Acorn Energy, Inc.

Good morning and welcome to the ACORN Energy 2023 first quarter conference call. At this time, all participants are in a listen-only mode. After some prepared remarks, we will conduct a question and answer session. As a reminder, today's conference is being recorded. I will now turn the call over to Tracy Kuecher, CFO of ACORN Energy and COO of its Omnimetrics Operating Secretary. Ms. Kuecher, you may begin.

Thank you. Welcome, everyone, to today's call. As a reminder, many of the remarks that follow and the answers to questions may be forwarding. These statements are subject to various risks and uncertainties. For example, the operating and financial performance of the company in 2023 and future years is subject to risks associated with disruptions to business operations and customer plans resulting from the company executing its operating strategy, maintaining high customer renewal rates, and growing its full-term base, as well as some changes in technology, changes in the competitive landscape, and changes in the financial and economic environment. Forward-looking statements are based on management's beliefs, and the attention is made to keep information currently available pursuant to the state's proper provisions of the private securities litigation report back in 1995. There are no assurances that ACORN or Omnimetrics will be able to achieve management's growth goals in 2023, or future periods to which the company undertakes no longer reason to disclose revisions to such forward-looking statements to reflect the financial circumstances occurring after today. Discussion of the risks and uncertainties that may affect the company is included in our 10-K, and the risk factors are filed with the Securities and Exchange Commission. A reconciliation of non-GAAP financial metrics to correspond to GAAP measures is provided in today's press release, available in the Investor Relations section of the company's website at acornenergy.com. I'll now turn the call over to Jayne Lowe, CEO of Acorn and our omnibus operating subsidiary. Jayne?

