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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 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 Form 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 it will be made available for replay via a link available in the Investor Relations section of Telkonet's Web site at www.telkonet.com.
With that, I would like to now turn the call over to Jason Tienor, Telkonet's President and CEO, to discuss the results. Mr. Tienor, you may begin.
Thank you, operator. Good afternoon. And thank you for joining us for Telkonet’s third quarter 2019 earnings call. As is seen in this morning's earnings release, Telkonet is pleased to share our 2019 year-to-date performance which exceeds our previous full years' results, and demonstrates a 15% and 41% increase over the three and nine month periods year over prior year.
These results are largely due to our efforts in expanding strategic relationships, both domestically and internationally, and to continued growth and market demand for comprehensive automation solutions demonstrated by our EcoSmart platform. These automation solutions are comprised of technologies beyond simply energy management, such as property management and building automation solutions, and security and lighting hardware products and integrations, such as those developed by Telkonet over the last several years as a key part of our EcoSmart platform. These integrations what position Telkonet as a leader in the commercial market that we service, because they've allowed us to engineer a comprehensive platform not offered by others to customers seeking to deploy enhanced solutions.
A significant contributor to our success thus far this year, as well as the company's backlog and pipeline moving forward has been our international efforts towards new partnerships and market penetration. In addition to the growth of existing partnerships and regions, including South America and Canada, Telkonet has seen widespread new activity in regions, including Oceana and the Middle East and new interests from Europe and Asia.
Partners including Islandaire, Onity, Varis, Assa Abloy and Trane, have brought a number of prestigious wins to our business, including Misawa Air Force Base in Japan, the Sheraton Hotel in Doha, Qatar, arguably the region's most famous and iconic property, the Fairmont Resorts in Sydney, Australia and numerous others. This success is just the beginning, representing the fruits of extensive effort over the last year to engage a wider audience and expand Telkonet reach and market penetration.
We expect that international sales will grow quite rapidly and become a much larger percentage of Telkonet’s overall annual revenues. As proof, we have just returned from meetings with the ownership of our recent Qatar success with insurances of at least three additional properties in the coming year. These efforts demonstrate the continued strength of our technology and our international channel partners.
As proof of the continued growth and acceptance within the hospitality industry, we’ve recognized rapid expansion of the existing programs within the space, as well as begun participation in a number of new expensive opportunities. These include the continued growth and participation in franchise wide programs, including Hilton Connected Room and others. The request to participate in emerging franchise wild technology initiatives, including the newly mandated panic button solutions directly with franchise operators themselves, and participation in and selection to move on in an RFP for a large portfolio of resorts, seeking to deploy a comprehensive automation solution.
With the majority of our revenue generated within the hospitality industry, these opportunities demonstrate the continued expansion of both market acceptance and interest in broad integration solutions. This is an area where Telkonet leads due to the development of EcoSmart as the first complete automation solution within the hospitality space with all aspects of our solution, including hardware, software, services and mobile and analytics, developed and deployed by Telkonet, in addition to the leading number and quality of integrations available, offering the only full lifecycle solution within the hospitality space.
Another market contributing to the significant revenue growth for Telkonet this year has been the educational space. With the continued increase and interest for sustainability and savings in the vertical, direct and channel sales alike have continued to increase year-over-year with this quarter alone seeing activity from NYU, Texas A&M, the Coast Guard Academy, Culver-Stockton, Penn State and numerous others. Our marketing and sales efforts continued to target this vertical for future expansion in increased growth.
Of significant note is the recent growth of our military housing opportunity. As many of you know, a prominent contributor to this year's performance was the award of our first full military housing opportunity in Hawaii totaling approximately 5,000 homes. While this project has been delivered and deployment is ongoing, we were recently notified of the award of the additional trials that not one but two additional military basis, totaling several thousand additional homes. These opportunities prove the strength and versatility of both the Telkonet product portfolio and the platform to support it across a variety of market verticals, as well as through a broad channels strategy.
Of particular note, as has been discussed on prior earnings calls, you’ll see that the gross profit decreased from full prior year, this amount mirrors the approximate cost of Telkonet of the current tariffs. You will also see that we’ve made adjustment in the quarter to increase our overall gross margin, including a catalog wide reprising that took place within the quarter that has begun to generate results in close business and a comprehensive restructuring and reorganization that has significantly reduced SG&A and overhead.
