Acorn Energy, Inc.

Welcome to Acorn Energy's second quarter 2020 conference call. All participants are in a similar mood. Should you need assistance, please call your 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 would now like to hand the conference over to Tracy Klippert, DFO of Acorn Energy and COO of the OmniMetrics 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 risk 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 our customer base, changes in technology, changes in the competitive environment, financial and economic risk, as well as having access to sufficient capital for growth. Board booking statements are based on management's beliefs as well as assumptions made using information currently available to management pursuant to the safe harbor for visions of the Private Security 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. I'll now hand the call over to Jan Loeb, CEO of ACORN. Jan?

Thank you, Tracy, and good morning. In our second quarter, Acorn achieved 7% year-over-year revenue growth, a gross margin of 70%, and we approached break-even on a consolidated net income basis with a net loss attributable to Acorn shareholders of $33,000 or 0 cents per share. This is the best bottom-line operating performance that we've achieved in many years. and it was achieved during the pandemic. With these results, I'm optimistic about the future of our business and proud of our Omnimetrics team. I would like to take this opportunity to publicly thank our entire Omnimetrics team for their individual and collective efforts over the past several months as we worked through the challenges of COVID-19 both personally and professionally. As a company, the health and safety of our employees and customers is paramount, as we continue to adhere to CDC guidelines in our daily operations in our 21,000-square-foot facility and at client sites. Our business, which provides remote monitoring control services for equipment and infrastructure support for government, health care, and other critical services, is classified as essential by the state of Georgia. As such, we have remained fully operational throughout the pandemic without any employee furloughs. We started the year with a bullish outlook for growth, but by the end of Q1 and into early Q2, we were seeing lower sales volumes, mainly due to reduced hardware sales activity as businesses were either closed or focused on other aspects of their operations in attempting to function successfully through the pandemic. As many of you know, cash-based sales is a performance tracking measure we use to supplement our GAAP-reported revenue and revenue growth trend. Cash basis sales are different from gap revenue because we defer and recognize revenue from hardware sales over a three-year period, and we defer and recognize revenue from monitoring contracts over the period of service, which typically is one year. We invoice upon hardware shipments and monitoring renewal period. which creates the difference between cash sales and GAAP-recorded revenue. Cash sales gives insight on the volume of business closed in a period. In Q2 2020, cash-based sales was essentially flat at $1.47 million as compared to $1.468 million in Q2 2019. We are satisfied with this result because we were able to maintain our sales volume level despite very challenging business development conditions caused by COVID-19 and related shutdowns and delays. In our biggest segment, power generation, which focuses on the monitoring of standby generators for commercial and residential accounts, our cash-based sales increased $77,000, or 6%, in Q2 2020 over Q2 2019. In our small cathartic protection, or CP, segment, focused on the monitoring and control of the electric current running in gas pipelines cash basis sales declined by $75,000 or 31% due to restrictions on travel and sales interactions. In the CP segment, our clients are generally larger corporations where in many cases sales meetings have been postponed due to social distancing and other restrictive policies currently in place. Additionally, CapEx budgets in the CP segment are also being impacted by energy price volatility and supply and demand disparities that continue to negatively impact this business. Prior to the COVID disruptions, our expanded sales team was making considerable progress building a solid pipeline of customer trials. The sales cycle in the CP segment is typically 12 to 18 months, but is likely to lengthen in many cases due to meeting and travel restrictions. However, we remain focused on converting these customer trials into deployments over time. Now more than ever, remote monitoring control has a very compelling value proposition as our technology and services enable our customers to manage mission-critical industrial equipment much more cost-effectively and safely. As we can substantially reduce the number of people and travel required to manage disparate assets over wide areas, these benefits are gaining even greater appreciation with mandated personal safety requirements, travel limitations, social distancing mandates related to the pandemic, in addition to the increasing frequency of severe weather events. We believe this equips us with even more fact-based justification to the need and benefits of our products and provides a substantive platform to support our expanding sales and marketing efforts, particularly given the very low penetration of remote monitoring and control solutions in our target market. Now, let's turn back to a few financial highlights. Afterwards, Tracy will provide more specifics to our financial performance and position, and then we'll open the call to your questions. I mentioned that we achieved 7% revenue growth over Q2 2019, a gross margin of 70%. Most significantly, our gross profit grew 13% in Q2 2020, outpacing revenue growth due to the strength in our high-margin recurring monitoring services revenue, which grew 19% in the quarter. This performance underscores the attractiveness and resilience of our monitoring service business and the strategy we've been executing for the past few years to refocus ACORN's resources on building this compelling business. Turning to business development initiatives in the second quarter, we launched our new Smart Enunciator product, which provides customers with status updates on critical electric systems. And last month, we forged our first distribution relationship outside of North America, targeting continental Europe with the Italian company MEL Systems, which will market our AirGuard monitoring solution in Italy as well as other countries in Europe. It will take some time to build out this distribution relationship and to customize our solution for the European market, but we believe this is an exciting new growth opportunity for our company. We also hope to launch a new online electric software product upgrade later this year, which will offer more features and value to our customers, solidifying our leadership position in the remote monitoring and control market, and we will have more to say after the launch. In the meantime, despite the COVID-related business development challenges in the near term, we see an abundance of market opportunities. Historically, new standby generator monitoring sales have been positively impacted by natural disasters and emergencies such as hurricanes and storms, to disrupt power systems and highlight the importance and value of standby power and remote monitoring to ensure generators can be relied upon to be called into service without delay and to operate for as long as necessary without interruption. Similarly, we believe the pandemic can also stimulate generator and remote monitoring demand as reliable electrical access for home offices has become more important. Some of you may have been impacted by the tropical storm that went up the East Coast last week. Although not a hurricane, this storm left millions of people without power, some for upwards of a week. We expect the aging of the U.S. power grid infrastructure will continue to be an issue and a driver of backup power generation and monitoring for many years. This is one of the many underlying trends that support our confidence in achieving our long-term annual average growth rate of 20%. For several years, we have stressed our goal to advance ACORN to achieve cash flow break-even and then profitability on a consolidated basis. I am very proud to report that we came very close to achieving that goal in the second quarter despite COVID-related challenges, and we are optimistic that we will be able to continue to build on the financial performance of the business to achieve positive cash flow and profitability over the next few quarters. Critical value as we approach profitability is the fact that ACOIN has a very large net operating loss carry forward, which would shield future income from income taxes benefiting both net income and cash flow. We believe we're on solid footing for next year. We're in expectation that the economy will be more fully reopened and business activity will at least begin to normalize. It's too early to establish specific goals for 2021, but we certainly hope to be in the black from a consolidated earnings and cash flow standpoint in 2021. We believe we have the resources to endure the current COVID-induced downturn, and we remain confident in the value of our remote monitoring services and their long-term growth potential within a still largely untapped market. Given the opportunities we see, our healthy cash position, and my confidence in the Onometrics team, I'm very enthusiastic about our business and what we can do going forward. Now I'll turn the call back to Tracy Clifford, our CFO, to go over more Q2 financials in more detail. Tracy.

