Acorn Energy, Inc. (ACFN) Q3 2017 Earnings Report, Transcript and Summary

Good day, everyone. Thank you for holding and welcome to Acorn Energy's Third Quarter Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to hand the conference over to Michael Barth, CFO of Acorn Energy. Please go ahead.

Thank you. Welcome everyone to Acorn Energy’s third quarter 2017 conference call. Joining me today are Jan Loeb, Acorn’s President and CEO; and Walter Czarnecki, President and CEO of OmniMetrix. Following our remarks, we will open up the call for your questions. As a reminder, many of the statements made in today’s prepared remarks or in response to your questions are forward-looking. These statements are subject to various risks and uncertainties. For example, the performance of our businesses in 2017 and future years is subject to factors such as access to sufficient working capital, risks associated with executing our operating strategy, meeting performance milestones, risks associated with conducting business with government customers, possible cost overruns on fixed-price projects, and success in driving growth in the Company’s core business. Such forward-looking statements are based on management’s beliefs as well as assumptions made based upon information currently available to management, pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. There is no assurance that Acorn, or its operating companies, will be able to achieve their goals for growth in 2017 and future years. The Company also undertakes no obligation to disclose any revision to these forward-looking statements to reflect events or circumstances after the date made. A complete discussion of the risks and uncertainties, which may affect Acorn Energy and our businesses, is included in the risk factors and the Company’s Form 10-K filed by the Company with the Securities and Exchange Commission. And with that, I will hand the call over to Jan Loeb. Jan?

Thank you, Michael, and thank you all for joining us today. I will begin by making some overview remarks, Michael will then review our third quarter results and Walter Czarnecki will follow him and discuss progress in our OmniMetrix business. We will then open the call to your questions. During the third quarter we continue to deliver strong revenue growth and margin improvement in our remote monitoring and control business OmniMetrix. At corporate, we continue working to strengthen our financial position to support future growth - focus on the monetization of our stake in DSIT. Over recent quarters we have made significant progress in reducing operating costs and these efforts combined with our strategic initiatives have enabled us to deliver improved operating performance and cash flow from operations over prior periods. During the third quarter we completed the deconsolidation – subsidiaries. This was the final step in the liquidation process and helps to improve our balance sheet by removing substantial nonrecourse risks and liabilities from our balance sheet generating a gain of $660,000 which led to positive net income for the quarter. Our longer-term priority remains on growing OmniMetrix which manages and protects its customers high-value industrial assets to its unique remote monitoring and technology. OmniMetrix solutions also deliver substantial cost reductions versus the alternative of regular site visits and on-site inspection. OmniMetrix business consists of hardware monitoring equipment sales for new installations as well as ongoing monitoring service revenue. The monetary side of the business offers a very attractive combination of from recurring service revenue along with very attractive gross profit margin and strong cash generation characteristics. To supplement the organic growth OmniMetrix sales continue to seek attractively valued acquisition target in the monitoring space as well as in related area where we can identify similarly strong recurring synergistic business models with the potential to enhance shareholder value. To provide some perspective on what we have accomplished over the past two years, I should point out that we reduced corporate expense just under 800,000 out for the first nine months of 2017 from 1.8 million in the prior-year period and 2.8 million in the first nine months ended 2015. That's a greater than 70% reduction in two years. Moreover, our OmniMetrix business did - in 2015 while this year we revenue of 1.4 million or approximately 45% growth for the two-year period and approximately 3% growth over 2016's revenue. Also in 2015 Acorn provided $930,000 to OmniMetrix in financial support versus the $300,000 OmniMetrix has needed from this year, nearly a 70% reduction. We do not expect the need to provide for the fund to OmniMetrix this year or going forward for their continued growth. There is work to be done yet but we have already accomplished a good part of the heavy lifting. As previously mentioned we remain active on an effort to monetize our 41.2% ownership in DSIT. While we like the business and its long-term potential we decided that the sale of our remaining stake in DSIT was the most expedient way to recapitalize our company are also bring focus on the growth potential and attractive cash flows of the OmniMetrix business. We also felt from a public company standpoint that this strategy offers the best path forward for our shareholder. Proceeds from the sale of our DSIT stake would be used to repay debt, support our working capital needs and help us in our remote monitoring and control or similar business. We are currently in dialogue with several qualified and interested parties. Unfortunately the process itself is highly predictable as to the outcome or timing. We will keep shareholders informed of any developments in this regard and in an appropriate and timely manner. And with that overview I will hand the call back to Michael to review our third quarter financial. Michael?

