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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, scope 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'd like to remind everyone that this call will be recorded and it 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 like to now turn the conference 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 once again for Telkonet's first quarter earnings call. If you have the opportunity to review our filing this morning, you will have seen that we've had dramatically improved beginning of the year compared to our prior year with 72% of revenue growth resulting in $2.8 million in total revenue.
The results of the first quarter would have been considerably higher but for the timing of several large projects that had individual constraints caused by partner products and procurement and project deployment completions, which will ultimately flow into future quarters. While impressive, our ongoing sales over prior year have demonstrated that our full year results will continue to extend to this quarter's performance even further.
Even though we're pleased with what we're seeing in our trends for both sales performance and revenue growth, we also recognize that the first quarter was dramatically impacted by multiple factors, some within our control and others not. First, the continued impact with the ongoing trade war with China continues to have a significant influence on our profitability, resulting in a negative 14% impact on our operating or fixed costs for the first quarter, or approximately $250,000 unnecessary costs to the company. While we continue to address this impact using all available means, a favorable resolution to this dispute will result in noticeably improved profitability for the remainder of the year.
Also, as our revolving industry adapt to new technologies and capabilities, our business recognize a non-cash inventory obsolescence charge of approximately $170,000 for the first quarter that when compared to the company's overall loss represents 20% of the total figure. This charge is due to new innovations in the Intelligent Automation markets and the initiation of partnerships with leading security vendors in our automation space provide integrations with other technologies that diminish the demand for a particular product that's been used extensively in the past.
While this charge may still be reversed in the future as we implement new offers and measures to market these products successfully, the delay in their sale has caused us to take this charge during the first quarter. If we were to address only these two negative influences on the first quarter, we recognize that they represent approximately 50% of our quarterly loss and would have reduced it to just over $400,000, a significant part of it non-cash and a number that would have outperformed our quarterly forecasted expectations and still have the opportunity to positively affect future results through improved market demand for the obsolescence products.
While these situations have negatively impacted our quarterly results, we were still able to report a significantly improved quarter, resulting in the 72% growth in revenue over the prior year to $2.8 million and 74% growth year-over-year in recurring revenue, which has grown to 7% of overall revenue. Our modest 2% growth in gross margin year-over-year was influenced by 42% decrease in the overall operating expense percent of revenue.
These factors enabled Telkonet to report a 29% improvement in operating income and net income, and a 30% EBITDA improvement over the prior year. This resulted in the second highest quarterly revenue per headcount in the company's history, and the highest quarterly ending AR balance in history of greater than $2.5 million and 98% increase year-over-year. This entire Q1 performance was preceded by a stellar year of sales in 2018. Ending the year having closed more than $9.5 million in sales and with more than $4 million in backlog heading into 2019, our sales and marketing efforts have continued to demonstrate the continued growth potential of our business.
Having just reported $2.8 million in revenue for the first quarter, we now recognized approximately $5 million in backlog and additional $2.6 million in verbally committed projects at just over a third through 2019. Our current sales efforts have yielded increasingly positive trends on a monthly and quarterly basis with 2019 seen more than $1 million monthly in average sales and each month better than the prior year but one. In addition, we have substantial faith in our second quarter performance at this time as well due to, as mentioned previously, several projects that recognition rolled over into the future quarter due to a myriad of reasons. This accompanied with several significant ongoing project deployments account for a large piece of our projected Q2 revenue and provides insight to our continued trending performance.
Significant piece of this performance is the ongoing focus towards expanding our channel partnerships and improving channel relationships. We ended 2018 with 69% of all sales according to our partner channel, and have already improved that number to 77% in 2019. Our continued sustained execution of programs, including Telkonet Partner Week, our HITEC after event EcoSmart University and more, emphasize our dedication to these relationships and the growth of this channel.
Numerous impactful opportunities affected our first quarter performance and continue to extend their performance into to 2019. Of these, some of the most significant include the ongoing Hilton Connected Room program. Of which, we are one of the only certified device providers. Not only have we seen solid success in this ongoing program for Hilton, but we have several additional products moving through the certification process and have even designed and developed the product and inspired by the Hilton program itself.
We have another project award with partner Johnson Controls. We've been participating in the deployment mentioned above to too large hospitality properties, totaling more than $1 million of project revenue. These opportunities exemplify the type of forward thinking and automation solutions that we see growing throughout hospitality and Telkonet's other target markets today. As discussed previously, our Phase 1 residential projects award for housing on a military base equaling greater than $1 million has just created not only new products in Telkonet's portfolio, but also a new and emerging market for our solutions.