We expect these measures to contribute significantly to the bottom line moving forward and combined with our rapid growth, move the company into profitability. A key contributor to the company’s successes has always been and will always be our innovation, rapid development, strength of market expertise and comprehensive technology solution. While we’ve invested heavily in the past 24 months to the development and the deployment of technology, we’ve begun to reap the benefits of those development efforts and costs. As proof, the military efforts mentioned earlier, are the direct result of new products and technology developed through these investments.
In addition, our participation in opportunities like the Hilton Connected Room and our certified products provide direct evidence as well. We also developed a brand new product that has already generated enormous interest as part of this program that has set to be released in the fourth quarter of this year. Also, through these efforts, we become one of the first companies to integrate directly with door lock providers using what is rapidly becoming the new standard in Bluetooth. This technology will enable us to participate in a number of new integrations and innovations that are rapidly becoming standard in the industry, such as panic button technology.
Lastly, through our development efforts, we've become one of the first technology providers to partner with industry leaders in networking technology, including Ruckus and Aruba, and utilizing their newest products incorporating ZigBee technology to function as the primary infrastructure for our platform deployments. This significant development enables us to capitalize on the broad audience that is their customer base, and utilize existing architecture where available, or partner with these providers in their new product deployments. This type of industry evolution and innovation is what enables Telkonet to maintain our competitive leadership in a fast moving technology landscape.
While our third quarter was successful in growth, we’re unfortunate in that we had additional opportunities representing significant revenue that were unable to be completed prior to the end of the quarter due to customer constraints. This work represented an additional $800,000 that has been pushed forward into the fourth quarter, even though a majority of the resources have been completed already. This backlog, in addition to our contracted but un-started and our verbal acceptance backlog representing more than $6.5 million, provides a solid understanding of our Q4 forecast, enabling us to provide guidance in the range of $11.5 million to $12.5 million in full 2019 revenue. This performance would represent a dramatic year-over-year growth of 36% to 48% and demonstrates the strength of our business and opportunity of the company moving forward.
One final note, a key focus of considerable interest is our ongoing efforts to identify strategic industry opportunities and engage in discussions to bring more rapid growth and expansion of Telkonet's future success. The third quarter saw extensive activity in this space with a number of discussions making significant strides towards potential engagements, and several of them spawning initial growth activity as part of the discussions. These activities represent a significant effort for Telkonet, and continue to be a priority as not only work with those companies we've identified but continue to survey the industry for new market entrants and additional potential discussions.
As you can see, the company has executed successfully on a number of fronts this year, while rapidly expanding revenue and market growth. From continued expansion of potential markets through international and channel growth to further penetration through dedicated relationships in existing markets, we continue to broaden our target audience. Through extensive efforts to maximize efficiencies and utilize outside resources, we continue to cut costs while expanding production and performance.
Lastly, while we've been able to capitalize on market opportunities and new growth, we've done so while scaling down and development costs fueling our ascent towards profitability. Once again, I'd like to thank you for your time and interest. And we appreciate your continued support of Telkonet, and look forward to providing additional updates on our success moving forward.
With that, I'd like to hand the call over to Gene Mushrush, Telkonet’s Chief Financial Officer, to review the quarterly financial performance.
Thank you, Jason. Ladies and gentlemen, good afternoon and thank you for joining us. Today, I will be summarizing our 2019 third quarter and year-to-date financial results.
For the quarter ended September 30, 2019, Telkonet reported total revenues of $2.2 million, a 50% increase compared to $1.5 million for the same period prior year. An increase of 44% in hospitality sector revenues was instrumental in this growth. Product revenues generated from value added resellers and distribution partners were $1.9 million for the three months ended September 30, 2019, an increase of 102% compared to prior year period.
Recurring revenues increased 40% to $203,000. Quarterly gross profits were $865,000, up 68% from $514,000 last year. The actual gross profit percentage increased 4% to 39% as well. Contributing to the improvement was 14% decrease in material costs as a percentage of product revenues, offset by an increase of $280,000 in material costs, an increase of $30,000 in logistical expenses, inclusive of import tariffs, and an increase of $40,000 in the inventory reserve obsolescence reserve. Tariffs imposed on Chinese imports resulted in an adverse impact of 7% on the actual quarterly gross profit percentage.
Operating expenses for the quarter fell 11% to $1.6 million compared to $1.8 million for the same period in 2018. The variance is attributable to $20,000 increase in audit fees and $50,000 increase in commission expenses, however, offset by $130,000 decrease in the bad debt reserve, a $90,000 increase -- a decrease in third party engineering consulting expenses and a $60,000 decrease in software consulting expenses. Operating expenses as a percentage of revenues fell 50% to 73% compared to the same period prior year.