Thank you, Jan. In April 2016 Acorn sold a portion of its interest in DSIT Solutions to Rafael Advanced Defense Systems and as a result Acorn no longer consolidates the results of DSIT but reports its investment and proportionate share of income using the equity method. As such Acorn's consolidated financial results for the nine-month period of 2017 are not directly comparable to the prior year period. Acorn's 2017 third quarter revenue rose 15% to $1.1 million compared as to third quarter 2016 revenue. Such revenue in both periods was only from our OmniMetrix subsidiary. Revenue for the first nine months of 2017 was $3.2 million compared to $7.6 million in the prior year which included $5.1 million of DSIT revenue. Excluding DSIT from 2016's revenue Acorn's revenue grew 27% in the first nine months of 2017 versus the comparable 2016. Acorn's loss before discontinued operation narrow 27% to 436,000 in the third quarter of 2017 from 597,000 in the third quarter of 2016 and also improved 17% from the $526,000 loss recorded in second quarter of 2017. For the nine months ended September 2017 Acorn's loss from before discontinued operations was $1.3 million versus income of 330,000 in the 2016 period which included a gain of - million on the sale of a portion of our DSIT interest. Excluding the gain a lot before discontinued operations would have been $3.2 million the 2016 period. We generated net income of 236,000 in the third quarter 2017, a $0.01 per share which includes income from discontinued operations of 633,000 or $0.02 per share primarily related to the deconsolidation of GridSense which generated a non-cash gain of 660,000 from the removal of GridSense net liability from the Acorn balance sheet. From a cash flow perspective net cash used in continuing operations improved to 514,000 in the third quarter of 2017 from 646,000 in the third quarter 2016, a 20% improvement. For the nine-month period of 2017 we used $1.3 million in cash and continuing operations compared to the use of 1.9 million in the first nine months 2016. Excluding DSIT our - or 31% improvement. Focusing on OmniMetrix, I would like to add some color on the business lines. As previously noted OmniMetrix third quarter revenue was 15% to $1.1 million driven by strong growth - which increased 84% to 272,000 versus the 148,000 in the third quarter of 2016. Power Generation or PG revenue principally from standby generator monitoring increased 2% to 813,000. The PG division typically has a certain amount of quarterly growth variance given the ordering behavior of customer. Looking at periods longer than one quarter the PG business continues to grow in the 15% to 25% range. For the nine-month period ended in September power generation revenue grew 23% and pipeline cathodic protection revenues increased 44% versus the prior year period. With higher revenue and gross profit OmniMetrix's third quarter 2017 operating loss was reduced to 182,000 from 259,000 in the third quarter of 2016. Likewise for the first nine months of 2017 OmniMetrix reported a reduced operating loss of 578,000 versus 953,000 in the first nine months of 2016. Turning to DSIT on a standalone basis third quarter revenue increased 21% to $4.8 million and first nine months revenue increased 9% to 12 - revenue from the $7.1 million Blackfish Hull Mounted Sonar Systems contract secured in June 2016 as well as some $6 million of new orders received in the second and third quarters of 2017 for development and production projects - $1.8 million in the third quarter of 2017 from $1.1 million in the third quarter of 2016. DSIT's gross profit also improved 26% to 4.6 million for the nine-month period ended 2017 relative to the prior year. Improvements were due to higher revenue and better margins in some non-naval projects as well as reduced material costs in some of the naval projects. For the first nine months of 2017 Acorn recorded $258,000 as its share of DSIT's net income under the equity method including $189,000 in the third quarter of 2017. At the end of the quarter Acorn had net working capital of $1.8 million which includes $293,000 in cash - of escrow deposits from the DSIT transaction. In October $579,000 escrowed funds from the DSIT transaction were released. From the release funds we were required to pay withholding taxes of $41,000 plus netting of $538,000. During the third quarter Acorn received an additional $400,000 in funding pursuant to loan commitments from certain board members of Acorn. A total $600,000 in loan commitments remain available to Acorn at this time for a total of $1.9 million committed in February of 2017. Borrowings pursuant to the board loan commitments are intended to be repaid from the proceeds of the planned monetization of our remaining DSIT ownership interest. Now I'd like to turn the call over to Walter Czarnecki few remarks regarding OmniMetrix.

Thank you, Michael. To maintain our technological leadership we continue to develop new and enhanced products to deliver improved features and functionality relative to our customers. Toward that end we launched a new higher performance PG product in the third quarter which has been well received by existing and new customers. We have several next-generation products and applications in our product roadmap over the next three years which will be key drivers of our future growth. We look forward to sharing more with you as we released those products. While we did see some disruption in our business related to the recent hurricanes the net effect of the situation has led to increased demand for standalone power generators and our remote monitoring equipment. OmniMetrix is proud to have worked with customers directly affected by the storms in Texas, Florida and Puerto Rico to ensure they were prepared and had a real-time view into the health of their backup power before the storms hit. We remain very enthusiastic about the visibility and global business focus of the emerging IOT or Internet of Things macro trend as it is very helpful in advancing customer thinking and decision-making with respect to the value proposition of remote monitoring and control of critical industrial assets. At the same time as the scope of IOT expands new areas of monitoring applications are emerging providing additional growth potential for OmniMetrix. We are pleased with the progress and growing array of opportunities for OmniMetrix and we appreciate your continued interest. With that operator, let's open the call for questions.

