Acorn Energy, Inc.

and only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to hand the conference over to Tracy Clifford, CFO of Acorn Please go ahead.

Thank you and welcome everyone to today's conference call. As a reminder, many of the statements made in today's prepared remarks or in response to your questions may be forward-looking. These statements are subject to various risks and uncertainties. For example, the operating and financial performance of the company years is subject to factors such as risks associated with disruptions to business operations and customer demand resulting from the impact of the COVID-19 pandemic. Executing the company's operating strategy, maintaining high renewal rates, growing its customer base, changes in technology, changes in the competitive environment, financial and economic risks, as well as having access to sufficient capital for growth. Forward-looking statements are based on management's beliefs as well as assumptions made using information currently available to management pursuant to the safe harbor of revisions of the Private Securities Litigation Reform Act of 1995. There are no assurances that ACORN or Omnimetrics will be able to achieve their growth goals in 2020 nor in future years. The company also undertakes no obligation to disclose any revisions to these forward-looking statements to reflect events or circumstances after the date made. A full discussion of the risks and uncertainties that may affect the company is included in risk factors on ACORN's Form 10-K as filed with the Securities and Exchange Commission yesterday. Now with that, I'll hand the call over to Jan Lowe, CEO of ACORN and acting CEO of Omnimetrics. Jan?

Thank you, Tracy, and good morning to those joining our call today. Before I review our operating performance in 2019, I do want to point out that Acorn has built a strong balance sheet, a strong cash position of $1.6 million over the past few years, and we believe we are well positioned to weather the brunt of the business impact over the next several months. I would also like to remind investors of the unique and recurring nature of our monitoring business and its cash flows, with historic renewal rates of 90% plus, gross profit margin in the near term, it is important to note that the value of our remote monitoring and control services business becomes even more evident in an environment where personnel and field activities are being disrupted by travel restrictions, illness, or other factors. For this reason, we continue to believe that the market adoption of IoT technology broadly will return to its long-term growth trend as the pandemic subsides. We are also taking active steps to adjust our cost structure and to spend certain activity to minimize current expenses and to shore up our ability to endure this challenging environment and to leverage any market disruption that may occur. Like all of you, we are working to understand the depth and breadth of the impact of the COVID-19 pandemic, and therefore it's really not possible to comment with any greater specificity at this time. Let us now turn to our review of ACORN and Omnimetrics 2019 performance, following which we'll open the call to your questions. In the fourth quarter and full year of 2019, Omnimetrics extended its record of revenue growth, improved gross margin, and achieved its third consecutive quarter of positive operating profits. Omnimetrics Q4 2019 before 2018. For the full year 2019, revenue grew 8% to $5.5 for the hard work of our team to achieve these gains. As many of you know, we use cash basis sales as a performance tracking measure to supplement revenue and give us another view of our growth in a given period. Pursuant to GAAP, we recognize revenue from our hardware sales over three years and typically over one year for our monitoring contracts, even though the cash is generally received upfront. Cash basis sales therefore provides visibility on the level of business that was completed in a period and therefore a window on relative growth performance. Cash sales for 2019 were $6 million compared to $5.6 million in 2019 and 2018, an increase of 7%. Our pie generation or PG segment sales, which relate to monitoring standby generators, were 13% on cash basis in 2019 versus 2018. In our smaller cathodic protection, Sales on a cash basis declined by 21% due to the impact of turnover on our sales staff and not being fully staffed throughout the year. Sales staff turnover was a combination of staff departures and changes initiated by management to strengthen our team. In Q3, we completed several new sales hires, and earlier this year we hired a new director of sales, Daniel Hess. Dan's extensive and very relevant out-of-sales experience was reviewed in yesterday's press release. Notably, Dan has over 25 years of experience successfully executing growth initiatives within the telecom, wireless, analytics, and IoT spaces, most recently with Sierra Wireless and its NumerNet subsidiary. We believe Dan has the right experience and ability to drive sales of new products and to address new market opportunities for Omnimetrics. We are now fully staffed building a solid pipeline of customer trials that we hope to convert to deployments later in 2020 and thereafter. Reflecting the team's progress, we currently have four times the number of customer trials in progress than we had at this time last year. Moving to power generation, historically our business has been favorably impacted by disasters and emergencies, such as hurricanes and storms, that disrupt power systems and raise awareness of the importance and value of remote generator monitoring. For example, we provide remote general monitoring for thousands of hospitals and other critical health care facilities across North America, and we stand ready to provide support should additional remote monitoring services be required to support the health care response to the current pandemic. Turning back to our improvements in gross margins throughout 2019, I wanted to underscore that this achievement is not only the result of a favorable product mix of higher margin monitoring revenues, but also due to deliberate initiatives that we have pursued in recent years to develop and bring to market innovative new hardware and software offerings that deliver enhanced functionality, as well as more efficient, lower-cost designs that support our margin growth profile. Next-generation products that have supported gross margin improvements include our Hero 2 rectifier monitors and our AirGuard industrial air compressor monitors. We also are about to launch an innovative new enunciated product that provides status updates on critical electrical systems. We have a new software product that we expect to announce in the second half of this year. Now I'll turn the call back to Tracy Clifford, our CFO, to go over the financial highlights. Tracy?

