Edited Transcript of ACFN earnings conference call or presentation 26-Mar-20 3:00pm GMT

Let us now turn to our review of Acorn and OmniMetrix 2019 performance, following which we’ll open the call to your questions.

In the fourth quarter and full year 2019, OmniMetrix extended its record of revenue growth, improved gross margin and achieved its third consecutive quarter of positive operating profit. OmniMetrix Q4 2019 revenue rose 7% to $1.4 million, and gross margin improved to 67.6% versus 61.8% in Q4 2018.

For the full year 2019, revenue grew 8% to $5.5 million. Gross margin improved to 65.4% from 61.4% and gross profit grew 17%.

This performance allowed OmniMetrix to realize an operating profit in 2019 versus a loss in 2018. On a consolidated basis, Acorn was able to cut its operating loss by more than half to approximately $700,000 versus $1.4 million in 2018. We are proud of the discipline and 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 3 years and typically over 1 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 the period and therefore, window on relative growth performance. Cash sales for 2019 were $6 million compared to $5.6 million in 2019 — in 2018, an increase of 7%.

Our Power Generation, or PG segment sales, which relate to monitoring standby generators, grew by 13% on a cash basis in 2019 versus 2018. In our smaller Cathodic Protection, or CP segment, which focuses on monitoring and control of the electric current running on gas pipelines, sales on a cash basis declined by 21% due to the impact of turnover in 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 IoT sales experience, including developing new products and multimillion-dollar accounts was reviewed in yesterday’s press release. Notably, Dan has over 25 years of experience of successfully executing growth initiatives within the telecom, wireless, analytics and IoT spaces, most recently with Sierra Wireless and its Numerex subsidiary. We believe Dan has the right experience and ability to drive sales of new products and to address new market opportunities for OmniMetrix. We are now fully staffed, and believe we now have the potential to increase our CP segment sales to historical and projected growth rates in future quarters as the pandemic subsides.

Despite the disruption in our Cathodic Protection sales team, our new team members are making considerable progress 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 4x 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 generator 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 acquired to support the health care response to the current pandemic.

Turning back to our improvements in gross margins throughout 2019, I want to underscore that this achievement is not only the result of a favorable product mix of higher-margin monitoring revenue, 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 Hero2 Rectifier Monitors and our AIRGuard industrial air compressor monitors. We also are about to launch an innovative new enunciator product that provides status updates on critical electrical systems, and 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?

——————————————————————————–

Tracy S. Clifford, Acorn Energy, Inc. – CFO [4]

——————————————————————————–

Thanks, Jan. As mentioned by Jan at the beginning of the call, OmniMetrix’ 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 in hardware. As a result, gross margin improved to 65.4% in 2019 versus 61.4% in 2018. Q4 ’19 gross margin improved to 67.6% versus 61.8% in Q4 ’18, reflecting similar dynamics.

OmniMetrix 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 our IT systems to support long-term growth. With revenue and gross profit growth outpacing expenses, OmniMetrix reported a 2019 operating profit of $177,000 versus an operating loss of $146,000 in 2018. OmniMetrix also generated an operating profit of $83,000 in Q4 ’19 versus an operating loss of $34,000 in Q4 ’18.

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 at OmniMetrix, 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 $0.02 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 Q4 ’19, net loss attributable to Acorn shareholders was $61,000, a flat 0 per share versus a net loss of $245,000 or $0.01 per share in Q4 ’18, which included a gain of $222,000 or $0.01 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 — I’m sorry, $1.2 million in 2019 from $2.4 million in 2018. Of this $1.2 million, approximately $404,000 related to OmniMetrix, and including $323,000 used to retire loans 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 20, on a consolidated basis, Acorn had cash and cash equivalents of approximately $1.6 million, and 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 Jan.

——————————————————————————–

Jan H. Loeb, Acorn Energy, Inc. – President, CEO & Director [5]

——————————————————————————–

Thanks, again, Tracy. Though the current environment is very challenging, we are actively managing our resources and cost to navigate the COVID-19 pandemic. As we see business conditions begin to normalize, we will resume prudent investments in product development, sales resources 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’ll continue to be disciplined and patient regarding any external opportunities.

For OmniMetrix, we continue to have a normalized top line growth goal of 20% per year on average. From a profitability perspective, we reduced our consolidated net operating loss by approximately 50% in 2019. And excluding any impact from COVID-19, we had expected to be on a cash flow breakeven run rate by this summer. It’s too early to assess the impact of COVID-19 at this point, but achieving breakeven is important from a shareholder value perspective, especially considering our large NOLs, which would shield future income from income taxes. 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 call back to the operator so we can take questions from our investors.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) Our first question comes from [Richard Sosa], Private Investor.

