Telkonet Inc

OTC:TKOI

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon, and welcome to Telkonet's Second 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 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 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.

And with that, I would 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, President and Chief Executive Officer]

Thank you, operator. Good afternoon, and thank you for joining us for Telkonet's second quarter 2020 earnings call. For those of you who have been following Telkonet for some time, you are aware of our enormously positive growth performance throughout 2019 of greater than 42% revenue growth, ending in an EBITDA positive fourth quarter.

Based on that demonstrated performance and the result in backlog and overall channel development, this tremendous year-to-year growth and performance had poised Telkonet for an incredible 2020. Unfortunately, after a quick start to the year based on the backlog entering 2020, the shutdown in China resulting in delays to our inventory production, manufacturing move and subsequent economic contraction in the U.S. due to the COVID crisis has had a substantially adverse impact on Telkonet's 2020 performance.

Because of the $880 billion loss for the airline industry caused by travel restrictions imposed due to COVID, hospitality has seen approximately half of the U.S. hotels totally closed during the response, and approximately half of all U.S. hotel rooms still remain empty, with more than a third of domestic properties not having rehired any of their furloughed staff.

With hospitality comprising more than half of Telkonet's revenue, this one market in these massive difficulties has had an enormous impact on Telkonet's performance thus far this year. Additionally, with more than 55 million students impacted at the height of school closures throughout the U.S., resulted in loss of revenue for Telkonet's second largest market of education. We recognized substantial added negative pressure during the quarter.

There have been extremely few industries that haven't seen some type of setback throughout this crisis, but each of Telkonet's primary target markets: hospitality, education, healthcare and MDU have been among the hardest hit throughout this period. Our current events have reduced Q1 and Q2 results. Positive sign is that only two projects have currently been removed from our backlog. This means that the majority of our efforts in 2019 to position the company for growth through our backlog are not lost, but postponed awaiting recovery period.

During this time, we've been able to take measures to minimize the significant portion of the economic impact to our business. Grateful for the release of the government's PPP, or Paycheck Protection Program, and thanks to the enormous effort of those in Telkonet's accounting team, Telkonet was granted just under $1 million in the form of forgivable loan to be used for the ongoing employment and compensation of our hardworking staff and to address relevant lease expenses during the early period of the economic shutdown.

Since the expiration of those funds, we've taken numerous measures to reduce ongoing expenses through salary reductions and employee furloughs over a period of three months. These measures assist us in managing ongoing demand, while reducing the company's burn during the economic slowdown. In addition to these measures, we've taken several more targeting areas of reduced demand, improved efficiencies and expected need during the forthcoming recovery.

These include reduced R&D expenses and ongoing product development costs, reduced inventory levels based on current demand and also through delayed inventory purchasing, we've been able to minimize tariff fees throughout the quarter, the significant reduction in overall average annual headcount, a hold on all non-essential travel and a release of all non-essential third party services.

You will see in the reported financials that through these and other measures during the second quarter, we've been able to maintain a relatively steady cash position as well as maintaining recurring revenue levels in line with prior year quarters. More recently, due to the recent reopenings, we've begun to see an increase in customer interest. While not nearly to pre-pandemic levels, we feel the increasing activity as a positive indicator for the second half of the year.

In support of this, the drive in fall school reopenings will assist in fueling our resurgence to reengage projects that have been placed on hold throughout the pandemic. We've seen pockets of continued projects throughout the pandemic response. One such project was a substantial win of the 3,500 unit project that was taken away from a competitor due to their inability to perform.

We've not only continued to support this project throughout the second quarter, but have gone on to win additional business from this customer as well. Although delayed due to the impact on labor in China, our forthcoming manufacturing move to Taiwan is currently slated for later in this year as well. We've also maintained our involvement with several potential projects in the military space that have seen renewed interest due to the energy costs during this recessionary period. These types of opportunities in atypical markets present new possibilities for Telkonet during a trying time.

Lastly, with regards to our ongoing strategic industry review, while extensive and lengthy, 2020 has seen considerable conversations with a number of different candidates, several of which have had a renewed interest due to market circumstances and new opportunities. I know that many of you are interested in the potential of what a different version of Telkonet's business may look like. Whether paired with a larger company or combined with other technologies or something altogether different, I want you to know that Telkonet's Board of Directors and Management continue to move through these discussions with this in mind. As I've said, these conversations are ongoing and we look forward to having something to share with you as soon as practical.

With that said, I'd like to thank you for your time today, and I'll hand the call over to Gene Mushrush, Telkonet's Chief Financial Officer. Gene?

