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Good afternoon. And welcome to Telkonet's Third 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 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 now turn the call over to Jason Tienor, Telkonet's President and CEO, to discuss the results. Mr. Tienor, you may begin.
Thank you. I would like to thank you everyone for joining us once again for Telkonet’s quarterly earnings call. 2018 has been a fairly turbulent year for Telkonet as most of you have seen. Fresh off the divestiture of our EthoStream division and the work that it created last year, we researched suitable advisors, engage with ROTH Capital Partners and move directly into a strategic analysis of business alternatives available for Telkonet's future growth and all of the applicable distractions and instructions that accompany this type of activity. This exercise will prove positive for Telkonet and deliver a more successful path forward.
The short-term effect of creating uncertainty and doubt amongst customers and partners is misinterpretation by Telkonet competitors and it’s requirements of our time, energy and resources are unfortunately shown in our third quarter performance. This being said, the impending completion of this process is identified several potential outcomes, each with enormous opportunity for Telkonet shareholders.
The exercises, upcoming conclusion will allow our focus to return to business growth and return Telkonet to a path of growth and profitability. Also contributing to the disappointing results in the third quarter is the unfortunate impact of ongoing tariffs in our industry that only exerted negative pressure on our margins and pricing, but also have a significant impact on the availability, timeliness and cost of components available for manufacturing.
As shown in our quarter-over-quarter performance, these decisions have a real impact and we continue to try to minimize their long-term effects on our business. We have taken all measures possible to reduce, eliminate or delay their effect and look forward to a swift resolution of this issue.
In addition to this, the year-to-date strength of the economy continues to impact our procurement abilities, while working diligently with our manufacturers and available alternative suppliers, our ability to reach production volumes and timelines continues to recognize headwinds.
Having said this, while Q3’s complete performance may not be presented well through our financial results, it represented one of our most significant periods for sales activity yet through the several key indicators.
Our sales bookings growth over a prior record quarter of 15% resulting in total Q3 bookings of over 2.8 million and increased to 65% of total sales bookings recorded through our Telkonet channel partners.
Total sales performance resulting in end of quarter backlog of greater than $3.3 million, which represents more than half of our entire 2018 current year's revenue. And additionally we have recorded more than $3 million in verbally committed contracts demonstrating that Telkonet is well-positioned for substantial growth moving forward.
One additional benefit of our current strategic analysis is it introduction to a number of new and potential partners that provide added-value through product and service integration. We remain true to our mission of being a leader in intelligent automation centered on efficiency, savings, comfort and convenience, and the opportunities presented by these relationships allow us to advance that goal more quickly than we would be able to do organically.
We have also continued to recognize a dramatic ramp in the automation and IoT space over the course of this year. If the level of our sales activity doesn't approve the technological ramp, we only need to look at the volume of standards being architected in franchises that have released a comprehensive strategy from new automation.
A prime example is our relationship with the Connected Room initiative that is being deployed by Hilton nationwide. As the first smart product provider in this program, we watch Hilton deploy a comprehensive strategy for Smart Room and Mobile First technologies that demonstrate the direction of technology for the hospitality industry.
Having just recently introduced the initiative to its full franchise, Hilton is driving this technology through its entire brand similar to its mobile key initiative and Telkonet is aligning our technology with the needs of this relationship and other similar initiatives.
Expanding beyond hospitality, we have recently begun the deployment of one of Telkonet's largest contracts ever been deployed into the residential market. As the first project of its kind for commercially operated military housing, this million dollar opportunity has Telkonet deploying data smart technologies to create smart mobile manage environments for residential homeowners.
Recognizing the opportunities beyond simply savings but the sustainability, comfort and true room intelligence, customer small and large are expanding the boundary of where technologies like Telkonet's EcoSmart and Symphony platforms add value.
Our ability to translate these technologies into two new markets and new opportunities not only maintain our leadership position through innovation and intelligence but enables us to better understand new market needs and capabilities.
With the recent release of Telkonet's newest product the the Touch Flex Wi-Fi Thermostat, we evolved our IoT platform to target markets both small and large, and commercial, as well as residential.
Our newest Symphony platform in automation environment simplifies the deployment, commissioning, testing and management of multi-platform, multi-vendor environments. This generational jump in technology demonstrates the innovation of both our technology and development, as well as our understanding of the industry in the direction that is moving.
With a number of additional products and services moving to our development roadmap, many specific opportunities regarding partnerships and market demands we see continued strength in our industry and increasing demand for intelligent technologies.