——————————————————————————–

Unidentified Participant, [2]

——————————————————————————–

Jan, this is [Richard]. I just had a few questions. Just on the monitor — my mind’s perplexed, I saw it monitoring 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 I’m always just curious how that works?

——————————————————————————–

Jan H. Loeb, Acorn Energy, Inc. – President, CEO & Director [3]

——————————————————————————–

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 March in monitoring — in product sales, monitoring sales were up stronger than new sales. In addition, monitoring is accumulative. So every year, presumably, even if new sales are not growing, the fact that we are making new sales add to our monitoring revenue. So its — monitoring reflects accumulative number of units that we have in the field. And therefore, its number can grow even though our new sales growth number is not growing as rapidly.

——————————————————————————–

Tracy S. Clifford, Acorn Energy, Inc. – CFO [4]

——————————————————————————–

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 would have been in hardware sales at the end of ’18 that were connected in ’19, we’d start seeing that. So I thought that might be helpful to understand.

——————————————————————————–

Unidentified Participant, [5]

——————————————————————————–

Okay. And then just 2 kind of — 2 questions off of this. I saw it in your press release and the 10-K, you’re just 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?

——————————————————————————–

Jan H. Loeb, Acorn Energy, Inc. – President, CEO & Director [6]

——————————————————————————–

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 most probably had a 3-week back — delay in getting circuit boards. Today, their delay is 3 days. So we’ve not — as of right now, we’ve not had any disruption in product flow.

——————————————————————————–

Unidentified Participant, [7]

——————————————————————————–

And they’re still assembling it okay in America?

——————————————————————————–

Jan H. Loeb, Acorn Energy, Inc. – President, CEO & Director [8]

——————————————————————————–

Yes.

——————————————————————————–

Unidentified Participant, [9]

——————————————————————————–

Okay. And then on the monitoring side, obviously, as you know, the reason why I like this company so much is it the recurring revenue, which has a high value, is really high value in the sense that people would just can’t cancel. I mean, what does it have to take for people to stop paying? And ultimately, if they stop paying, they don’t get monitored. So one, have you seen any of that happening more so over the last few weeks? Or what would have to happen?

——————————————————————————–

Jan H. Loeb, Acorn Energy, Inc. – President, CEO & Director [10]

——————————————————————————–

So we have not seen it happen yet. It’s certainly something that we concern 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. Second is the customer, 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, well afford to spend anywhere between $10 and $25 with their 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 customer has already paid for the monitoring and then suddenly his monitor goes off. So for those 3 reasons, 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.

——————————————————————————–

Unidentified Participant, [11]

——————————————————————————–

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

——————————————————————————–

Jan H. Loeb, Acorn Energy, Inc. – President, CEO & Director [12]

——————————————————————————–

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.

——————————————————————————–

Operator [13]

——————————————————————————–

Our next question will come from [Sam Schechter], he’s a Private Investor.

——————————————————————————–

Unidentified Participant, [14]

——————————————————————————–

I got 2 questions. Number one, are you in an active search for a new CEO, somebody more permanent?

——————————————————————————–

Jan H. Loeb, Acorn Energy, Inc. – President, CEO & Director [15]

——————————————————————————–

Right now, we are not actively searching.

——————————————————————————–

Unidentified Participant, [16]

——————————————————————————–

Okay. My second question was, what compensation package do you offer your salespeople?

——————————————————————————–

Jan H. Loeb, Acorn Energy, Inc. – President, CEO & Director [17]

——————————————————————————–

We offer a combination of a base out…

——————————————————————————–

Unidentified Participant, [18]

——————————————————————————–

I’ll tell you, I’m trying to figure out how you can bring a guy in with 25 years sales experience with revenues where they are. So I’m assuming you’re trying to ramp this up?

——————————————————————————–

Jan H. Loeb, Acorn Energy, Inc. – President, CEO & Director [19]

——————————————————————————–

Correct. And again, he is 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 is a 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 6 of our other salespeople. So there’ll be an exponential impact.

——————————————————————————–

Unidentified Participant, [20]

——————————————————————————–

Is this his only position currently?

——————————————————————————–

Jan H. Loeb, Acorn Energy, Inc. – President, CEO & Director [21]

——————————————————————————–

Yes.

——————————————————————————–

Operator [22]

——————————————————————————–

(Operator Instructions) I’m showing no further questions at this time. So now I would like to turn the conference back over to Jan Loeb for any closing remarks.

——————————————————————————–

Jan H. Loeb, Acorn Energy, Inc. – President, CEO & Director [23]

——————————————————————————–

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.

——————————————————————————–

Operator [24]

——————————————————————————–

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