[Richard Mushrush, Chief Financial Officer]

Thank you, Jason. Ladies and gentlemen, good afternoon, and thank you for joining us. Today, I will be summarizing our 2020 second quarter and year-to-date financial results.

For the quarter ended June 30, 2020, Telkonet reported total revenues of $1.3 million, a 64% decrease compared to $3.6 million for the same period prior year. Product revenues decreased 67% to $1.1 million when compared to the prior year. Product revenues derived from value-added resellers and distribution partners were $830,000 for the quarter, a decrease of 68% compared to the prior year period.

In the current quarter, all major industry sectors decreased when compared to the prior year. Hospitality revenues decreased 58% to $979,000, government revenues decreased 97% to $14,000, educational revenues decreased 84% to $73,000 and MDU, or multiple dwelling units, revenues decreased 67% to $37,000. International revenues decreased 73% to $94,000 compared to the prior year period. The decrease in international revenues was primarily driven by non-repeatable revenues from two customers in 2019 and limited international revenues in 2020.

Recurring revenues fell 6% to $178,000 compared to the same period prior year. Backlogs were approximately $2.9 million and $4 million at June 30, 2020 and 2019, respectively. Gross profits for the quarter were $720,000, down 70% from $1.4 million last year. The gross profit percentage decreased 7% to 33%. The decrease was primarily attributable to a decline in revenues of $2.3 million, partially offset by decreases in material costs of $850,000, logistical expenses of $60,000, inclusive of import tariffs, use of installation contractors of $260,000 and salary expense of $30,000.

Tariffs imposed on Chinese imports resulted in an adverse impact of approximately 12% on the actual gross profit percentage for the three months ended June 30, 2020, compared to approximately 9% for the prior year period.

Operating expenses for the quarter were $1.4 million, a 29% decrease compared to $1.9 million for the same period in 2019. The variance is primarily attributable to decreases in expenses incurred with third-party engineering consultants of $125,000, trade shows of $140,000, salary expenses of $130,000, legal fees of $30,000, advertising of $20,000 and sales commissions of $50,000, all partially offset by a $30,000 increase in temp staffing.

We incurred an operating loss and reported negative adjusted EBITDA, a non-GAAP measure of $943,000 and $927,000 respectively for the quarter ended June 30, 2020. This compared to an operating loss and a negative adjusted EBITDA of $504,000 and $485,000 respectively for the same period prior year.

For the quarter ended June 30, 2020, Telkonet reported year-to-date revenues of $3.1 million, a 51% decrease compared to $6.3 million for the same period prior year. Product revenues decreased 55% to $2.7 million when compared to the prior year. Product revenues derived from value-added resellers and distribution partners were $1.9 million, a decrease of approximately 59%.

Year-to-date, all major industry sectors decreased when compared to the prior year. Hospitality revenues decreased 46% to $2.2 million, governmental revenues decreased 92% to $78,000, educational revenues decreased 55% to $322,000 and MDU revenues decreased 58% to $130,000. International revenues decreased 83% to $150,000 when compared to the prior year period. Once again, the decrease in international revenues was primarily driven by non-repeatable revenues from three customers in 2019 and limited international revenues in 2020.

Recurring revenues increased 2% to approximately $372,000 compared to the same period prior year. Year-to-date gross profits were $1.2 million down 49% from $2.4 million last year. However, the gross profit percentage increased 2% to 40%. The decrease was primarily attributable to a decline in revenues of $3.3 million partially offset by decreases in material costs of $1.2 million, logistical expenses of $280,000, inclusive of import tariffs, use of installation subcontractors of $290,000 and inventory adjustments of $90,000.

Tariffs imposed on Chinese imports resulted in an adverse impact of approximately 7% on the actual gross profit percentage for the six months ended June 30, 2020 compared to approximately 9% for the prior year period.

Year-to-date operating expenses fell 25% to $2.8 million compared to $3.8 million last year. The variance is primarily attributable to decreases in expenses incurred with third party engineering consultants of $231,000, trade shows of $200,000, audit fees of $60,000, legal fees of $40,000, salary and recruitment of $240,000 and sales commissions of $100,000 partially offset by $80,000 increase in temp staffing.

We incurred an operating loss and reported a negative adjusted EBITDA of $1.6 million each for the six months ended June 30, 2020. This compared to an operating loss and a negative adjusted EBITDA of $1.3 million each for the same period prior year. We reported $3.1 million in cash and equivalents at June 30, 2019 compared to $3.4 million last year. Cash used in operations during the first six months was approximately $488,000 compared to $2 million the prior year period.