Thus, while we've seen the current headwinds face to our internal activities and external factors have created demonstrable disruption in our business, current key indicators demonstrate how we continue to pursue our strategic roadmap to not only surpass our goals, but develop a stronger and more vibrant Telkonet long-term.
With that, I would 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 2018 third quarter and year-to-date financial results. For the quarter ended September 30, 2018, total revenues fell 28% to $1.5 million, compared to $2 million for the same period prior year. Educational revenues usually a strong Q3 segment due to seasonal accessibility were down significantly quarter-over-quarter.
Recurring revenues grew 10% to $145,000 compared to the same period prior year. Gross profits for the quarter were $514,000, down 37% from $821,000 last year. Material margins decreased 8% quarter-over-quarter.
As mentioned during our Q2 earnings call, the U.S. Federal Government began imposing tariffs on a large number of products imported from China in early July. Our core products are manufactured in China and therefore are subject to these tariffs.
During the quarter tariffs of approximately $140,000 were incurred, representing an adverse impact of 10% on gross profits, a combination of the aforementioned offset by a reduction in subcontractor services led to an overall gross margin erosion of 5% compared to prior year.
Operating expenses for the quarter were $1.8 million, a 6% increase, compared to $1.7 million for the same period in 2017. SG&A expenses were 85% of revenues, compared to 58% for the same period prior year. Increases in bad debt expense, engineering and two non-recurring true-ups were offset by decreases in personnel and legal expenses.
We incurred operating losses from continuing operations of $1.3 million and $871,000 for the quarters ended September 30, 2018 and 2017, respectively.
Income from discontinued operations was zero and $11,000 for the comparative quarters ended September 30, 2018 and 2017, respectively.
Net losses were $1.3 million and $642,000 at September 30, 2018 and 2017. We reported negative adjusted EBITDA, a non-GAAP measure from continuing operations of $1.3 million and $867,000 for the quarters ended September 30, 2018 and 2017, respectively.
Total year-to-date revenues of $6 million were relatively unchanged compared to prior year and increase in hospitality revenues were offset by decreases in education and commercial segments. Although, the total revenues were relatively flat year-over-year, recurring revenues increased 16% to $400,000.
Year-to-date gross profits were $2.6 million, down 5% from $2.7 million last year. Material margins decreased 6% year-over-year. Tariffs incurred to-date represented an adverse impact of 2% on gross profits. In all, gross margins fell to 43% of revenues, a 2% decline when compared to last year.
Year-to-date operating expenses were $5.3 million, an 8% decrease, compared to $5.8 million for the same period in 2017. SG&A expenses fell to 63% of revenues, compared to 72% for the same period prior year.
Reductions in incentives and expenses related to last year's sale of the company's wholly-owned subsidiary were offset by increases in bad debt, engineering, sales of software and two non-recurring true-ups.
We incurred operating losses from continuing operations of approximately $2.7 million and $3 million for the nine months ended September 30, 2018 and 2017, respective. Income from discontinued operations was zero and $602,000 for the nine months ended September 30, 2018 and 2017.
Gains from the sale of the wholly-owned subsidiary were zero, compared to $6.6 million last year. The year-to-date net loss of $2.7 million, compared to net income of $4.2 million at September 30, 2017.
Year-to-date EBITDA from continuing operations grew – was relatively unchanged at a negative 2.6 million for both 2018 and 2007.
We reported $5.1 million in cash and equivalents at September 30, 2018, compared to $9 million at this time last year. Cash used in operating activities of continuing operations during the first nine months was $3.7 million, compared to $2.5 million the same period prior year.
We reported a working capital surplus measured as current assets less current liabilities of $6.5 million at September 30, 2018, compared to a surplus of $9.8 million at this time last year. In addition, we had a borrowing -- available borrowing capacity of $454,000 on our revolving line of credit.
Our cash conversion cycle, an indicator of the company's efficiency in managing working capital assets and liabilities increased to 157 days from 116 at this time last year. A shorter cycle means greater liquidity, which translates into less need to borrow, more opportunity to leverage spend view cash discounts and an increase capacity to fund the expansion of the business into new product lines or markets.
Once again, thank you for your interest and to our shareholders specifically, thank you for your continued support. I will now turn the call back to Telkonet's President and Chief Executive Officer, Jason Tienor.
Thank you, Gene. And with that, I will hand the call over to the Operator to take any questions you might have. Operator?
Thank you. [Operator Instructions] Our first question comes from the line of Michael Brick with National Securities. Please proceed with your question.
Yeah. Hi. Just – could you maybe look at some highlights we can look for in the fourth quarter and do you think we are at an inflection point yet or is it still we have got some hard slogging to do before it really is on the move.
