Acorn Energy, Inc.

Good day, everyone. Thank you for holding, and welcome to Acorn Energy's first quarter 2020 conference call. All participants are in listen-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, this event is being recorded. I'll now like to hand the conference over to Tracy Clifford, CFO of Acorn Energy and CEO of its Omni Metrics subsidiary. 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 in 2020 and future 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 for 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 the 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. I'll now hand the call over to Jan Loeb, CEO of ACORN. Jan?

Thank you, Tracy, and good morning to those joining our call. To start off, I would like to discuss the COVID-19 situation and how we are addressing it as a company and why we think we're well-positioned to get to the other side of this pandemic in an even stronger position. As you know, we provide monitoring and control services for industrial equipment, including backup generators for government and healthcare facilities. As a result, Omnimetrics operations have been classified essential by the state of Georgia, enabling us to continue to operate throughout the pandemic. Though we have moved to reduce onsite work as much as possible, while instituting a variety of protections designed to keep our team safe. For purposes of social distancing, we reduced the number of on-premises management employees at our Georgia facility to an average of five people versus approximately 20 normally on-premises. The remaining team members are able to work from home and have been doing so successfully. The state of Georgia has reopened, and we now expect to have employees return to the office starting this coming Monday, May 18. Of course, we will adhere to guidelines issued by the Centers for Disease Control regarding social distancing, hand washing, and wearing a face mask as appropriate. Though we started the year with encouraging growth, we finished the quarter only up 1% on a gap basis as COVID-19 responses began to significantly impact our new equipment sales due to travel and business activity restrictions. So far in Q2, we're seeing only about a 9% decline in sales volume, principally related to a decrease in new hardware sales, highlighting the strength and recurring nature of our core monitoring service revenue. It remains very hard to predict how the COVID-19 pandemic will ultimately impact business and consumer decision-making and investments in remote monitoring, as well as its impact on the pace of our sales efforts. On the plus side, however, remote monitoring is an ideal solution for managing industrial equipment more cost effectively, while at the same time substantially reducing or eliminating the personnel and travel required to manage disparate assets over wide geographies. Clearly, this benefit is gaining greater appreciation given social distancing and other mandated personal safety requirements related to the pandemic. Financially, We have a strong vantage point from which to navigate this environment, with $1.9 million in cash as of May 10th, including loan proceeds received by Acorn and Omnimetrics in Q2 2020 under the CARES Act to support companies through the pandemic. Given the opportunities we see, our financial position, and management's confidence in our team members, we have not laid off any employees in relation to COVID-19, and we do not expect to do so. We are also implementing programs to lower cost and maximize efficiency. One example is the decision to take certain aspects of our hardware assembly work, which were previously outsourced, and bring them back in-house. This will reduce overall cost and give us more control over quality, production timelines, and inventory. We believe we have the resources to endure the expected downturn and remain confident in the efficiency and value of our remote monitoring services and their long-term growth potential within a still largely untapped market. Throughout this process, we will continue to actively seek opportunities to streamline my cost structure and to make prudent investments in product development and sales and marketing to ensure omnimetrics leadership in the industry. Let me now briefly touch on our Q1 2020 results. And following that, I will let Tracy provide more specifics on our financial performance, and then we will open the call to your questions. I would like to highlight a few notable items from Q1 performance, beginning with our gross margins. We continue to achieve solid gross margins with our Q1 2020 gross margin rising to 69% versus 62% in Q1 2019. The increase in gross margins primarily reflects a favorable mix of higher margin monitoring revenue compared to product sales. I also wanted to point out cash basis sales, a performance tracking measure we use to supplement our reported revenue and revenue growth trends. We recognize revenue from hardware sales pursuant to GAAP over a three-year period and recognize revenues from monitoring contracts over the period of service, typically one year. While generally receiving cash up front, creating a disconnect between cash received and GAAP revenue recorded in a period. As a result, we also track cash sales to provide more visibility on the volume of business closed during the period, which will be recognized as revenue over time, and to compare actual cash sales growth to prior periods. Q1 2020 cash basis sales were $1.301 million as compared to $1.317 million in Q1 2019, a decrease of 1%. This is notable because despite the impacts of COVID-19, we were able to hold cash sales essentially flat during the quarter. Looking at the performance of our segments, in our power generation segment, the monitoring of standby generators for commercial and residential accounts, our cash basis sales were flat on a cash basis in Q1 2020 versus Q1 2019. In our small cathodic protection segment, which focuses on the monitoring control of electric current running on gas pipelines, cash basis sales declined by 5% as our sales team gained traction and we deal with the initial restrictive impacts related to COVID-19. In this segment, where clients are principally larger corporations, typical sales interactions with prospective customers have been tabled due to social distancing and other restrictive policies in place currently. Bear in mind that our new expanded and experienced sales team have made considerable progress building a solid pipeline of customer trials prior to the COVID-19 disruption. We have about two times the number of customer trials in the field than we had at this time last year, though the sales cycle in this segment can be 12 to 18 months. Of course, the pandemic may delay or reduce our progress in converting trials into formal agreements. We still hope to convert most of those trials to deployments over time. Of course, there are some customer budget challenges in the energy sector related to pricing, volatility, supply and demand disparities, and COVID-19 impacts. We see expanding opportunities for our AirGuard industrial air compressor monitors, which we believe have a market opportunity comparable to that of our generator market, and there are cross-selling opportunities with existing industrial customers. We are also in the process of launching an innovative new smart enunciator product this month that provides status updates on critical electric systems. We have a new software product that we expect to announce in the second half of this year. So despite challenges in the near term, we believe there are plenty of market opportunities. Historically, new monitoring sales have been favorably impacted by natural disasters and emergencies, such as hurricanes and storms, that disrupt power systems and highlight the importance and value of remote generator monitoring. The COVID-19 pandemic has the potential to be similar. As more people today are working from home across the country, given this change of work location, ensuring reliable electricity access for home offices is more important than ever and could stimulate demand for backup power generation and our monitoring solutions. Longer term, excluding the impact of COVID-19, we continue to have confidence in our annual growth goal of 20%. We also have a goal of reaching consolidated cash flow breakeven, which prior to COVID-19 outbreak we had expected to achieve by mid-2020. This is clearly an important goal for our company, especially considering our large NOL position, which would shield future income from income taxes. We still believe we have the financial resources available to reach these goals, although the timing is uncertain in the current environment. We hope to have more visibility next quarter as regions of the country start to reopen, and business normalizes. Now, I'll turn the call back to Tracy Clifford, our CFO, to go over more Q1 financial details.