Thank you, Tracy. Good morning and thank you all for joining our call. It's been less than two months since our Q4 call, so I'll keep my comments brief and leave plenty of time for your questions. We are pleased to report that our monitoring revenue returned to growth in Q1 2022, following negative year-over-year comparisons in 2022. principally due to the impact of the sunsetting of 3G wireless technology. With this transition behind us, Q1 2022 marketing revenue grew moderately over Q1 2022, providing the first quarter of year-over-year growth since Q4 2021. As we've mentioned in the past, the wireless provider's sunsetting of legacy 3G wireless technology required our customers to upgrade to next-generation LTE wireless systems. This wireless network upgrade drove an increase in retention sales of new remote monitoring equipment in 2022. However, it also had a negative impact on our base of monitoring endpoints. As a small percentage of customers either chose to not upgrade and thus let their annual marketing service last, they switched to a competitive product such as an OEM solution. Due to this cycle, our Q1 2023 hardware revenue decreased 0.7% compared to Q1 2022. Reflecting the offsetting impact on hardware and monitoring, Acorn's total revenue was flat at 1.75 million in Q1 2023. Note that monitoring revenue gross margins are approximately double those on hardware. Also, we consider monitoring revenue to be annual recurring revenues or ARRs because setting aside unusual gains, such as sun setting, gives over 90% of the monitoring service plans to renew upon explanation. In terms of monitoring ARR growth, with its high profitability, it enabled us to trim our Q1 2020 net loss of $85,000 from a net loss of $123,000 a year ago. Given these things and our high gross margin contribution, we leave eight corners on our trajectory to achieve profitability based on our growth goals. Taking on a cash basis, historically our first quarter tended to be the slowest quarter with business building into Q2, followed by Q3 as the strongest quarter and Q4 being our second strongest quarter. 2022 was an anomaly to this pattern as hardware sales were highly normal in Q1 2022 So rather than our weakest quarter, Q1 2022 was a very strong quarter in terms of cash basis revenue and why cash basis sales were down 99% in Q1 2023. We do expect this year to return to a more normal pattern with Q1 likely our weakest quarter and sales building in Q2 and Q3. We continue to be optimistic that our business can achieve 20% annual cash basis revenue growth in 2023. If we are able to meet our both goals, we expect to achieve positive cash flow enabling us to cover corporate overhead and achieve profit until we get on a consolidated basis. Also, it is important to note as we try to accomplish goals, the ACORN has over 70 million of net operating worth category that would largely shield fee-for-profitability from tax liabilities and therefore benefit our cash flow as we become profitable. Our confidence in achieving our annual growth goal is based on the business trends we have seen complete in 2023 in terms of sales discussions, forecasts, and new business leads, including customer pre-testing activity and a few sizeable potential opportunities. We also believe our business will benefit from the increasing focus on environmental issues, including severe weather patterns, as well as business benefits of our industry-leading solutions. We have a solid and growing base of high-market commercial and industrial customers, which we expect to be the foundation of our growth in 2023. Commercial and industrial companies face many challenges, including rising labor and fuel costs, increasing environmental pressures, budget constraints, and ROI goals. Common metric solutions can have a positive impact across all these areas for a broad array of businesses. Increasingly, customers are attracting to the reduced carbon footprint of remote monitoring as they see opportunities to minimize their environmental impact. We believe this trend combined with our controlling ROI will support our business development efforts moving forward. One solution that we're really optimistic for in 2023 is our remote AC mitigation disconnect solution for gas pipelines that we call RAS. Pipeline operators install devices to protect their access from AC voltage created by overhead power lines. These voltages increase the risk of corrosion. The existing devices also have a need to be serialically disconnected and reconnected, which is done by hand. This requires additional manpower and many hours to complete. Our RAD product connects via cellular or satellite network and is used to remotely disconnect and reconnect these devices. This eliminates the need for this to be done manually, as well as ensuring the existing devices are functioning properly. The RAD reduces company expenditures while dramatically increasing employee safety and being environmentally friendly by saving truck trips. Our RAD solution went into customer trials in late 2022 and we hope to convert some of these trials into orders later this year. We also hope to see initial customer activity in 2023 for our demand response program and partnership with Cetel Energy. The program compensates generator owners for making the generator available to curtail energy loads when coffee time and purchase a hidden grid operator. and it allows standby generators to be automatically turned on to provide electrical relief in periods of extreme demand. This added power supply is designed to help grid operators avoid rolling brownouts or blackouts. Standby generated man response programs are helpful for CNI and residential customers that have deployed new enhanced energy efficient generators. We expect to see these programs begin in 2023 with initial deployments and in-flow in the coming years. Importantly, we expect to add value to our monitoring and control solutions for demand response to deliver roughly twice the profitability of our traditional monitoring enterprise. In addition to near-term opportunities in 2023, upward trends should continue to benefit our business longer-term. An aging power grid, lack of investment in new power supplies, growth of electric vehicles, and other corporate electrification strategies will take further stress on the grid, as well as increasing prevalence of severe weather events, all of which increase the benefits of sample power generation with remote monitoring control. Take on closed Q1 2023 with $1.3 million of cash no debt and a business that is approaching positive operating cash flow. We believe we are very well positioned to fund our current growth and pursue potential external opportunities. We continue to evaluate potential bolt-on opportunities. Fortunately or unfortunately, some of the private valuations have come down, and we do have the flexibility to be opportunistic in deals in our space that would be a treater to our business and benefit our shareholders. Finally, in the past, I have said that we are looking to hire a West Coast sales manager, which we recently did, and he starts next week. We feel he has the background to help jumpstart our efforts on the rest of the large and growing market for back-to-power generation. Also in March, we added a new director to our board, long-time shareholder, Peter Rabo, of Arches Capital. He is a committed shareholder and a confident internal benefit from his experience in leadership. For that, I'll pass the phone back to Stacey for her review of the financials and insights on our operations. Stacey?