Thank you, Jan. Today, we released our second quarter and year-to-date results in a press release issued this morning, and we also filed our 10-Q with the Securities Exchange Commission yesterday evening. I will review some of the highlights from our GAAP basis results as reported. On the metrics, Q2 revenue increased, as Jan mentioned, approximately 7% over Q2 2019 to 1.5 million on strength in our largest segment, power generation, which grew 19% or 205,000. This increase was partially offset by a decline of 114,000 or 36% in our smaller cathodic protection segment, reflecting the overall challenges that Jan discussed in the energy sector and delayed sales interactions related to COVID-19. Gross profit grew 13% to $1,022,000 in Q2-20 versus $901,000 in Q2-19. The increase in gross profit was principally attributable to a revenue mix that included more monitoring revenue, which has a significantly higher gross margin than hardware. Consequently, gross margin improved to approximately 70% in Q2-20 versus 65% in Q2-19. operating expenses decreased 5% at Omnimetrics to $822,000 in Q220 versus Q219, primarily due to decreased travel expenses related to COVID-19 restrictions and also a decrease in legal fees. However, we anticipate that the full year 2020 Omnimetrics SG&A costs will increase approximately 15% over 2019 as a result of our fully staffed sales team and continued IT infrastructure investments and other expenditures for growth. With higher gross profit coupled with lower quarterly operating costs, Omnimetrics reported a Q2 20 operating profit of $200,000 versus an operating loss of $40,000 in Q2 19. At the corporate level, G&A decreased 9% to $222,000 in Q2 20 from $243,000 in Q2 19 due to decreased traveling expenses and a reduction in insurance costs, but was flat to Q1 20, which was $223,000. Management does not expect corporate G&A expense to change materially for the full year 2020 other than expenses that may be required to support growth at Omnimetrics. Net loss attributable to ACORN shareholders improves to $33,000 or 0 cents per share in Q220 as compared to a net loss of $199,000 or a penny per share in Q219. For the first six months of 2020, ACORN's net loss attributable to shareholders improved to $316,000 or negative penny per share versus $436,000 at penny per share also in the first six months of 2019. In terms of cash flow, on a consolidated basis, we generated $78,000 from operating activities in the six months into June 30, 2020, as compared to use of cash of $423,000 in the first half of 2019. The improvement was due to increased receivable collections as well as to a reduced net loss. Consolidated cash and cash equivalents were $1,760,000 at June 30th and $1,775,000 on August 9th, including loan proceeds of $462,000 received by Acorn and Omnimetrics in April from the Paycheck Protection Program. Assuming substantially all of the loans are forgiven under the terms of the PPP, we expect to record a related gain later this year. 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?