Thank you, Jan. I want to start by clarifying that while Jan has discussed cash basis sales, I'll be discussing gap basis performance as presented in our final financial statements. Ominometrics' Q1 revenue was essentially flat, increasing approximately 1% over Q1 2019 due to strength in our largest segment, Power Generation, which grew 11% or 109,000. This increase was offset by a decline of 102,000 or 31% in our cathodic protection segment to 229,000 in Q1, reflecting a decrease in sales and challenges in the segment and the energy sector as previously discussed. Gross profit grew 12% to 922,000 in Q1-20 versus 821,000 in Q1-19, significantly outpacing revenue growth. The increase in gross profit was principally attributable to a revenue mix that included more monitoring revenue, which is a significantly higher gross margin than hardware. Also, the prior year period included a $30,000 cost of sales adjustment related to obsolete inventory. As a result, realized gross margin improved to 69% in Q120 versus 62% in Q119, or 64% after you adjust for the inventory charge in 2019. On the metrics, total operating expenses increased 11% to $973,000 in Q1-20 versus $879,000 in Q1-19, mainly due to planned increases in personnel costs, IT software and infrastructure expenses, travel expenses, and payment processing charges. We anticipate that for the full year of 2020, SG&A costs will increase approximately 15% over the 2019 full year costs as a result of a fully staffed sales team and continued IT infrastructure investments. We will closely manage any further spending increases, focusing on driving sales as economic and market circumstances make it prudent to invest to support our long-term growth. With higher gross profit offset by higher operating costs, Omnimetrics reported a first quarter 20 operating loss of $51,000 versus an operating loss of $58,000 in Q1-19. At the corporate level, G&A increased 7% to $223,000 in Q1-20 from $209,000 in Q1-19, reflecting an increase in offshore compensation and travel expenses offset by reduced insurance expense. Management does not expect corporate G&A expense to increase materially for the full year 2020 other than expenses that might be required to support growth at omnimetrics. Net loss attributable to ACORN shareholders was $283,000 or a penny per share in Q120 versus net loss of $237,000 or a penny per share in Q119. Turning to cash flow on a consolidated basis, cash generated from operating activities was $242,000 in Q120 versus cash used in operating activities of $325,000 in Q119, mainly due to the increased accounts receivable collections in first quarter 2020. Consolidated cash and cash equivalents were approximately $1.4 million as of quarter end. As of May 10th, our consolidated cash and cash equivalents are $1.9 million, which includes the loan proceeds of $461,000 received by Acorn and Omnimetrics in April under the CARES Act. That concludes my review of the financial results, and now I'd like to turn the call back to the operator so we can take questions from our investors. Operator? Operator?