Thanks, Sharon. I wanted to note that we filed our King County this morning. I'll run through some key elements related to our reported results and then we can turn it back to the operator for any industry questions. The remarks that follow, I'll compare T1 of this year to T1 of last year for income statement items. The balance sheet items will generally compare March 31, 2023 to December 31, 2022. Also, the numbers I discussed are on a gap basis, except for cash basis revenue, which Jan mentioned. Q123 reported revenue was flat versus Q122 at approximately 1.75 million in each period. Our primary wireless provider, AT&T, stopped the spring 3D wireless units in February of 2022, impacting the prior year period as JAN previously noted. Notably, Q122 hardware revenue and cashback revenue were higher than otherwise would have been, creating less favorable top line comparisons. Hardware revenue was down 4.9% and cash basis revenue was down 9.9%. However, on a more favorable note, the impact of sunsetting now concluded. Our higher margin and recurring monitoring revenue returned to year-over-year growth. Given a higher percentage of high margin monitoring revenue in our mix, our Q1 to A3 gross profit margin increased to 75.2% of sales compared to 71.8% in 2.122, enabling us to generate $48,000 in additional gross profit. Total operating expenses increased 2.2% in 31,000 in 2.123, a 51% increase in SG&A expense, and an 8% increase in research and development expenses. Anomal increase in SG&A expense due in part to tiny audit fees at the corporate level, which were higher this year compared to prior year period, in addition to a decrease We believe we have the best technology and products in the industry due to the quality of the on-the-network team and innovative culture. This has allowed us to grow our market share, particularly in the special and industrial segment where we continue to introduce new solutions. Net loss attributable to stockholders increased to $85,000 versus a loss of $123,000 in Q1-Q2 and frozen cash profit outpaced opportunities. On a per share basis, our net loss was 0 cents per share in both periods. Turning to cash flow, the company used $83,000 of cash in operating activities in Q1-Q3 and primarily due to our net loss, and we used $26,000 in investing activities for minor hardware and software technology updates. We continue to invest in the development of a new monitoring data customer interface called Omnibus 2.0, which is planned for launch later this year. In terms of the balance sheet, we increased to $803,000 and $689,000 year-end. and $674,000 at March 31, 2022. With so many paintings, some success inventory to mitigate potential delays and product delivery to fulfill large volume orders and to strategically support expected growth. Under capital liquidity, we have consolidated cash of $1.3 million at quarter end and $1.5 million as the main rent. We believe our balance sheet provides solid support to continue executing on our growth strategy. As many of you know, in accordance with CRPD, we're taking approximately 90% of our hardware sales as deferred revenue and then amortize it rightfully into revenue over a time period. Similarly, we defer monitoring revenue and amortize it over the time of the monitoring plan, which is typically one year. The cash value of hardware and monitoring services, however, are invoiced at the time of the sale and collected on normal payment terms, which go to the next days. We took the time to create the backlog of deferred revenue, and we want to point out that we ended Q123 with a record backlog of $62 million versus $5.7 million in Q122. We expect approximately two-thirds of this to be recognized as staff revenue in 2023. Overall, we are very excited for the rest of the year and for longer-term opportunities in our business, particularly in an underserved commercial and industrial market for remote monitoring and control solutions. I look forward to updating you on our progress in the future. Thank you everyone for joining the call, and now we'll open the conference call for questions. Operator?

Thank you. We will now begin our question and answer session. To ask a question, you may press star and 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To resolve your question, please press star and then 6.

And at this time, we will pause momentarily for a simple hour or so. And again, if you would like to ask a question, please press star then 1.

As I'm showing no questions at this time, this concludes our question and answer session. I would like to turn the conference back over to Jan Lugg for any closing remarks. Thank you, everyone, for your interest in Acorn Energy. We appreciate your support, and I'm happy to speak to investors or potential investors, anybody who just want to ask a question on the call can certainly call us. You can set up a call with Jason or myself or ask a question through our our IR team, whose content information is in today's press release. Based on our reports, updating yesterday on our EC conference call in August. Thank you again.