Telkonet Inc

OTC:TKOI

Earnings Call Transcript 2020-Q1

[Operator]

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 statement:

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 in 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, on its reports on Form 8-K filed with the Securities and Exchange Commission. Telkonet is under no obligation to update items discussed in today to reflect subsequent developments.

Lastly, I would 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.

[Jason Tienor, Chief Executive Officer and Director]

Thank you, operator. Good afternoon, and thank you all for joining us for Telkonet's 2020 first quarter earnings call. While it's only been a short time since our 2019 year end call on March 30th, we've all experienced a dramatic shift in the economy and our day-to-day lives since that time. Unfortunately, Telkonet has not been immune to the impact of the ongoing pandemic and subsequent quarantine of cause. With Telkonet's target markets being some of the hardest hit industries overall during the economic slowdown caused due to the significant reduction in travel and educational institutions being shuttered, we've experienced a significant slowing in industry activity.

While 2020 began strong for our business, extended by the impressive close to 2019, our first quarter results were tempered by the headwinds countered towards the end of the quarter. This being said, our first full quarter results, while less than our initial forecast and our year ago numbers, were a return to the pre-2019 first quarter levels, while still exceeding 2018’s Q1 results.

We believe that had the pandemic and its reluctance resulted impact not occurred, our performance was on pace to achieve our expected our Q1 results. This is promising since it demonstrates the continued strength of Telkonet's business. In addition, the company recognized a 24% improvement in profitability compared to 2019’s first quarter loss of $840,000. This improvement was recognized at the same time the company saw a 35% reduction in revenue from the prior period. Through strenuous cost containment measures, advancements in inventory planning and a concentration on systems improvement, we've been able to improve gross profit percentages by 9% and reduced import tariffs impact by 6% during a difficult quarter.

We expect these efforts and their results to continue to provide significant benefit long after the economic recovery and a return to normalized business. A significant factor in the company's forward view is that throughout the first quarter, we've experienced only 2 canceled projects. All other businesses are either continuing forward on pace, at a reduced pace or have been put on hold depending on other factors. This provides a positive outlook that the pipeline that we've created will continue to fuel growth moving forward, but it's simply postponed until we see a return to a more normalized operating economy. We continue to use the same relationships to market and for future projects, ensuring continued growth in pipeline during the quarantine period, and pointing towards enormous potential for growth during recovery.

While it was recognized that the COVID epidemic would be affecting Telkonet and our operations as well as our customers, the company took early and decisive action to minimize the financial impacts to our business and maximize the efficiency of our operations. Including these steps were the immediate mitigation measures for all places of business, a comprehensive travel block and ongoing review, initial furlough and salary reductions to staff, review of all publicly available economic relief measures, extensive financial review and cost mitigation measures, and immediate safer at home workplace initiation. Ongoing measures include increased ongoing management and staff communication, enhanced safety measures when on-premise and continued expense monitoring and cost containment.

Through these measures, the company is able to report zero infections while maintaining an enhanced level of activity. We're also happy to report that the company successfully applied and was approved for the first phase of PPP within the CARES Act through our trusted banking partner Heritage Bank of Commerce in San Francisco. Due to this, we've been able to return all staff to full time activity and concentrate on providing comprehensive services for our customers, while positioning our business for a rapid and successful exit of the quarantine growth during the economic recovery.

Finally, as you all have seen through the company's previous earnings call, 2019 fourth quarter demonstrated the growth in both fundamentals and top line for Telkonet’s business. Having posted the first profitable quarter since the company's divestiture of its networking division, Telkonet was positioned for a substantial 2020 performance. Early results from Q1 also strengthened the company's forecast and ability to meet its 2020 expectations. While the unfortunate events that have transpired have placed significant strain on all businesses and uncertainty towards forecasts, Telkonet’s recent performance has proven the company's value and opportunity. Due to this, the number and depth of our strategic discussions that we're currently participating in has grown significantly as interested participants have begun to visualize both the market opportunity and Telkonet’s position as a leader in our target markets.

As we proceed through 2020, addressing the difficulties of the economy in the ongoing pandemic, we continue to strive and position Telkonet for a rapid and successful recovery from the current market slowdown. As part of this, we're also reviewing Telkonet’s existing and emerging technology to determine where we might implement new and innovative measures that assist our customers in the new post-COVID reality.

Lastly, we continue to further our strategic analysis and discussions with a number of strong candidates that represent increased shareholder value and an opportunistic outcome for shareholders.

With that, I'd like to pass the discussion over to Gene Mushrush, Telkonet’s Chief Financial Officer, Gene?