We incurred operating losses of $737,000 and $1.3 million for the quarters ended September 30, 2019 and 2018 respectively. We reported negative adjusted EBITDAs, a non-GAAP measure, of $719,000 and $1.3 million for the quarters ended September 30, 2019 and 2018 respectively. Total year-to-date revenues of $8.5 million represented a 41% increase year-over-year. Increases in hospitality and governmental sectors represented approximately 81% of this improvement. Product revenues generated from value added resellers and distribution partners were $6.4 million, an increase of 39% compared to the prior year period. Recurring revenues increased 42% to $569,000.
Year-to-date gross profits were $3.3 million, up 26% from $2.6 million last year. The actual gross profit percentage fell 5% to 38% when compared to the prior year. The variance was primarily attributable to an increase of $1 million in material costs, an increase of $430,000 in the logistic expenses inclusive of import tariffs and an increase of $260,000 in the use of installation contractors. Increase were offset by material costs, as a percentage of product revenues, falling 6% to 42% compared to the prior year period.
Tariffs impose on Chinese imports resulted in an adverse impact of approximately 7% on the actual year-to-date gross profit percentage. Year-to-date operating expenses grew 1% to $5.4 million. The variance is attributable to $120,000 increase in sales commissions, $120,000 combined increase in audit and legal fees, offset by $110,000 decrease to the bad debt reserve.
Operating expenses as a percentage of revenues fell 24% to 63% compared to the same period prior year. We incurred operating losses from operations of $2.1 million and $2.7 million for the nine months ended September 30, 2019 and 2018 respectively. We reported negative year-to-date adjusted EBITDAs of $2 million and $2.6 million in both 2019 and 2018 respectively. We reported approximately $3.5 million in cash and equivalents at September 30, 2019 compared to $5.1 million at this time prior year.
Cash used in operations during the first nine months was approximately $2 million compared to $3.7 million in the prior year period. The increase in accounts receivable is primarily the result of revenue growth and invoice timing as opposed to collection difficulties. During the 12 month period ended 12/31/18, the company's cash balance decreased approximately $309,000 per month. In comparison, during the nine month period ended September 30, 2019, the company's cash balance decreased approximately $133,000 per month. This improvement is the result of increased revenues and cost management efforts.
We reported a working capital surplus, measured as current assets plus current liabilities, of approximately $4 million at September 30, 2019 compared to a surplus of approximately $6.5 million at this time last year. The outstanding balance on our credit facility was approximately $910,000 with an available borrowing capacity of approximately $742,000 at September 30, 2019. An outstanding balance of approximately 256,000 with available borrowing capacity of approximately $454,000 existed at this time last year.
On November 06, 2019, the 11th amendment to the credit facility was executed to extend the maturity date to September 30, 2021 and eliminate the maximum EBITDA loss covenant. The sole financial covenants, our minimum asset coverage ratio and minimum unrestricted cash balance of $2 million, both of which are measured at the end of each month. The amendment was effective as of September 30, 2019.
In closing, 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. With that, I'd like to hand the call over to our operator to take any questions you might have. Operator?
[Operator Instructions] Thank you. Our first question comes from Ed Stein with -- just Ed Stein. Please go ahead, sir.
Given all of your potentials which very exciting, but when you start talking about $5,000 -- 5,000 houses and you have certain limit on how much cash and borrowing ability that you have. Are you confident that you have enough liquidity, or can get it in order to fulfill all those possibilities?
Absolutely, Ed. We are met liquidity constrained or -- we constrained at all at this point. In fact, we were able to execute on the production and provisioning of those units entirely within the first six months of this year. And if you look at the cash and equivalents that we reported at 9/30 of this year was equivalent to that where we were on April 1st of this year. So without burning cash, we’ve been able to continue to function without any issues with the relation to 40% growth of our overall revenues.
Thank you…
And then I'd just like to add one. I think it's customary for Telkonet to request deposits in advance of customer projects. These military projects are no different than the ones that we conducted in Hawaii where we received positive upfront in order to help bridge that working capital gap.
Also in some calls past and I haven’t been on the most recent one, because of conflict. I know that we had hired an investment banker or the equivalent to help us look for either strategic partner or a buyer, or a merger candidate. Can you give us an update on that?
