Telkonet, Incs' (TKOI) CEO Jason Tienor on Q4 2017 Results - Earnings Call Transcript

Telkonet, Incs. (OTCQB:TKOI) Q4 2017 Results Earnings Conference Call April 2, 2018 4:30 PM ET

Executives

Jason Tienor - CEO

Richard Mushrush - CFO

Analysts

Mike Breard - Hodges Capital

Joe Pierce - Plymouth Rock Financial

Operator

Good afternoon, and welcome to Telkonet's Fourth Quarter and Year End 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 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 variable 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 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 everybody 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 call over to Jason Tienor, Telkonet's President and CEO, to discuss the results. Mr. Tienor, you may begin.

Jason Tienor

Thank you operator. Welcome, everyone, to today's Telkonet's 2017 fourth quarter and year-end earnings call. We certainly appreciate your continued interest in Telkonet, whether you are an employee, client, analyst and investor or a valued third-party partner. We continue to value your support of our business and our goal to become a leading provider of commercial intelligent automation.

With a year and the past since Telkonet’s debenture of our highest Internet of assets, the company has accomplished an enormous amount of work to transition to a new and more efficient business within the automated and IoT space, and also to help and deploy brand new platform that will allow Telkonet to expand more quickly both in penetration of the existing markets, but also into new rapidly evolving area of the Internet-of-things, as well as to manage large scale deployments not previously encountered.

2017 was a dramatic year of change for Telkonet because of the co-divestiture we needed to move our headquarters as well as our warehouse to manufacturing operations. We also needed to redevelop the internal software and systems that manage the business operations and recreate the infrastructure that products and solutions run on.

We needed to fill staff positions opened by the [Indiscernible] course as part of the divestiture and we all had to replace, recreate and rebuild tool used to operate and grow our business. Through all of this, we continued not only in fulfilling the needs of our customers and partners, but also in improving some of the most significant opportunities that Telkonet has developed throughout its history.

These include opportunities with some of the largest financial items in the hospitality industry, expensive new international awards through long-standing foreign partners, deployment opportunities throughout military leasing and partner shipments with some of the largest energy service companies in America.

Because of our repositioning, we’ve been able to nurture these opportunities in relationship that have set us on a path as the leader in the markets that we currently service.

From [Indiscernible] being certified in one of these engagement is the only provider to meet the respective core requirements for our corrective initiatives to being selected for proof of accounts such for another major [Indiscernible] hospitality franchise. We continue to [Indiscernible] a path driven by our new catastrophe, capability and focus.

As 2017 and our re-engineering efforts concluded, we begin 2018 with a renewed focus on sustained both profitability and [Indiscernible] recurring revenue and the [Indiscernible] proficiency. While revenue has been initially growing as quickly as we had hoped year-over-year revenue increases and 42% growth of Q4 over prior year demonstrates the strength of Telkonet’s business.

With a steadfast focus on efficiency and profitability, we’ve recognized and increased quarter over quarter in gross margin by 6% and continued to lower our cost by ending the year’s lowest SG&A and OpEx of the year resulting in a gain of several cents per share. This focused on business fundamental after the redevelopment of Telkonet’s infrastructure from the ground drove Telkonet to the highest revenue per headcount in the company history and resulted in a substantial quarterly EBTIDA improvement and also [ph] operating income loss for the year, declining 58% quarter over prior quarter.

One significant impact on our full financing outlook is the global growth of manufacturing components and lead time between affecting employee [ph] purchases by as much as six months has created difficulty in forecasting ramping our overall revenue effecting fixed [Indiscernible] Telkonet’s overall growth.

Regardless, our re-divestiture has provided us liquidity to enjoy these extra difficulties more readily through increase [Indiscernible] and inventory. As mentioned in the previous [Indiscernible] is the driving force in commercial market is to target entity, investments, intelligent [Indiscernible] and the comprehensive of integration of rules enforced.

One benefit that we’ve seen over the last several years is the Ecosmart development that is the vast value of simplicity and integration. We’ve also learned that our strength in automation extends to a number of commercial environments and in order to target them, we needed to expand our platform, with significant action with the party partners and provide comprehensive thrust with [Indiscernible] yet easy-to-use tools for others to expand the process that we’ve provided.

Based on the upcoming release of the project it’s still valuable for the proceeds of our company, and to the [Indiscernible] release that we currently removed. This platform will be released during Q2 to the largest annual conference and it will be utilizing existing opportunities that are moving through demonstrate the continued strength of its market and our leadership.

As we move through the remainder of 2018, we will be generating even more opportunities that acted as this driver of the evolution of this new solution and our continued innovation and outlook. We are excited about 2018 and the opportunities that it has brought to Telkonet and we look forward to sharing more of these exciting developments. This new phase of our company’s growth demonstrates the benefit of our company’s [Indiscernible] expertise, and continued innovation.