Thanks, Jan. As mentioned by Jan at the beginning of the call, Omnimedics' Q4'19 revenue increased 7% to $1.4 million from $1.3 million in Q4'18. driven by strength in our largest segment, power generation. Full-year 2019 revenue grew 8% to $5.5 million in 2019 from $5.1 million in 2018, with power generation growing 17% to $4.3 million. This increase was partially offset by a decline of $223,000, or 16%, in our cathodic protection segment to $1.2 million in 2019. reflecting a decrease in hardware sales as a result of the sales staff turnover that Jan previously discussed. As Jan also noted, our sales team has been fully staffed since the beginning of 2020. Gross profit grew 15% to $3.6 million in 2019 versus $3.1 million in 2018, significantly outpacing revenue growth. The increase in gross profit was attributable to revenue growth, increased hardware gross margin, and a better mix of monitoring revenue, which yields higher gross margin than hardware. As a result, gross margin improved to 65.4% in 2019 versus 61.4% in 2018. Q419 gross margin improved to 67.6% versus 61.8% in Q418, reflecting similar dynamics. On the metrics, total operating expenses increased 4% to $3.4 million in 2019 versus $3.3 million in 2018. We will closely manage further spending increases focused on driving sales as economic and market circumstances make it prudent to invest in the expansion of our sales team and on our IT systems to support long-term growth. With revenue and gross operating profit of $177,000 versus an operating loss of $146,000 in 2018. Omnimetrics also generated an operating profit of $83,000 in Q4 2019 versus an operating loss of $34,000 in Q4 2018. At the corporate level, Acorn reduced its G&A by 30% to $876,000 in 2019, from 1.3 million in 2018, reflecting a range of cost reductions related to personnel costs, board fees, and other public company costs. Lower corporate overhead combined with growth that on the metrics allowed Acorn's consolidated operating loss to be cut approximately in half to 699,000 in 2019 from 1.4 million in 2018. Net loss attributable to Acorn shareholders was 618,000 or two cents per share in 2019 as compared to $2 million or $0.07 per share in 2018. The prior year period included a loss of $0.02 per share related to the sale of DSIT. In Q419, net loss attributable Acorn shareholders were $61,000 or flat zero per share versus a net loss of $245,000 or $0.01 per share in Q418, which included a gain of $222,000 or a penny per share related to the DSIT transaction. Looking at cash flow on a consolidated basis, ACORN reduced its net cash used in operating activities to $1.2 million in 2018 from $2.4 million in, I'm sorry, $1.2 million in 2019 from $2.4 million in 2018. Of this $1.2 million, approximately $404,000 related to Omnimetrics, including $323,000 used to retire a loan from a former director, with the remainder related to ACORN. On a consolidated basis, ACORN had cash and cash equivalents of approximately $1.2 million. As of March 20th, on a consolidated basis, Acorn had cash and cashable loans of approximately $1.6 million, an outstanding balance on our operating credit line of $369,000, and $115,000 available to borrow. That concludes my overview of results, and now let me pass the call back to Dan.

Thanks again, Tracy. Though the current environment is very challenging, we are actively managing our resources and costs to navigate the COVID-19 pandemic. As we see business conditions begin to normalize, and IT support profitable growth. We will also consider any shareholder value enhancing opportunities, including tuck-in acquisitions, on an opportunistic basis. Perhaps there may also be opportunities that occur as a result of this challenging environment. With a solid balance sheet, we will continue to be disciplined and patient regarding any external opportunities. For OmniMetrics, we continue to have a normalized top-line growth goal of 20% per year, quote, break-even run rate by this summer. It's too early to assess the impact of COVID-19 at this point, but achieving break-even is important from a shareholder value perspective, especially considering our large NOLs, which would shield future income from income stagnance. We feel we have this financial resource available to reach these financial goals, although the timing is less certain in the current environment. We thank you for your support in this journey, and with that, I would turn the quote back to the operator, so we can take questions from our investors.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Richard Sosa, private investor. Please go ahead.

Hey, Jen. How are you doing? It's Richard. Good morning, Richard. Good morning. I just had a few questions. You know, I'm always perplexed. You know, I saw the monitoring's up 22%. Can you just walk me through how that is up so much with hardware being down year over year? I mean, it's a good thing, obviously, but, you know, I don't know what it is.