At this time, we will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please tuck up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily with some lower roster. And our first question comes from Peter Rabover of ARCO Capital. Peter, please proceed.

Hey, Jan. Hey, so I wanted to kind of focus some of my questions on your monitoring revenue piece. So that's obviously growing well and steady. And so I guess I'm just curious if you could add a little bit more detail on how many subscriptions you maybe volume of subscriptions and average price and You know, what's been the driving dynamic? And then I guess in that same vein, I don't know if that helps or not, but, you know, maybe a way to think, even though hardware sales are volatile, clearly each dollar of hardware sales adds something to the monitoring revenue segment because it sounds like you're outpacing your disconnect rates. And so maybe a good way for us to think about, like, how much does each dollar of hardware add to the monitoring revenue? So if you could give us any color, I'd really appreciate it.

Okay. Good morning, Peter. Thank you for your question and your support of the company. Our monthly – because that's where we look at it – our monthly monitoring revenue ranges anywhere from approximately – $10 to $30 a month, depending if you're a residential owner. Again, we don't sell directly to the owner, but we sell to the dealer who sells to the residential owner, to if you're a commercial and industrial user of our monitoring system. So that's kind of the range, $10 to $30 a month. You're correct that for every piece of hardware we sell, we typically sell it with a one-year contract, and we have a 90-plus percent renewal rate, because once the monitor is embedded in the generator, there's really no reason for anybody to change the monitor to go to somebody else, because that costs more than... over a year's worth of monitoring the difference it's just not worth it so uh the renewal rate in the business is is quite quite good um there should always be growth in monitoring i mean there are some disconnects you typically our disconnects are not because uh somebody doesn't want the service but somebody moves and uh from house a to house b and um the new owner you know, doesn't even know that there's a monitor sitting inside the generator. So we usually have some disconnects. We have some disconnects for people who don't pay. But generally, as I said, we have over 90% renewal rate on monitoring. Does that answer most of your questions?

Yeah. I mean, I guess just more of the way to think about, you know, what's I guess maybe more statistics. What, what do you think the average life of your monitoring revenue customer is? I know you said 90%, uh, plus renewal. So when you've been around for a while, so I would assume, you know, those lives are in years instead of, you know, months.

And, uh, yeah, the average, uh, person is well over five years. So, um, As I said, the stickiness of the business is quite good. And you can tell the margins are quite good on the monitoring side, and we view that as really the core of our business. And what makes our business so valuable, as you can see during this period of time, we really haven't had a decrease that you would expect, like most companies.

Right. And then, you know, maybe from the competitive slash sales position, I assume your gross expenses, you know, direct cost of goods sold on the monitoring stuff is the commission that you pay to your dealers.

Is that the way to think about it? I mean, usually our commission to pay to dealers is a net price. So that doesn't come off as expense. Our main expense is data. So, I mean, all our monitors have cellular radios built in, and we are constantly monitoring that unit. So we have data costs. So our major expense in the monitoring, once they're put in, is data costs.

Does the dealer receive any piece of the monitoring revenue that you collect?

Yes.

So the reason I'm asking that, so I'm trying to get at, and I, you know, because you sell primarily through the dealer network and, you know, your competitors, you know, are OEMs that have their own monitoring hardware and software built in. And so I'm just curious whether that's a nice selling point, you know, that you're incentivizing your dealers, that even after they sell the product, they get to receive a piece of the revenue from you relative to your competitors. Do your competitors offer those sort of incentives to their dealers or not? And I guess I'm just trying to think of it like that's a positive revenue generator for your dealers that their other suppliers do not provide them.

