of January 1, 2018. Results for recording periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the company’s historic accounting under topics 605 revenue recognition.
The company recorded a decrease to beginning retained earnings of $430,000 as of January 1, 2018 due to the accumulative impact of adopting ASC 606. The impact to beginning retained earnings was primarily driven by the deferral of revenue for unfulfilled performance obligations. The balance of contact assets as of March 31, 2018 and at the date of adoption of ASC 606 was $640,000 and $350,000 respectively.
The company recorded contract assets of $640,000 as of March 31, 2018. Included in the contact asset balance was $330,000 of costs incurred, but deferred in proportion to revenues recognized. The balance of contact liabilities as of March 31, 2018 and as of the data of adoption of ASC 606 was $1.7 million and $800,000 respectively.
The change in the contract liability balance during the three month period ended March 31,2018 is the result of cash payments we received and billings in advance of satisfying performance obligations. Less a $150,000 of revenue recognized during the period that was included in the contact liability balance at the date of adoption. Please refer to notes A and C in our Form 10-Q for expanded disclosures on this topic.
Regarding cash debt and liquidity, we reported $8.1 million in cash and equivalence as of March 31, 2018 compared o $10.7 million last year. Moneys held in escrow for certain indemnification items since the subsidiary sale were received in full on April 6.
We reported working capital surpluses, measured as current assets plus current liabilities of $7.9 million and $11.4 million for the quarters ended March 31, 2018 and 2017 respectively. Our current ratio dropped from 4.7 to 3.3 year-over-year. Cash used in operating activities and continuing operations during the quarter was $992,000 compared to $1.1 million last year. And finally, at March 31, 2018 our debt to equity ratio, a measure of the company’s financial leverage increased from 0.28 to 0.46 when compared to prior year.
In closing, thank you for your interest and to our shareholders specifically. Thank you for your continued support. I’ll now turn the call back to Telkonet's President and Chief Executive Officer, Jason Tienor.
Thank you, Gene and with that I’ll hand the call back to our operator for any questions our audience might have.
Thank you. [Operator Instructions]. Thank you, our first question is from Thomas Kaplin [ph] a Private Investor. Please proceed with your question.
Okay, so I’ve been an investor for a long time. I’d held on to my stock in spite of the performance over the years, and what I have seen lately is announcements of changes in your sales structure, you hired a Sales Vice President, you invested in channel partners and then you made arrangements with them and yet I see zero growth in sales and I find that very upsetting. Any comment about that?
I can appreciate your feeling towards the performance around sales. Honestly, I understand being an investor myself in Telkonet how disappointing having results that don’t meet the expectations of what you are aspiring towards.
With that being said, I understand that we have a lot more taking place internally for opportunities that are driving us forward. Large engagements with franchise hospitality companies that take time in order to evolve and in the beginning, initial testing and initial proof of concept deployments are what lead to much larger and more engrained operations and that’s what we are striving to at this point in time.
Unfortunately it hasn’t taken place as quickly as we’ve liked, but having left EthoStream, have divested EthoStream last year has allowed us to concentrate on the development of our platform to meet the needs of these opportunities and move forward with this opportunities as we are today and moving very quickly towards successful large gauge deployments within those activates that we’ve been undertaking.
So I do apologize that we have not been able to provide the results that we have been looking for. I do hope that we are able to meet those expectations as we move forward, but understand we are dedicating each day towards driving shareholder value and the initiatives that we are moving towards, we believe we have the opportunity to do that.
Thank you.
You’re welcome.
[Operator Instructions]. Thank you, I will now turn the floor back to – I’m sorry, excuse me, our next question is coming from Michael Pisincy [ph], a Private Investor.
Good morning. I understand that the company implemented a stock buyback program or at least the board authorized it sometime in the past. Has any stock been purchased under that program?
At this time there has not been.
Okay, is there any plan moving forward to do that or if you can just describe the circumstances under which you think that might be done.
Correct. The broker is given certain permeates, lows, highs, things like that in order to operate within. However since December 31 we have been under a blackout period due to the SEC regulations and the company in essence, according a rule B10-18, this held the same regard as insider trading would be concern. So we haven’t been allowed to trade since December 31, ’17.
Okay alright. And Jason it would be helpful for us to hear your vision for the future, just in broad terms. You sound optimistic. It sounds like there is a lot happening. It’s hard for us to understand, to quantify that. Are you able to just expand a little bit on your opportunities that you see in the future?
Absolutely! I appreciate the questions. The one reason that or one of the largest reasons that we divested at EthoStream last year was simply because we saw the market for IoT and automation within our target markets begin to increase in activity and take hold. We’ve moved past the educational phase of new product and new solution deployments and into the competitive pace. Meaning, instead of having to educate each one of our customers as we are offering up our products and services as to what they were and what their value was, we understood the value of IoT or automation and now they are comparing to us other technologies in the market.