So monitoring revenue reflects the growth that we've had in previous years versus new sales is what we did in a particular year. So since over the last few years we've had good growth in monitoring in product sales, monitoring sales are up stronger than new sales. In addition, monitoring is cumulative. So every year, presumably, even if new sales are not growing, the fact that we are making new sales adds to our monitoring revenue. So monitoring reflects a cumulative number of units that we have in the field, and therefore its number can grow

And I can just add to that, Richard, for some additional clarity. We actually start amortizing the revenue in when the unit is installed. So a dealer could purchase a large number of units to put in inventory and install them on varying dates moving forward. So any inventory that could have been in hardware sales, you know, at the end of 18 that were connected in 19, you start seeing that. So I thought that might be helpful to understand.

Okay, and then just two kind of, two questions off of this. You know, I saw in your press release in the 10K, you were kind of talking about any potential disruption in the supply chain. On the hardware side, how much inventory do you have, and where is it sourced from?

Is it all from America, or is it from all over the place? So, at year end, our inventory was approximately $290,000. All our products are assembled in the United States. Some of our circuit boards come from China, but everything is assembled here in the U.S. I would say in China, at the height of COVID-19 in China, it was hard to get circuit boards. We must have had a three-week delay in getting circuit boards. Today, their delay is three days. As of right now, we've not had any disruption in product flow.

And they're still assembling it okay in America? Yes. Okay. And then on the monitoring side, obviously, as you know, the reason why this company so much is in the recurring revenue row, which has high value, It's really high value in the sense that people just can't cancel. What does it have to take for people to stop paying? Ultimately, if they stop paying, they don't get monitored. One, have you seen any of that happening more so over the last few weeks or what would have to happen?

We have not seen it happen yet. It's certainly something that we constrain ourselves with. But if you think about it logically, the monitoring is a profit center for our customers. So we sell our monitors to the dealers. The dealers mark up the monitoring, and they sell it to their end customer. So we're a profit center for the dealer, and I think that's one thing to recognize. whether it's a residential customer or a commercial and industrial customer, if you're spending $15,000 to buy a generator for standby power or more, you need it or you're a well-heeled individual. So the typical customer of our customer, of our dealers, are usually people who can well afford to buy a generator and therefore will afford to spend anywhere between 10 and 25 bucks if you're a commercial industrial customer on the monitoring. And thirdly, most of our dealers sell yearly monitoring packages. So they've already sold a yearly monitoring package to their customer and if we don't get paid, our policy is we turn off the monitor it would put the dealer in a sticky situation where his customers already paid for the monitoring and then suddenly his monitor goes off. So for those three reasons, you know, logically we should continue to get paid on our monthly monitoring business, which as you probably said is very profitable and very key to our business. But I don't know that necessary logic is the right way to look at it in this environment. But so far, we've not seen anybody not pay us.

Correct. And you might not be a planter, but since most of your business comes from these generator dealers, how are they doing it? Do they have good balance sheets? Are they working right now? Are they installing? Are they even able to put in generators right now? Or is that culted as well?

You're right, I don't really know the answer. All I can tell you is we still do get new orders, so at nowhere near the pace that we got in January and February, but we are still getting orders, so I have to assume that they're still working, but clearly I don't know their own financial position.

Okay, that's settled up.

Thank you. Our next question will come from Sam Schecter, who is a private investor.

Please go ahead. Hey, Jay. Thanks for taking my call. I got two questions. Number one, are you in an active search for a new CEO, somebody more permanent?

Right now, we are not actively searching.

Okay. My second question was, What compensation package do you offer your sales people? We offer a combination of a base salary. I'll tell you, I'm trying to figure out how you can bring a guy in with 25 years of sales experience with revenues where they are. So I'm assuming you're trying to ramp this up. Correct.

And, again, he's a director of sales. So not only do we expect, so to speak, that he himself is helpful in bringing in sales, but more importantly, there's an exponential impact because he being as senior as he is and having led sales teams in the past will help increase the sales of all six of our other salespeople. So there will be an exponential impact. Is this his only position currently? Yes. Okay. Thank you very much.

Thank you. Again, if you have a question, please press star then 1. I'm showing no further questions at this time. So now I would like to turn the conference back over to Jan Lowe for any closing remarks.

Once again, I would like to thank everyone for their interest in ACORN. We appreciate the support of our investors. I'm always happy to speak with existing or prospective investors who may have questions or concerns about the company and our strategic direction. Please reach out to our investor relations team with questions or to set up a call with me. Thank you again for your time today. Everybody should stay safe. Operator, I believe that should conclude this call.