I’d like to thank you all once again for your interest in Telkonet’s development and with that, I’ll pass the call to Telkonet’s CFO, Gene Mushrush, for our fourth quarter and yearend financial review. Gene?

Richard Mushrush

Thank you, Jason. Ladies and gentlemen, good afternoon, and welcome. Today, I will be reviewing [ph] our 2017 yearend financial summary. For the year ended December 31, 2017 total revenues from continuing operations were unchanged at $8.3 million compared to last year.

Recurring revenue grew 5% to approximately $484,000 compared to the prior year. Although aggregate revenues were unchanged, educational revenues increased approximately 41% year-over-year, revenues via our channels relationships increased approximately 6%. These metrics are important since they are [Indiscernible] strategic initiatives, market diversification and channel growth.

We posted gross profits of $3.8 million than compared to [Indiscernible]. Supply chain disruptions leading to increased freight costs, inventory evaluations are [Indiscernible] primary factors for the decline.

Recurring revenues decreased 9% to 64% compared to last year as a result of increased staffing. Telkonet incurred year-to-date operations of $7.3 million compared to $8 million for the same period to the prior year, a decrease of 9%. Significant factors contributing to this decrease were the 2016 one-off events of the contested proxy and used tax item.

Overhead restrained and finally a reduction personnel result into last year’s [Indiscernible] of the company’s wholly owned subsidiary. We incurred operating losses from continuing operations of $3.5 million and $4 million for the year ended December 31, 2017 and 2016 respectively.

Income from those discontinued operations were approximately $613 million and $2.6 million incurred in the same reporting period. We reported net income of $3.7 million compared to a net loss of $1.4 million for fiscal year ended 2017 and 2016 respectively.

Negative EBITDA’s and non-GAAP measurement of $3 million and $3.8 million recorded for the years ended December 31, 2017 and 2016 respectively. Reported approximately [Indiscernible] in cash and equivalents at December 31, 2017 compared to $791,000 to last year. The outstanding balance on our credit facility was approximately $680,000 and $1.1 million at December 31, 2017 and 2016 and the remaining available borrowing capacity was approximately $200,000 and $110,000 respectively.

Cash used in operating activities of continuing operations during the year was $3.6 million compared to $3.4 million last year.

We reported a working capital surplus measured as current assets less current liabilities of $9.5 million at December 31, 2017 compared to a deficit of $160,000 at December 31, 2016.

Our current ratio was 4.5 compared to 0.8 at this time last year. The indemnification escrow of approximately $800,000 associated with the subsidiary sale disclosed currently as restricted cash is anticipated to be released in full in April.

2017 was certainly a rewarding challenging year in our history. During the first quarter a significant amount of resources were expended that lead to the successful sale of the subsidiary. Post sale, synergic infrastructure build over the period – prior period of ten years in new transition and retool.

By the end of the third quarter this process was substantially complete and the essence of normalcy returns. During 2018 flexibility in our work capital levels were paramount as international expansion continues, product and platform development advances and opportunities larger than our historical average are persuade. 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

Thank you, Gene. With that, I'd like hand the call back to our operator to answer any questions you might have, operator?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question and answer session. [Operator Instructions]. Our first question comes from the line of Brian Nelson of Private Investor. Please proceed.

Brian Nelson

Hi, Jason, how are you?

Jason Tienor

I’m well, Brian and yourself?

Brian Nelson

Good. See, Your REIT was all muscle today. I’m not sure what’s going on. But the trend we saw as an often people could actually hear it, doesn’t – I don’t know if many people stayed on because that was very broken?

Jason Tienor

Sorry to hear that Brian. But anybody who is still listening, if you do have questions, please ensured that you give us a call directly on our IR line and we’ll try to answer your questions you might have. [Indiscernible]/

Brian Nelson

I heard a little bit about international partner, if the new international partners that are joining up?

Jason Tienor

Yes. We have been fostering a couple of relationships in Middle East and in South America and we spend [Indiscernible] performance of those partners over the last couple of year, because their efforts and growing their footprint in those regions we’ve seen a lot of business begin at the beginning of 2018 due to the budgets, so we’re very excited about what that’s going to do for this year and our ability to move beyond the domestic boundaries of the U.S.

Brian Nelson

Okay. Yes. That was one. The other one was the possibility with more colleagues coming board for their dorms?

Jason Tienor

Yes, absolutely. You’re absolutely right of that being a significant area for us largely because of our relationships with energy service companies who deals specifically with [Indiscernible] expand their business beyond traditional academic [ph] and administrative buildings moving into the dormitories which is an area where we excel and solution that we provide a specific to those. The education areas by far the fastest growing area for us and we’ve been able to become part of record number of new educational opportunities going forward, the majority of us as I mentioned being through partners that we currently trust [ph].