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 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 will come from Richard Sosa, who's a private investor. Please go ahead. Good morning, Janet. Tracy, how are you?

Good morning, Richard. Great. Thanks, Richard. I'm great. I just had a few questions. I won a great quarter. I've been an investor since 2016, and it was great to see, you know, it was definitely the best quarter since I've been an investor, so congratulations. First, you mentioned, I believe, on the last call about manufacturing some of your devices in-house. Have you continued with that, or is there any progress?

Yes. As of right now, we've continued with that, but as sales have strengthened, we plan to go back to the normal a normal structure over time.

Okay. And historically, the third and fourth quarter on a cash basis have been materially stronger. Do you believe that that could be the case this year? I know this year is very different, and a lot of the drive in the past has been from some of your energy customers, well, your larger customers. But do you see that as a possibility this year?

It's certainly a possibility. The unknown really is in the CP segment. Typically in the fourth quarter, the CP segment has been the stronger as some of our customers have budgets to spend, and they spend it with us on corrosion protection equipment. It's hard to say exactly. With COVID-19, no meetings, and oil price and gas price volatility, what will happen in the fourth quarter with their budgets? So I would take a conservative approach, and that's what we're doing internally as to the CP segment and the fourth quarter.

Okay, and just in terms of the sale of BSIT, have you received all that cash back, and is it in the bank, or is there anything left that you get back?

No, we've received all the cash, and it's in the bank.

Okay, and then just on the PPP money, do we expect that in the third quarter? Would that just translate all into sales, or how does that work, if you can comment?

Certainly. So the guidance that's out right now, and certainly the SBA is changing certain of the regulations on what appears to be a weekly basis. But we'll continue to report the proceeds of the loan as a liability until it's partly or wholly forgiven and we've been completely legally released. I do intend to do an assessment before the filing of the third quarter queue and actually before the end of the third quarter at 9.30 and see where we are on the 20 as far as the utilization of the proceeds and if it's If it appears at that time that we've utilized all the proceeds prior to 930, then I'm going to go ahead and file for the forgiveness prior to the end of the third quarter, even though we would have a somewhat extended period on that to do so if we've not yet used all the proceeds on the 24-week period. extended term. At that time, as soon as we are legally released from either all or part of the loan, we would take it in as a gain on extinguishment of the loan. So it will be shown as a gain from loan forgiveness.

Our next question will come from Peter Robober with Archipelago Capital. Please go ahead.

Hey, guys. Congratulations on getting to break even cash flow and starting to generate cash flow. I wanted to just kind of follow up on the dynamic of the long-term growth. And as you're introducing new products, how should we think about the growth in terms of the volume versus price versus product mix? growth, is there kind of like a split that you're thinking about, or any call you can give us would be great.

I'd say that, I don't want to say volume versus price, but I'll say that the Smart Announce is a higher-cost product than we've had in the past. So if the product is successful, which we think it will be and hope that it will be, I would think you would see a pickup in hardware sales over time in the PG segment. Smart Enunciators is in the PG segment, so I would see that we should have a pickup there. It has similar margins to our existing hardware product in the PG sector, but just at a significantly higher price point. So that's one thing that I think you can expect. Is there a higher monitoring revenue component to that? No, there's a similar monitoring component. So the enunciator is a product that incorporates our technology. So it will have a similar monitoring revenue but a higher hardware number. When we launch our new software product, that will flip it a little bit to the other side. That will be more of a SaaS type of revenue versus a hardware sale. So that will flip the monitoring and the SaaS kind of revenue to that side. So we have different things going on, so it's hard for me to tell you that, you know, what one is going to be versus another as we have stuff in both categories. But those are some of the trends that you should expect to see over the next few years. Okay, great.

And then just a follow-up. I know you had mentioned, obviously, some difficulty with getting new sales and converting leads into sales because of COVID lockdowns and all that. How has your, I guess, renewal rates with customers have been on the monitoring side? Has there been an impact there from the economic, like, other than the usual, you know, disconnect that you usually have? Has there been an economic uptick or anything like that, or no?

No, we've not seen any change in renewal rates or in collection of receivables. As you can see from our cash balances, things have been fairly strong in that area. Okay, great. That's it for me.

I'll hop off. Thank you.

Thank you. Our next question will come from Jim McElroy with Bradley Woods. Please go ahead.