Absolutely. You’re referring to ROTH Capital Partners, whom is the investment bank that we’ve been working with, absolutely. Over the course of the last roughly 12 months, they’ve brought a number of parties to the table to facilitate discussions in a number of different avenues, those that you described, anything from initiating joint ventures to potential MA activity, both inbound and outbound.
We have ongoing conversation taking place as part of that process, and we continue to move those down the road. Unfortunately, they don’t typically take place overnight. So there is a lot of due diligence and a lot of effort that goes into those. But we continue to moving down the road as we function on a daily basis and continue to move our business forward.
It seems like you’re getting more and more attractive to a potential partner or purchaser every day. So keep up the good work.
Thank you, Ed. We appreciate your continued interest, and look forward to speaking with you again in the future.
Thanks [Operator Instructions]. Our next question comes from Joe Pierce with Telkonet. Please state your question.
Jason, good job. I read the report this morning. I'm sorry I came on this call a little bit late. So I didn't hear what you initially said. But it appears as if this was probably the best quarter to-date. Is it true?
From a revenue perspective, no, that would have been last quarter. I can tell you from, both of the strategic discussions that we've been having, as well as from a performance, this was absolutely one of the best quarters that we've ever had. But as mentioned during the call, we had a significant amount of revenue, which while earned during the period of the third quarter, won't be recognized until the fourth quarter due to revenue recognition consideration. So it has been a great quarter. Obviously, it puts us in a fantastic position for full year. And as we stated, we're expecting some significant growth year-over-year this year. And obviously, puts us in a position for profitability that we've described previously. But in answer to your question, last quarter was by far the largest revenue recognition quarter of the company's history.
The previous caller had mentioned, as far as mergers -- acquisitions, whether they'd be you being acquirer acquiring somebody else. Personally, I would hope that's premature because of the price right now, I can't imagine it much of the company.
Unfortunately, in any discussion in any transaction that is a key consideration is what the current market capacity is, or market appetite is for a business of our type. Obviously, as well as not having profitability today it becomes a large part of the discussion and valuation for the business. So you're absolutely accurate in saying that we try to take everything into account. But understand the process moving forward everybody on the call.
If there is an agreement of sorts, if there's an interested party that needs to move forward in a -- to a decision points, that would be brought in front of the shareholders to vote on prior to any actual action being moves forward. So you would have say in it as what every shareholder. We want to make very clear that in all of these conversations, we're looking out for the interest of the shareholders. And when there is a value partner or party that has an offer to be considered, it will be brought forward through a proxy process to your attention, and you'll have the ability to voice your opinion.
As far as the -- also the previous caller had mentioned the investment bank that you're currently using. It's been my -- in past history, when we have an investment bank, one of those jobs is to go up here and find companies who will support you as far as writing reports, doing research in the company and see if it's something that they might want to research down the road, or recommend down the road. It appears we haven't done any of that yet. Is that true?
I can't share what they have or have not done internally or through voicing of their activity with parties that they're bringing to the table to discuss, to be initiate conversations with us. But what they're doing in the active market from a report writing perspective that there have been no public reports provided by ROTH today.
And to go on that same vein, is there a plan in place -- are you putting a plan in place to how you might be able give some support the price the stock over the next couple of quarters?
The board and company management continuously pursue discussions around how we can improve the valuation, or how we can improve performance. Unfortunately, for a company of our size and shape, as I'm sure you can appreciate, Joe, is the fact that with minimal volume and trading and being a small microcap tech stack, what really matters for I believe most investors in Telkonet is that we achieved profitability and continued growth.
So the performance and execution as we have thus far this year and as our financials have shown is really where our attention is focused on moving through to profitability and expanded growth. But the strategic conversations that we continue to have with interested parties help to provide the type of interest or where the initial lies in those parties' conversations with Telkonet. So the board, as I said and management, continue to review, analyze, and we’ll move forward as such and we’ll try to provide as much support as we can, but we appreciate any input that you guys provide.
Thank you. Ladies and gentlemen, this ends today’s Q&A session. I’ll now turn the floor back to management to conclude.
Thank you, operator. And thank you to everyone who joined the call today. We appreciate your continued interest in Telkonet. If there are any further questions you might have, please feel free to contact Telkonet’s IR at 414-302-2299. We hope you all have a wonderful afternoon.
Thank you. This concludes today’s conference. All parties may disconnect. Have a great evening.