With the first shipments in this project accruing Q1 and the second in Q2, we continue to see significant potential for this market and have just began entering the second phase to evaluate further potential and opportunity with the same customer beginning with their same location. During Q1, we also looked at sensibly with one of our largest OEM partners to provide a product for development customer that will be used in modular housing development. This opportunity alone is worth approximately 800,000 and is spread across 2019 as well.
2019 has also seen Telkonet grow extensively with several other largest partners, especially through international agreements. We haven't seen much traction through international efforts historically, but these relationships have awakened significant opportunities and that respond to market growth in Telkonet's pipeline, especially since the initiation of our strategic review and discussions. Our 2018 international revenues totaled 2% but in Q1 of 2019 alone, we saw 20% of revenues through international sales.
Lastly, we've been recipient of inbound interest due to the failure of one of our competitors. Without detail and warning, one of our closest competitors have gone out of business, opening their customers and staff to Telkonet and creating new potential for growth. Finally, while much of what we've shared here has been driven by activities we've engaged in over the last year and have ties to discussions begun during our strategic market review. We've not shared much with regards to the Boards discussion in current direction. We're actively in discussions with multiple entities regarding strategic opportunities and transformative outcomes for Telkonet. And as you can see, 2019 has started off successfully for Telkonet and continues to ramp as we move through year.
We've identified a marked improvement in our target markets and invigorated interest in automation solutions. Through continued innovation and increased the marketing emphasis and market penetration, we continue to build our pipeline and expand our emergence as a market leader in intelligent automation. We continue to be heavily optimistic towards our full-year performance and look forward to sharing future results with you as the year progresses.
With that, I'd like to hand the call over to Gene Mushrush, Telkonet's Chief Financial Officer, to review the quarterly financial performance with you.
Thank you, Jason. Ladies and gentlemen, good afternoon and thank you for joining us. Today, I'll be summarizing our first quarter to 2019 financial results. For the quarter ended March 31, 2019, we recorded total revenues of $2.8 million, an increase of 72% compared to the same period prior year.
Recurring a non-recurring revenue revenues were proportionate to the total increase. Increases in the hospitality and governmental sectors were instrumental and there's aggregate growth. Revenues recognized via our channel grew $2.1 million for the three months ending March 31, 2019, an increase of $860,000 compared to the prior year period. We posted gross profits of $987,000 compared to $551,000 for the same period prior year. Gross margins of 36% represented 2% increase compared to prior year. Increases in inventory reserve, subcontractor services and logistical expenses contributed to the sub 40% margin level.
During the quarter, tariffs imposed on Chinese imports resulted in a adverse impact of approximately 9% on gross profits. First quarter operating expenses increased 5% to $1.8 million compared to $1.7 million in the prior year. The current quarter experienced increases in legal, audit, consulting services and commissions. However, operating expenses as a percentage of revenues dropped 42% year-over-year. We incurred net losses of $845,000 and $1.2 million, and recorded adjusted EBITDA, a non-GAAP measure, of a negative $821,000 and $1.2 million for the quarters ended March 31, 2019 and 2018 respectively.
In February 2016, the Financial Accounting Standards Board issued leasing standard ASU 2016-02, or ASC topic 842 for both lessees and lassoers. The standard is the byproduct of the joint effort with the International Accounting Standards Board aimed at converging U.S. GAAP and international financial reporting standards to increase transparency and comparability amongst organizations. Under its core principle, a lessee will now recognizing its right of use asset and related lease liability on its balance sheet for all arrangements longer than 12 months. The pattern of expense recognition will depend upon the lease classification.
On January 01, 2019, we adopted ASC topic 842 or supersedes ASC topic 840 using the transition method of adoption. The financial results reported in the period prior to January 01, 2019 remained unchanged. Upon adoption, the company determined there were no financing leases. We recognized a minimum rental expense on a straight line basis over the lease term for the fixed components of the arrangement. Please refer to our Form 10-Q for expanded disclosures on this topic.
We reported $3.7 million in cash and equivalents at March 31, 2019 compared to $8.1 million last year. The outstanding balance on our credit facility was approximately $907,000 and $623,000, while available capacity was approximately $1 million and $429,000 at March 31, 2019 and 2018 respectively. Cash used in operating activities was approximately $1.7 million compared to $992,000 last year, driven by an increase in accounts receivable. We reported working capital surpluses measured as current assets plus current liabilities of $5.2 million and $7.9 million at March 31, 2019 and 2018 respectively.