[Gene Mushrush, Chief Financial Officer]

Thank you, Jason. Ladies and gentlemen, good afternoon, and thank you for joining us. Today, I will be summarizing our first quarter 2020 financial results. Total revenues of $1.8 million represented a 35% decrease compared to the current period prior year. Product revenues decreased 38% to $1.6 million when compared to the prior year. Product revenues derived from value-added resellers and distribution partners were $1.1 million, a decrease of approximately 48%. The decline was driven primarily by non-repeatable revenues from three isolated customers. Product revenue decreases incurred in all major industry sectors where hospitality revenues decreased 29% to $1.2 million, governmental revenues decreased by 85% to $64,000, educational revenues decreased 2% to $249,000 and multiple dwelling unit revenues decreased 54% to $93,000. Recurring revenues did increase by 10% to $194,000, when compared to the prior year period, due to increased unit sales of call center support services. Backlog orders were approximately $2.8 million and $4 million at March 31, 2020 and 2019 respectively.

Gross profit for the quarter decreased 17% to $814,000 when compared to the prior year period. The actual gross profit percentage increased 9% to 45%. Product costs decreased 43%, compared to the prior year period, based upon lower revenues. The variance was primarily attributable to decreases in material costs of $350,000, logistical expenses of $216,000 inclusive of import tariffs, inventory adjustments of $77,000 and call center staffing of $44,000. Material costs as a percentage of product revenues were 43% for the quarter, an increase of 8% compared to the prior year period. Our core products are manufactured in China. And as a result, tariffs imposed on those imports resulted in an adverse impact of 3% on the actual gross profit percentage for the quarter ended March 31, 2020, compared to 9% for the quarter ended March 31, 2019.

Operating expenses fell 20% to $1.5 million compared to the prior year period. The variance is primarily attributable to decreases in expenses incurred with third-party engineering consultants of $106,000, decreases in trade shows and audit fees of $68,000 each, decreases in salary and recruitment of $103,000 and decreases in sales commission of $48,000, all partially offset by a $46,000 increase in temporary staffing. We incurred operating losses of $641,000 and $840,000 for the quarters ended March 31, 2020 and 2019 respectively.

Negative EBITDAs, a non-GAAP measurement of $624,000 and $82,000 were recorded for the quarters ended March 31, 2020 and 2019 respectively. We reported approximately $3.1 million in cash and equivalents at March 31, 2020 compared to $3.7 million last year. Cash used in operations during the quarter was approximately $110,000 compared to $1.7 million in the prior year period. We reported working capital surpluses measured as current assets less current liabilities of $3.6 million and $5.2 million at March 31, 2020 and 2019 respectively.

As of March 31, 2020 we had a borrowing base of approximately $720,000, an outstanding balance of approximately $518,000 and availability of $153,000 on the asset-based credit facility. As of March 31, 2019 comparables were: a borrowing base of approximately $2 million, an outstanding balance of $907,000, and availability of approximately $1 million on the credit facility.

In March 2020, the World Health Organization classified the COVID-19 outbreak a pandemic, based upon the rapid increase and exposure globally. The spread of the outbreak caused significant volatility and uncertainty in U.S. and international markets. The company's sales have been disrupted resulting from customers furloughing and/or laying off employees and/or suspending projects. Despite these challenges, quoting remains active and the aggregate pipeline has not contracted significantly. Thus far, the impact has been delays as opposed to outright cancellations.

Due to travel restrictions, social distancing and shelter-at-home ethics, the hospitality industry, our largest market that generally accounts for more than 50% of our revenues, has suffered as much as any. At this time, the disruption is expected to be temporary. However, the length or severity of this pandemic is unknown. As a consequence, the demand for our products, our customers’ ability to meet obligations, our supply chain and production capabilities, and our workforce's ability to deliver our products and services, could all be impacted.

Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry and workforce. While we expect this disruption to have a material adverse impact on results of operations, financial condition and cash flows for the year 2020, the company is unable to reasonably determine the impact at this time.

On April 21, 2020, the company entered into an unsecured promissory note with Heritage Bank of Commerce for approximately $913,000 under the Paycheck Protection Program. The loan program has been administered by the U.S. Small Business Administration and was authorized by the Keeping American Workers Employed and Paid Act, which is part of the Coronavirus Aid, Relief, and Economic Security Act that was signed into law on March 27 2020. The principal bears interest of 1.0% per annum and has a maturity date of April 21, 2022. See Note N in our Form 10-Q filed today for a summary of those loan terms.