Brian Nelson

Okay. That’s pretty much. Again, was our broken up team might have some people contact you about your message there. I know you had put a lot of effort into that? Anyway, appreciate all your help [Indiscernible]?

Jason Tienor

Thank you. You bet.

Operator

Thank you. [Operator Instructions] Now our next question comes from the line of Mike Breard with Hodges Capital. Please proceed.

Mike Breard

Just seconding what [Indiscernible] hardly hear most of the conference call. But your product now – market now for several years. Are you beginning to see people call on you, wanting your product or saying or you can actually sell the product without demonstrating how it works for six months or things like there?

Jason Tienor

That’s a very good question, Mike. In fact if you understand the model we have seen the last quite a while that we would have to demonstrate either in the limited file or to run installation to customers, the performance of the solution and savings of the solution prior with additional products. We have seen that kind of subside in this market specifically because they show an enormous data set of the things that we have had over the past seven, eight, nine years already of deploying solutions in that market.

We’re still seeing a lot of new [ph] in order to do that is the secondary market that we service like education, military, MDU, MTU where there isn’t as larger data set that be able to provide [Indiscernible]. We still have to do quality savings analysis. We still have to provide balance installation. The one thing that we can say is of course for the last 12 months we’ve seen those secondary markets move forward much more quickly and move on what we call the adjacent phase and into the simply the [Indiscernible] and what that is to teach a potential market about a newer technology or newer capability to moving them through a making a competitive decision on that product or solution, so we’ve seen those markets really with an understanding of these type of solutions provide the value and the understanding of what they offer and to move ahead and really deploy sustainability and automation as a key part of what they’re doing. So, an answer to you – long-winded answer to your question is yes.

Mike Breard

Okay. Thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Joe Pierce with Plymouth Rock Financial. Please proceed.

Joe Pierce

Hello, Jason.

Jason Tienor

Hi,

Joe Pierce

Can you hear me okay?

Jason Tienor

I can hear you just fine, Joe. Thanks you.

Joe Pierce

Jason, everything seems to be great, but I had curiosity, on the 3.7 million, how much comes from sales of Ethostream?

Jason Tienor

Roughly 6.6.

Joe Pierce

6.6.

Jason Tienor

Again, recognize [Indiscernible] EthoStream over the book.

Joe Pierce

All right. So even without that, you had a good year.

Jason Tienor

Yes. As we stated previous calls and when we talked about the divestiture of Ethostream, we obviously knew that Telkonet standing on its own to utilize simply EcoSmart's revenues still have profitability, the simple fact of the matter was the decision to divestiture [Indiscernible] valuation was not only agreeable to us but it was actually in itself. We knew that it will take a year or little bit longer in order to ramp up EcoSmart business to be sustainable, profitable and we are right in the cycle with where we expected to be.

Joe Pierce

Excellent. And now as far as get the name out into investment public, do you have any plans that you have [Indiscernible] to have an investment bank that goes stand up and take it forward?

Jason Tienor

We have a number of [Indiscernible] at the board level about what finance are moving forward from market perspective, but one initiative that we have was post divestiture was really seeing the business up operating is single [Indiscernible] as Gene and I in the call and I apologize for those who enable to hear it. 2017 was a year of enormous amount of work. We had to move all of our facilities, all of our people. We had to rehire enough positions in order to fill gap, we had to rebuild our own software and operations of our business. So 2017 really was [Indiscernible] from every staff member in order to fully maintain the business to customer, to our partner and continuing developing products but simply to sustain a business and bring it back up to where it needed to be and doing that.

So 2018 now was really we’re concentrating on that growth moving forward and the marketing of Telkonet overall. As we also during the phone call we have a number of long term gains that we’ve been working to the last several years in the development perspective and maturing the opportunities that we’re really quite strange on operating them moving to the year right now. So our concentration and focus is on [Indiscernible] opportunities and bringing forward and then utilizing those into benefit and the value of the business overall.

Joe Pierce

Thank you.

Operator

Thank you. It appears we have no further questions in queue at this time. I’d like to hand the floor back over to our speakers to closing remarks.

Jason Tienor

Thank you very much, operator. And once again thank you to everybody who has joined us today for Telkonet earnings call. We apologize for a quality of the conference call. We’ll try to ensure that the recorded call is as clear as possible that we will be putting up in the website. If you are unable to see the results for the information that you’re looking for with regards to our earnings call at that time please feel to contact at telokinet.com, [e-mail] or should they call in to our IR conference live. Again, thank you for joining us this afternoon. Everybody has a great evening.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.