Thank you, Michael. To be honest, I believe based on the results that we posted from the sales activity during the third quarter, we really have reached that inflection point. As I mentioned, our sales activity began to rise pretty dramatically especially through large channel contrast throughout the third quarter, leaving us with the largest backlog that we have ever had in the history of the company. So I believe that we are seeing the inflection point based on a number of external factors and the fact that our channel relationships have grown dramatically throughout the year.
All right. Thank you very much. Keep it going.
Thank you.
Appreciated.
Thanks.
Thank you. Our next question comes from the line of Ed Stien [ph], Private Investor. Please proceed with your questions.
Hi, Jaosn. I guess, Ross is trying to help us find whatever combination or sale or whatever that could make sense for us. But if we are just selling out I supposed to a joint venture or something else, it seems like it's going to be a pretty tough assignment for them without having any earnings ever. So would our technology and patents be in and of themselves without having any earnings from them enough to interest some of the people that they're bringing to us.
Hi. Thank you for the question. It’s a great question. Honestly when you take a look at the type of strategic alternatives that would be available for Telkonet, you really up to audiences. You have a financial market, which would really be basic any evaluation of Telkonet on the financial performance of the business and you have a strategic audience. Those companies that similar to Telkonet are looking at expanding their portfolios or expanding their platform, growing their customer base or growing their technology base, it’s not driven necessarily by the financials when it comes to strategic as much as what the combination of one plus one equals greater than two, a large number of our conversations, obviously, the majority of our conversations are with companies of that strategic nature, those that are looking at doing things similar to ourselves, expanding our portfolio of products and services, creating a larger platform that more quickly than we could organically in reaching out to a larger combined customer base where we might be able to add more share of pocket and individual sales. So, yes, we absolutely have significant interest in those types of discussions and have had a number of discussions bringing for us a number of different alternatives. As we move through the completion of these activities we will be able to share more light on what those types of combinations might be. We hopefully can provide some guidance to shareholders of what we feel is the most valuable opportunity moving forward.
Thank you. Appreciated and good luck.
Thank you.
Thank you. [Operator Instructions] We do have another question from the line of Steve Pendergast with RBC. Please proceed with your questions.
Hey, Jason. How are you?
Yeah. Steve, good.
Could you give us an idea of the potential or current impact that your efforts with Alexa have on your products?
Absolutely. One of the newest technologies that has hit the market for not just our markets or the commercial industry, but obviously for the residential industry, yes, it is broken records with product sales throughout the consumer space. But it is voice.
IoT has been around for a long time, machine-to-machine technologies, the ability to do things via remote control, et cetera. Even being able to control devices off of the media platforms like Control4 or using your television IR controllers to control lighting. But voice has become probably the most prominent opportunity to introduce new intelligence into the environment and truly create more efficiency – efficient opportunities.
While we have deployed voice technologies as part of our platform for a couple of years now, specifically within hospitality, a combination that we entered into with a company named Volara earlier this year has really shown how rapidly that technology can deploy itself.
Specifically thus far we have seen it more so hospitality, because IoT solutions themselves have taken root more quickly in the space, but we're seeing it across all markets that we are working with. Obviously, within healthcare when we have individuals that are unable to move us freely, voice becomes a very large opportunity to introduce new comfort technologies.
When you look at the other features and functionalities that voice offers by pairing a number of different, what should I say function together like, say, for instance, in a home environment the ability to say, I'm home, good night and it to take place everything that you need for your home, locking of the door, shutting up a garage door, turning off the lights, et cetera. It creates enormous opportunities to create different experiences and that's really what we see IoT becoming.
Not necessarily an energy efficiency exercise solely based on the amount of savings that you can recognize, but a combination of that along with new comfort in a growth activity based on being able to provide new functions and functionality to users.
Okay. What – just a follow on that, what percentage of your existing product offering has voice that is in a style of Alexa versus where you see it going forward?
If I understand the question correctly, Steve, we don’t deploy the command control directly in the hardware products. Specifically, because where we see the technology most being used is where voice already is deployed within the room, either through another device, through the media platform or being introduced through native platforms like Google, Siri and Alexa. Where we create our integration is through partnering with companies that provide those services and provide our platform to have control directly over all of the functionality of take for instance a thermostats, light switches and wall outlets.
Okay. Thank you.
Thank you. Ladies and gentlemen, at this time, I would like to turn the floor back to management for closing comments.
Thank you once again for your time today. Again if anyone has any further questions that they like us to respond to, please feel free to email us at ir@telkonet.com. With that, thank you and I hope that everybody has a excellent afternoon.
Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participations.