In response to the pandemic and its effects on the company's operations and financial results, the company has taken a number of actions to preserve cash. These actions include suspending the company's 401(k) match through the end of 2020, suspending the use of engineering consultants, postpone -- postponement of inventory procurement, and canceling all travel and tradeshow attendance. In addition, in early April of 2020, management made a decision to furlough certain employees and instituted pay cuts for certain other employees. However, with the receipt of the PPP loan, the company was able to bring back the furloughed employees, restore payroll to prior levels and delay the suspension of the 401(k) match. The actions taken in response to the pandemic are in addition to the liquidity management actions the company began implementing in the second half of 2019. There is no guarantee that these actions, nor any other actions identified, will yield profitable operations in the foreseeable future.

The company is using the loan proceeds to support its ongoing operations and currently expects to also draw on its cash reserves and utilize the credit facility to finance its near term working capital needs. Our credit facility provides us with needed liquidity to assist in meeting our obligations. Continued operating losses will deplete those cash reserves and could result in a violation of the financial covenants. Consequently, repayment of amounts borrowed under the credit facility may be accelerated and the bank's commitment to extend the continued credit may be terminated. The occurrence of any of these events could have a material adverse effect on our business and results of operations.

The impact of COVID-19 continues to evolve, and as such, it is uncertain as to the full magnitude it will have on the company's financial condition, liquidity and future results of operations. We will continue to monitor the market developments and are prepared to take additional cost containment actions as short and long-term implications become more known. These actions may be difficult but are critical to ensure the company is positioned to sustain the pandemic's impact.

In closing, thank you for your interest, and to our shareholders specifically, thank you for your continued support. Lastly, to our employees. Despite the discord COVID-19 has created in our personal and professional lives, your steadfast commitment to the success of the company has not gone unnoticed. And on behalf of management, I offer the sincerest of thanks.

I'll now turn the call back to Telkonet’s President and Chief Executive Officer, Jason Tienor.

[Jason Tienor, Chief Executive Officer and Director]

Thank you, Gene. And with that, I'd like to turn the call back to the operator to take any questions that you might have. Operator?

[Operator]

[Operator Instructions]. The first question comes from Vishal Mishra. Please go ahead.

[Unidentified Analyst]

Hi, Jason. There's a line in your Q which says -- I think Gene quoted that line as well that despite the challenges quoting remains active and aggregate pipeline has not contracted significantly. So what does it mean? Does it mean, just like all these revenues will move to 2021. So the total pipeline has not decreased or what -- just if you could elaborate upon that, that will be great?

[Gene Mushrush, Chief Financial Officer]

Jason, I can take that. Speaking with our Director of Sales, the feedback that he's getting from the marketplace is, we are still actively quoting projects. Delays can either mean delays in further negotiations because of the surrounding circumstances or delays can mean that projects that were set to kickoff in the second quarter or first quarter have been delayed because of access issues. For instance, universities, we know we have seen examples where international students are now being housed in residential settings, they're being repurposed for that condition because international students can't leave due to the travel restrictions. So that prevents us from getting access or even having the ability to consider having access. So far, there -- I think Jason had mentioned earlier, there have been simply two cancellations that we know are a direct result of COVID-19 out of pipeline, Jason, and correct me if I'm wrong, but the pipeline is probably what north of 30 million in total, various stages of the pipeline. Two projects totaling less than $100,000 combined is a pretty impressive feat given the circumstances.

[Jason Tienor, Chief Executive Officer and Director]

Yes, so further at that response, what we've encountered through the course of the quarantine period is that a number of businesses, operating companies, performance management companies or ownership groups are continuing moving forward with the planning stages of their projects. We haven't seen as many of them pull the trigger with actually kicking off shovels in the ground, but we've seen them move quoting forward, choosing, making decisions, writing specifications. So basically, they're continuing forward with all of the activity leading up to the initiation of a project. But I think what I'm experiencing and what I'm hearing from my associates in the industry is that companies are largely waiting to try to get the temperature of the industry and the economy, once they have a better understanding of how and when we will come out of this, they want to be in a position to immediately begin moving forward with the projects that they're currently working on.

[Operator]

[Operator Instructions]. Our next question comes from Ed Stein. Please go ahead.