That being said, obviously we work in two different veins. We look in the retrofit opportunities in selling technologies solutions into existing buildings. And then we work in new development, new buildings that are being built. So we educate architects, engineers, mechanical engineers on what the value proposition of our products and services are. They take those to their customers for a potential new build, new development properties and that sales cycle is roughly a year to a year and a half and we’ve seen an increasingly large component of our pipeline become or to come through that new development avenue, which is new for us, which is great for us, it provides us more forecasting into the future.
And the redevelopment aspect of our technology solution, we have recognized that previously we were selling into the higher end of hospitality markets, people that were less price sensitive about the solutions that they were putting in place. Currently we are seeing that move downward in the market. It’s not as much price sensitivity as there is an understanding of the energy savings, but the cost of those solutions in the lower end of our target markets is more competitive. Thus we have created a couple of new products and solutions that fit the nitch for that. They have been developed over the previous six months moving through testing, moving through manufacturing at this point. So it allows us to compete across the broader markets that we service.
That being said, on the other side of the projects that we talk about, that’s our standard day-to-day business. We talk about large project opportunities; our fee engagements with franchises or our fee engagements with individual ownership companies. In the last couple of years, we’ve become engaged with hospitality franchisees that have put out our fees for a comprehensive portfolio of solutions and we’ve been able to win not just first and second round, but have begun to deploy proof of concept properties within these RFPs and as long as our production and solutions bear fruit in what we are describing they do and provide the type of savings that they expect, we expect to see these deployments move forward very rapidly at a much larger scale.
So that being said, with regards to you know our current opportunities, we continue to move down the road on the sales and marketing and maturing of these opportunities, but we are constantly reevaluating the strategic opportunity for the company, what the market appetite is for our business, as well our solutions and what the greatest advantage is for us to approach the market independently or as part of some other joint venture partnership or otherwise.
So in my mind, we have a great opportunity to expand our business today, but to meet the type of growth that the prior gentlemen had asked about. We understand that there might be other avenues to achieve that move quickly and as a board, as well as a company we continue to evaluate the industry and what those avenues might be.
Okay, well I appreciate that and wish you luck of course into the future and I hope that the growth can accelerate as you would like it to. It’s important to everybody.
I appreciate that Michael.
Our next question is from the line of Brian Nelson [ph] a Private Investor. Please go ahead with your question.
Hey Jason, how are you doing today?
I’m doing well Brian, yourself?
I’m good, I’m good. Hey multifamily business, how are we coming with that?
We see a lot of activity in the northeast, specifically because there are a lot of incentives to it. The majority of our sales and activity in multifamily are through partner developments, simply because we don’t have an extensive array of sales resources here internally. So we build market awareness within that market and then we support our partner channel in order to move into the market and focus on those efforts. We have two large partners in the northeast located out of New York that have seen a significant amount of activity and we continue to grow our business in those markets through those two partnerships.
Okay. Do you have any idea what like the next quarter is going to be? This is a little bit frustrating for you guys, I understand. Is it going to – you are saying they are robust a couple of times. Are we going to have some – I think next quarter to be really a good one?
I would hope so. I absolutely expect that the second quarter exceeds the first, and I would like to see the second quarter exceed last year and obviously be a breakout quarter.
Historically for us within EcoSmart, the ramp was first, second through third and then kind of levels off through third and forth. The second quarter is where we being our educational opportunities as schools let out and we are able to begin working within the dorms themselves. That’s where we start to see some revenue driven through education, as well as hospitality and multifamily that we’ve seen in the first quarter.
So we expect to see that. We have had a pretty good start to closures in the second quarter. So it’s really going to be about as Gene described the 606 regulations, how much we can get done within the quarter in order to have revenue recognition.
We are really striving to understand how that’s going to impact our business and how it will play out and where the revenue drops into. One thing that the broad and the company have really worked on is rather than driving towards individual quarter closures, ensuring that we meet our goals for the full year. So whether the revenue drops into the first or the second quarter, the second or the third quarter, we are trying to insure that we meet that overall goal for 2018.
Right, I see that. I did talk to someone about utility expenses and they've really gone up in the last two years. So okay, good, we’ll hope for a better quarter, thank you.
Thank you, Brian.
Our next question is from the line Ron Klusky [ph], a Private Investor. Please go ahead with your question.
Hi Brian – I mean Jason, sorry.
Hi Ron.
I had a question regarding the debt to equity ratio, you have increased it. Can you elaborate as to why and what’s the money being used for?
The ratio has increased mainly due to the loss that we reported on the equity side. Money is right now being devoted – the largest items are always going to cost of goods sold, as well as the human capital aspect of personnel. We are also dealing with R&D, as well as other administrative fees, but the increase in the debt to equity is being driven by the net loss if you will and decreased to or they are increased to cumulated losses.
Alright. Thank you.
Thank you, Ron.
Thank you. At this time I will turn the floor back to management for closing remarks.
Thank you, operator. Once again we thank you for joining our call this afternoon. If you have any further questions please don’t hesitate to reach out to us at ir@telokinet.com or directly to our website. We look forward to speaking to you with regards to the second quarter earnings call. Have a great afternoon.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.