Thanks a lot. Good morning. I apologize if you went over this in your commentary, but do you have an estimate for how much COVID impacted your hardware sales in the quarter? Jim, hi.

Good morning. You can tell, historically, CP is a growing segment within our company, because we started from a fairly low base, so in the early years had very strong growth on a percentage basis. Last year, we had some turnover in the sales people, but you can tell. You can tell a little bit throughout just looking at the expected trends in CP versus where we are. You can make an estimate as to what it is, but we don't really look at that.

Did you have or do you have currently issues on parts? to manufacture the units? Are there any supply chain issues that you're working through?

Currently, no. At the beginning in March, you know, we had some delays, but today we have no delays whatsoever.

Got it. And I think you said, I think I heard you say that you think COVID or the grid resiliency is going to have a beneficial impact for you. Is that something that's backed up by evidence you've seen so far, or is that more of a, you know, just based on kind of your view of the market?

No, it's backed by evidence. If you looked at Generac, which is the largest manufacturer of generators in their second quarter results, they had very strong results, in particular in the residential area. So they clearly are seeing an uptick in that. short-term study, the amount of electrical usage at homes since the stay-at-home orders were put into place, and the electrical usage is up significantly. I mean, just think about person's at home all day with his computer or going to the refrigerator, having the air conditioning on, just the electrical usage at a home is up substantially. I think I saw one particular study in New York City, apartments was up 7%. So electrical usage is certainly up because of COVID.

Yeah. No, there's...

Certainly in my house it is. Okay. And it's not only just the usage, it's also the need and the importance. So if you're now working at home, you can't afford to be down for two days. So I think backup power becomes more important, not just because of the usage, but because of the requirement to be up.

Yeah. Yeah.

Fair enough. Okay.

And I think complementary to that is there has been an increase in home improvement costs and investment. You know, more people that are working from home are spending money on their home, and there has been some guidance posted out there on the folks that are investing a lot more in their homes and their home offices. So I think we're going to see more. and alternative backup solutions as a result of that as well.

Yeah, that's an interesting point, particularly if you're not spending it on restaurants and commuting and parking and things like that. Yeah, I appreciate that. All right, thanks a lot. Good luck with everything.

Again, if you'd like to ask a question, it is star then 1, star then 1 to ask your question. Our next question will come from Jack Mayer, who is a private investor. Please go ahead.

Hi, Jen. Congratulations, and thank God it seems to have been a wonderful quarter. I wondered if you could expand a little bit more on this European initiative. Any particular reason that you started in Italy, or it's just that this distributor is centered in Italy? Any particular reason that you started with the air compression? Why not PG? Why not something else? You can come with it all on the competitive landscape there as opposed to the U.S. Anything that you can do to expand on it?

We love Italy. It's a great place to visit. The NEL approached us. They had heard about our air compressor solution, and they had done their research, and our product was the best in the market. So they approached us about purchasing our product and distributing it within Europe. So we're European strategy, they came to us and their business is mainly air compressors, so that's why they chose our air compressor monitor versus our PG monitor. But they are big in Europe and we'll see what happens. It's a little difficult in Europe for us in terms of monitoring, setting up monitoring, meaning our customer service, which is It's just a superior customer service to most of our competitors. It's hard to do it in Europe because of the time differential. So there are a couple of things we're doing a little different, and that's why I said in my remarks that it would take a little bit of time to develop this completely, but it's a beachhead and I think an interesting one.

In terms of what you know about competition in Europe, is there anything that's structurally different than here?

Structurally, no.

Okay. Thanks very much.

You're welcome. I'm showing no further questions at this time, so this will conclude our Q&A session. At this time, I would like to turn the conference back to Jan Loeb for any closing remarks.

Thank you. The current environment remains challenging from a growth standpoint, but we are well positioned from a balance sheet and capital standpoint to navigate the pandemic, and we are well positioned for 2021, assuming business conditions begin to normalize. We will continue to look for growth opportunities in the markets we serve and complementary opportunities and to make investments in product development to meet market demand where we see it. We would also consider any external acquisition opportunities that might arise as a result of the challenging economic environment, if it would be accretive to profitability and to shareholder value. I just would also like to mention that we are planning to have our annual shareholders meeting on September 14th, 2020. And it will be a, you can come in person or a virtual via Zoom. And the link will be made available on our website ahead of time. And you can certainly contact our investor relations team for information. We'll put out a press release about that in the coming weeks. Once again, I thank you for your interest in ACORN. We genuinely appreciate the support of our shareholders, and I'm happy to speak with investors about the company. Please contact our investor relations with any questions or to set up a call with me. Thank you again for your time today. Operator, I believe this concludes our call.

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