Our current ratio dropped from 3.4 to 2.4 compared to this time last year. Our average day sales outstanding increased 14% to 84 days compared to 72 last year. Our cash conversion cycle, an indicator of a company's efficiency in managing working capital assets and liquidity, increased to 157 days from the 152 days at this time last year. A shorter cycle means greater liquidity, which translates into less need to borrow more opportunities to leverage spend via cash discounts and an increased capacity to fund business expansion. In terms of a single business segment, reported revenues were the second largest first quarter numbers in company history, a welcome achievement considering first quarter has historically been our weakest and has often hampered full year performance.
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 from Telkonet's President and Chief Executive Officer, Jason Tienor.
Thank you, Gene. With that, I would like to hand the call over to the operator to take any questions that you may have. Operator?
At this time, we'll be conducting a question-and-answer session [Operator Instructions]. Thank you. [Operator Instructions] Our first question comes from the line of Joe Pierce with Plymouth Rock Financial. Please proceed with your question.
I’ve known the company as long as 10 years, and this is the best performance to-date. A couple of questions, regarding Johnson. Do you see them helping -- continually helping as far as hospitality and how about the military?
Johnson is the largest partner today as I know when we’re looking at first quarter numbers that they had double-digit percentage of our first quarter, and that number itself is going to jump dramatically due to the project, the impending and closed project that we are finishing up with them. The presence that they have in Military, it’s a different division and we often work with -- we’re working with commercial and education far more heavily. So we will introduce to their military organization division at the end of last year, and are just getting rolling with their contracts within Military. To-date we’ve seen far more success with DSO’s, MRSO and Noresco who we work with very closely.
You mentioned about strategic possibilities that the board’s been discussing. Basically, you're saying the companies -- the board is thinking about even merging the company, selling the company or seeing which way they can capitalize on the best current board members?
I think that I can answer that question towards the latter, Joe. And that we've had conversations towards all of the above, mergers, acquisition, sales, partnerships, investments. The board has continued to review each of the conversations to determine what is the most beneficial for the company and its shareholders. And I can say confidently that they've undertaken consideration of every type of transaction that you’ve described.
For people who’ve been holding your stock upwards of 10 years, I mean it probably has an average price of anywhere from $2 to $4. I mean, that would be devastating for them.
I can understand exactly what you’re saying Joe. And as the board continues to review and analyze all of the current offers that we did earlier that we -- I'll ensure that I continue to bring your opinion. And as I know that a number of board numbers were on this call, they'll continue to hear your opinion as well. So thank you for the question.
And just one of the quick question as far as going forward, is this growth sustainable?
We believe so. We currently track all trends from sales to operational performance, as well as we’re tracking a number of industry KPIs that we've seen grow dramatically over the course of the last 18 months. Our sales themselves, as I mentioned on a monthly basis throughout 2019, have been -- I can’t think of a better word than saying dramatically beaten everything that we’ve done last year. So we continue to see this moving forward.
Honestly, the largest negative impact that I can see on our business today is the impact of the tariffs themselves. If we were able to resolve the disputes and remove those tariffs today, we would have a dramatically more impressive profitability for our year for one. That being said, I can tell you that as you listen to Gene as he went through the financials and the review that the type of growth that we’re seeing right now also does have an impact on working cash flow. So that’s a huge consideration as the board continues the dialog that we have going with a number of the different interested parties. But yes, I definitely see that we have trending performance and continued to improve trending performance throughout the year and we see that we're going to have very strong year for 2019.
Our next question comes from line of Chris Pearson with Davenport Asset Management. Please proceed with your question.
I just had a quick on cash flow, and specifically related to the accounts receivable growth. And you just mentioned that that's related to the revenue growth that we're seeing. I just wonder if you expect to get some of that back as a tailwind to free cash flow in upcoming quarters, and just how to think about that? Or if we do continue to grow at these rates, should we continue to expect that to be a headwind?
Where we sit today with the accounts receivables and then the performance, both sales and operational performance moving forward, Chris, we believe that we have the opportunity to start to shelter cash moving ahead. That being said, one thing that we see early in every year as we did early in this year is the significant use of capital in order to increase inventory for our growth.
While we're situated fairly well for the current year and we believe that we have forecasted for the pipeline that we had in place, we do believe -- we're expecting to have a significant hit again at the beginning of 2020 as we ramp-up for the full-year growth on next year. So while I expect that we're going to see improved cash flow opportunities in the near-term. As we look out further on, we do have an expectation our planning for a buffer to apply to those needs.
And Chris, in addition the significant portion is always related to the timing of that AR as well, to try as we might -- we are still witnessing the majority of our recognized revenues, as well as the AR balances occurring in the last 30 days of the quarter due to project closings, availability access to the sites, which is basically a combination of the improved sales activity, as well as the timing of when those jobs are actually getting invoiced that's lead to that significant surge in the AR balance. I can assure you it doesn't have anything to do with collectability, if that helps.