[Unidentified Analyst]

Hey, Jason. It wouldn’t be a conference call without at least one question. I got to tell you. From my perspective, this quarter is as good as any you've had because in what you were up against to be able to keep the loss where you did, I think that's a remarkable achievement. And things could always be worse. I may have told you but I'm on the board of a small publicly traded REIT. And within two days of the impact hitting or people realizing what was going on, the average occupancy in our hotels, they're all in the Southeast, went from about 70% to about 12%. That is very hard to recover from. Some of our hotels were among Telkonet’s first customers for the plug-in, get on the Internet system. So it can always be worse. But while thinking about what we have to do to try to get the guests back in the hotel, an idea sort of presented itself. And I know you don't have a whole lot of extra money for research and development. But would there be possibly a way to have the temperature taking? Well, it wouldn't be an app, it would just be an addition to your platform, so that if a guest was giving off a fever, it would register either at the front desk or somewhere, it would make the guests feel safer because that means everybody else would be encountering that. And it would also help the hotels because whatever technology was able to read the fever could be installed in the break room for all the staff and staffs are very conscious of safety. And sometimes you have trouble getting people back into restaurants and hotels, because they're not assured that there are enough measures in place to make sure that, that nobody who is affected is working at the hotel. Is that it is so far away that you can't even think about it?

[Jason Tienor, Chief Executive Officer and Director]

I only laugh at, because I believe you must be bugging our offices or our phones. I had this very same conversation with my CTO just yesterday afternoon. We are reviewing all of our technology and we're taking a look at not just what we currently do today and how it might help our customers and potential customers move through this hardship more effectively and efficiently, but also what we might be able to develop, what new innovations we might be able to come up with that. And I hate to say take advantage of, but at least, new innovations that might have been created by this current hardship and where we can use our technological expertise in order to assist and provide greater value. And that is one of the very same conversations we were having. There are a lot of different innuendos that go along with that. If you think of the type of temperature reading that you're talking about, it has to be fairly specific. Basically you'd have to -- if you think of a temperature gun, the very same thing that we use to take temperature in a room, when we're installing our products and making sure that they are configured appropriately, you point the gun at a location and it shoots a red laser to that location, and that's the location where it's taking a temperature. It’s within a certain distance, and it's very, very accurate to that particular point. But if you think of that same idea, if you try to point that gun at somebody wearing a winter coat or if you tried to point it at somebody who just came back from the gym, it's not going to give you the type of information you're looking for, because you're not getting an accurate read or the person's temperature has risen for a specific reason.

So, there's a lot of innuendo that goes along with it. I'm not going to say that we're not continuing to evaluate the opportunity and to determine if there is something that we can do there. That is one of the things that we are continuing to research. But it’s a very interesting idea. I can share with you that our current solutions, namely our cloud services, we found to be an enormous tool during this period of time, because if you think very similar to what you just described with hotels, if they've had to shut their doors entirely or if they're unlimited staff, they want to be able to move their hotels forward, clean them, build them, renovate them, et cetera, but they're trying to do so on a limited staffing. What we're able to do using our online networks and the systems and AI that we put in place is assist our customers in directing their limited staff to where they need to be spending time, rather than having them moving through every room trying to maintain and update their equipment. So, one of the things that we found during this period is that we're focusing on our contracts and subscriptions and working with our customers to ensure that we're providing them as much value using our cloud services as possible.

[Unidentified Analyst]

One other question. I know that there are problems in different industries, like the hotels. Is the uncertainty over which colleges and universities are going to open in the fall or go to virtual or whatever, is that affecting your education sector?

[Jason Tienor, Chief Executive Officer and Director]

Very interesting question, namely, because while I expected to see more activity take place over the last several months, simply because we normally perform our work in higher education, while the students are out of their rooms leaving in the summer periods, and since the students have moved out early, I expected universities to move ahead with the projects that they were planning for the summer and pull them into the spring. What we've seen though is that, universities are using this time to perform other work, such as cleaning the rooms and making sure they're in condition for the students to be able to return. So, it's difficult to say which way they're going to go. But I can tell you, we're still seeing a level of activity in universities. I was just informed earlier this week that we won a new project for the summer, one school with seven or eight different dorms. So I do know that these projects are ongoing. Universities seem to have a bit more activity. But it really depends on what the individual universities decisions are. I can't say that there is any type of herd mentality taking place within that industry like there is in hospitality.

[Operator]

Thank you, ladies and gentlemen. There are no further questions at this time. I'll turn it to management to make some closing remarks. Thank you.

[Jason Tienor, Chief Executive Officer and Director]

Thank you very much operator. With that, I'd like to reiterate Gene’s final statements to our employees, I would like to say thank you for all of the hard work, all of the effort. I know this is a trialing time for everybody, whether it be the economy, whether it be the health, and whether it be trying to maintain working outside of your normal environment. I know that my staff has done a phenomenal job and the amount of work that has been accomplished during this period in very difficult circumstances has been herculean. So I, as well as Gene and the rest of the management team would like to reiterate, thank you to you all.

And with that, I thank you all for joining us this afternoon. If you do have any remaining questions, please feel free to contact us at [e-mail]. Wish everybody a wonderful day and stay healthy.

[Operator]

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.