As of June 30, 2020, we had a total borrowing base of $714,000, no outstanding balance and availability of $664,000 on our asset-based credit facility compared to a total borrowing base of $2 million and outstanding balance of $864,000 and availability of approximately $1.1 million at June 30, 2019. We reported a working capital surplus measured as current assets less current liabilities of $2.6 million at June 30, 2020 compared to a surplus of $4.7 million last year.

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. The company’s sales and gross profits have decreased significantly resulting from a contraction in commercial demand for our products, a lower revenue conversion rate in our existing pipeline and significant one-off transactions from customers in 2019 that have not been and are not expected to be repeated in 2020.

Due to travel restrictions, social distancing and shelter-at-home edicts, the hospitality industry, our largest market that generally contributes more than 50% of our aggregate revenues has suffered as much as any. According to a new study prepared for the U.S. Travel Association by Tourism Economics, domestic travel spending will likely drop 45% by the end of 2020. In addition, according to data from STR, during the second quarter, an estimated 5,100 hotels closed temporarily in the U.S.

In response to the pandemic and its effects on the company's operation and financial results, the company has taken and is continuing to take a number of actions to preserve cash. These actions include suspending the use of engineering consultants and canceling all non-essential travel and the company's attendance at trade shows.

In early April of 2020, management made the decision to furlough certain employees, instituted pay cuts for certain other employees and suspended the company's 401(k) match through the end of 2020. With receipt of the Paycheck Protection Program loan, the company was able to bring back the furloughed employees, restore payroll to prior levels and delayed suspension of the 401(k) match. However, the pandemic continues to impact the company's operations and financial results. And once again, in late June, 2020, management once again made the decision to furlough certain employees, institute pay cuts for certain other employees and suspend the company's 401(k) match through the end 2020.

On April 21, 2020, the company entered into an unsecured promissory note dated as of April 17, 2020 with Heritage Bank of Commerce under the Paycheck Protection Program, SBA 7(a) loan. The PPP loan program is being administered by the United States 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 in the law on March 27, 2020. The principal amount of the loan is approximately $913,000. Bears interest of 1% per annum and has a maturity date of April 21, 2022.

On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 was signed in the law. It amended the CARES Act and ease rules on how and when recipients can use loans and still be eligible for forgiveness. The PPP Flexibility Act of 2020 changed many aspects of the PPP program, including extending the covered period for loan forgiveness purposes from eight weeks to the earlier of 24 weeks from the loan origination date or December 31, 2020, lowering the amount required to be spent on payroll cost from 75% to 60% of the loan principal, extending the loan maturity period from two to five years for PPP loans made on or after June 5, 2020, and finally, revising the loan payment deferral period until the date when the amount of loan forgiveness is determined and remitted to the lender.

At June 30, 2020, the loan balance was approximately $913,000 and is presented as current debt on the balance sheet gross of any possible forgiveness. No assurance is provided that the company will obtain forgiveness of the loan in whole or in part. The company has used the PPP 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.

We expect to incur operating losses and negative operating cash flows for one-year beyond the date of these financial statements. The credit facility provides us with needed liquidity to assist in meeting our obligations or pursuing strategic objectives. Continued operating losses will deplete these cash reserves and could result in a violation of its financial covenants. Consequently, repayment of amounts borrowed under the credit facility maybe accelerated on our bank's commitment to extend credit under the loan agreement may be terminated. The occurrence of any of these events could have a material adverse impact on our business and results of operations.

Both the health and economic aspects of the pandemic are highly fluid and the future course of each is uncertain. We cannot predict whether the pandemic will be effectively contained on a sustained basis nor the severity and duration of its impact. If the pandemic is not effectively and timely controlled, our results of operations, financial condition and cash flows may continue to be materially and adversely impacted as a result of a deteriorating market outlook, a global economic recession, weakened liquidity for factors that we cannot foresee. 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,

[Jason Tienor, President and Chief Executive Officer]

Thank you, Gene. With that, I'd like to now hand the call over to our moderator to take any questions you might have. Moderator?

[Operator]

Thank you, sir. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Thank you.

[Operator]

Thank you. I'll now turn the conference call back to Mr. Jason Tienor. Go ahead, Mr. Tienor.

[Jason Tienor, President and Chief Executive Officer]

Thank you, moderator. And thank you again, everyone for attending this call. Again, since there were no questions, we'd like to remind you that you can reach out at any time to the company’s IR at [e-mail]. Again, that's [e-mail] or by calling us at [phone]. Again, thanks once again for attending the call this afternoon, and we hope that everyone has a great weekend.

[Operator]

Thank you. This concludes today's call. All parties may disconnect. Have a great day.