Our next question comes from line of [Randy Keho], Private Investor. Please proceed with your question.
I've been with this company now for over 10 years, I'm one of those people that own the stock and want higher [indiscernible] for now. I have friends that I told the stock -- and told them about the stock. We have probably over a million shares together. We are not excited this year that this board came in and we thought was going to do a good job and it sounds like they're doing good job that they are doing. But I don’t understand why they would even talk about selling the company now that things are finally starting to turn around? It just doesn't? It seems inconceivable to me that they might as well now. Why not let it continue to grow, and then talk about selling the company.
Thank you, Randy. I can appreciate your opinion and your longevity with the company. I know how long that is as I've been here as long as you are. So the one thing that I can promise to do, obviously, as I mentioned earlier, I know a number of board members are here on the call and hearing your comments. And I will make sure that at the next conversation we have I continue to hear your opinions as well. I do want to reiterate that a number of the conversations that we're having as a board and as a company are not sale conversations. I have to say this. I've been through a number of transactions with prior companies and obviously as selling Etho to Telkonet.
And moving through transactions like this, I can say that the variety of conversations and interests that comes from different parties and whom we're speaking with at this time has been very surprising to me. So understand that the board is looking at all different avenues to help the company grow bigger, larger in the most efficient and effective manner possible, as well as to take advantage of the opportunities available through automation and IoT's incredible growth and recognition right now. So I appreciate the opinion Randy, and I will definitely share it for you.
Well, I appreciate it, Jason. I've -- put our trust -- my friends and I in you guys. And we'll be watching to see what you do, because again, we've been with this for long time. And we're hopefully expecting this company to continue to grow well before anybody talks about selling the company.
Our next question comes from line of [Marc Minkoff with Minkoff Capital]. Please proceed with your question.
Jason, great progress on the on the quarter. If I heard it right, there's a 9% increase in costs related to tariffs I assume it's with China. Do you have an alternate strategy to source product away from China, or to a country that doesn't have these tariffs that are hitting your costs side?
Believe me Mark, we have evaluated every option from obtaining waivers for our products to determining if we could purchase and ship through other countries and other suppliers to conducting a comprehensive evaluation of all potential contract manufacturers, both domestically and abroad. We conduct that final analysis every year as where we're doing an analysis of all manufacturing opportunities, both as a potential supplant for our current contract manufacturer, as well as for redundancy in case anything were to happen to our contract manufacturer.
The issue that we burn into Mark is that through that evaluation, historically up until the most recent, we have not found a single contract manufacturer that was able to bring their costs less than twice of what our current contract manufacturer chargers. One of the significant impediments to that is the fact that we've been with our current contract manufacturer for so long, have such a significant relationship with them and built up the goodwill that we currently enjoy with them to receive the type of pricing that we have. Unfortunately, while that benefits us from a pricing standpoint, it just allows anybody to near them and provide the type of pricing we certainly enjoy.
Recently we have come across one contract manufacturer, while international they are closer to the U.S. that has a better rate than anything that we’ve ever seen, but it’s still 30% higher than what we’re currently paying and still higher than even what our current costs are in addition to the tariffs. So we continue to evaluate all options, as I said, including waivers, including potential shipping partners. At this time, we’re at an impasse on improving our situation. But we continue to hope that the dispute has resolved rather quickly, and we’ll be able to see that return back to our margin.
Our next question comes from the line of Michael [indiscernible] with National Securities. Please proceed with your question.
Just a follow up on this last one. On the tariffs are you eating all of it, or are you splitting it with the supplier, how are they trading here?
Unfortunately, the supplier doesn’t take any disadvantage when it comes to tariffs. They charge what they charge, what they’ve always charged. They shift the product to us and it’s up to us to pay the tariffs and determined how we include it in our pricing, whether we pass that increase along to our customers, whether we take the entire increase, or whether it’s a combination of the two and we pay the tariffs via ourselves and simply eat the cost. The problem is we don’t have an ability to pass this along to our customers, because we live in a very competitive industry in a competitive market.
And a number of our relationships and agreements constrain our ability to increase pricing within the agreements themselves. We have been able in a few to negotiate and leverage the tariffs in order to raise prices to account for the additional costs. But the greater majority of our shares today incorporate us taking the entire branch of the tariff expense.
Ladies and gentlemen, we have reached the end of the question and answer session. And I would turn the call back to Jason Tienor for closing remarks.
Thank you, Operator. Again, we thank you for your continued interest and support to Telkonet. If you have any remaining questions following this call, please contact us at 414-302-2299, or by emailing ir@telkonet.com. We hope you have a great afternoon.
This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.