Yeah, so I would say is that we definitely – have a very good incentive to our dealers, and our dealers very much like us, and dealers have been with us for many years. And so some of the selling advantages that we have is I think that some of the OEMs do provide incentives as well. So I don't know that the incentives themselves are the number ones. differentiator between us and our competitors I think the number one differentiator is that our that our dealers want to control the end customer and they don't want the OEM to be in touch with your end customer because the dealers want to sell them servicing parts and maintenance which is the most profitable part of the dealers business so if the OEM gets in inside with the customer. The OEM can start selling parts directly to the customer. So I think that's the number one reason why people like us relative to the OEM. We also have a much better product. Our product is more data rich. Some dealers find it important. Other dealers don't find it that important. But I think that That would be the second reason why dealers really like us. We do have a premium product in the marketplace.

Okay. And then maybe one last question. You know, we've had a couple of quarters since the PG&E debacle in California, and I know it's kind of a mixed bag with the COVID stuff, but have you kind of seen – any noticeable uptick or result of that that you can comment on? If not, that's not a problem, but just curious.

We have not yet seen that. Typically, I would not expect to see it. Firstly, the dealers have to get set up. There were not that many dealers out there because it wasn't such a big market. The dealers have to get set up first Then they have to sell generators, then they sell monitoring, kind of in that order, so to speak. So we have not seen it yet, but it is something that I anticipate seeing coming out of COVID-19.

Okay. And so I guess just like maybe one last question, but this is part of my ignorance on this, but have you – Is there any way to participate in the battery storage business for you guys, you know, as more and more, you know, the storage costs lower and, you know, more and more people have solar or battery packs installed in their house to monitor those sort of things?

There are ways for us to enter that market, and we are definitely on top of it.

Okay, great. Thank you so much, Aaron, and, you know, keep up the good work. Thanks.

Thank you. As a reminder, if you have a question, please press star, then one. Our next question comes from Richard Sosov, a private investor. Richard, please proceed.

Hey, Jen. Just had one quick question on the hardware. You had mentioned that you were planning on taking some of the manufacturing back in-house. I just wanted to see if you could maybe go into when you did make some of these products in-house and why you changed and why you're looking to change back?

So it's a question of using our team efficiently and in this environment. So I've made a commitment to our employees that we really do not want to fire anybody. And so we want to use our employees efficiently. So rather than have some product produced by outside vendor, if we can do it in-house during this period of time where sales are not that robust, why not produce it in-house? This way we can keep our employees working efficiently and we have, as I said, better control over the quality and the inventory. during this period of time. I do envision, you know, post-COVID, that sales, that new equipment sales pick up, that we would then allow our outside vendor to do the assembly and we would move it back out. But right now, why pay them if we can keep the cost in-house?

And that's something that's pretty easy to do. I mean, I'm assuming you had been making them prior. That wasn't that long ago?

Correct.

Okay. And I guess that's it.

And by the way, and Richard, we do have the ability, not just from a personnel standpoint, but from a facility standpoint to do it.

Right, right. And last quarter, during the March call, you had mentioned that You know, one of the risks was that you would be unable to get some parts possibly. Is that kind of risk gone away? Yeah. Obviously, you could still worry about it, but it's probably not too big of a worry now? Is things getting back to normal? Correct.

We have not had any problem right now with that. Okay. Thank you. Thank you.

As a final reminder, if you have a question, please press star, then 1. At this time, we have no further questions. I'd now like to turn the conference back over to Jan Libb for any closing remarks.

Obviously, the current environment is challenging, but we are actively managing our resources to strategically navigate the pandemic and to be well-positioned when business conditions begin to normalize. We will continue to make prudent investments in product development, sales resources, and IT to support growth. We'll also consider any shareholder value enhancing opportunities, including those that may occur as a result of the challenging economic environment, and we'll remain value disciplined and patient as we have the balance sheet to do so. I thank you for your interest in Acorn. We genuinely appreciate the support of our investors, and I'm always happy to speak with investors with questions, concerns, or suggestions about the company. Please contact our investor relations team with questions or to set up a call with me. Thank you again for your time today. Everybody, please stay safe and healthy. Operator, I believe that will conclude this call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.