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

I just had a few questions first for Jan, correct me, I might have misheard you but did you did provide guidance for the quarter or did you say $4.4 million revenue this year or is that last 12 month.

$4.4 million would be for 2017 or 2017 the revenue number for OmniMetrix.

And assume you didn’t take out that the rest of the director loan, does that mean that you're maybe getting close to the end of this DSIT.

I didn't understand the question. Can you repeat the question?

I noticed you only took out half of the of the loan from the directors, could that lead me to believe that you're getting close to wrapping up the sale of your remaining interest at DSIT.

No, I don't think that the director loans is correlated to our sale of DSIT. I think the requirements of our director loans is dependent upon our cash needs and we didn't need that much cash so we didn't have to take the director loans and now that the escrow has been released we replenished our cash. So I don't anticipate taking much of the director loans of the $600,000 that we have left. I did say in my remark that from DSITs we are talking to people so we're certainly moving along with the process. One never knows how long it takes but we're certainly moving down and talking to interested parties.

And then I had a quick question for Walter. The 84% or maybe 80% growth in the cathodic prevention unit that's pretty big growth. I mean what do you think, what caused that this quarter.

Well that's really a combination of what we've been doing over the past two and half years. It was at the end of 2014 when we set a strategy to grow that division and as you know that takes time and so we have seen incremental growth through the years and this year we're really seeing a lot more progress. A part of that's the momentum of the past few years of building it but also we're just gaining a lot of new customers and displacing competitors. So we're excited about what we've done so far and…

I think you might have mentioned you have a pretty small market share in that segment correct?

Today we do, yes.

Our next question comes from Steven Jackson, a Private Investor. Please go ahead.

I have a question about cash flow. I would like to know about OmniMetrix's window be, will it be cash flow positive in 2018 and when would the company expect to be cash flow breakeven. Also I just wondering about acquisitions. You’ve mentioned acquisitions in the past, what kind of acquisitions you think might fit and would make an acquisition help you to get to profitability quick using the net operating losses. And along that same lines with acquisitions, how are you going to finance acquisitions with the stock price depressed - of the need for a reverse split anything you can say on that would be appreciated.

That's a lot questions, let me try to take them in order. So yes, we certainly believe that OmniMetrix will be cash flow breakeven – '18 as you might have picked up in my remarks as I said that Acorn does not anticipate - Acorn Corporate does not anticipate putting any money into OmniMetrix which we've done ever since we bought the asset many, many years ago, so that would be indicative of cash flow breakeven to positive in 2018. In terms of acquisitions we believe in acquisitions that would fit with OmniMetrix so what we like most about OmniMetrix is the monitoring business so we have a strong kind of annuity of revenues and profitability. So a business that has a monitoring aspect to it is what we like, is kind of we're focused on and what we like best. Obviously those are generally good businesses and they don't necessarily come cheap but that's the area that we're looking at. And of our NOLs, yes, we can we can shelter some income better than other people and that's certainly part of the strategy of acquisitions is to use the NOLs to shelter some income. And then it was one of the one last question that you threw in there, can you just remind me what that was.

How are you going to –- the share price and - and funds obvious.

For that once we sell DSIT and people recognize that we're focused company on OmniMetrix and remote monitoring technology that the stock price will be more reflective of what we as management and the Board believes is the value of Acorn. So I think that's in my mind step number one. Step number two is I think as we go out and make an acquisition and people will recognize that we’re not overpaying and that we're doing something synergistic I think they will respond as well in terms of positive move in the stock price. And it will be up to us to try to structure right deal whether it will be some debts, some shares, whether we’ll sell some shares into the public markets at that point in time we’ll really have to see. In terms of a reverse split while we have shareholder approval to do a reverse split we have not yet done one, we don’t feel that reverse split in of itself is accretive to value and so that's why we’re not doing it just because you have a higher stock price doesn’t mean that more valuable to the company. So at the right time we’ll do that when we think it is truly accretive to shareholder value?

I have one question for Walter, Walter how big is the various markets you’re targeting from the metrics and in those markets what remains unmonitored?

Well with respect to and if you look just at the cathodic protection business just in the U.S. it's $1 billion total addressable market for just the monitoring. So we can calculate what share we have of that the additional question to ask there is of that $1 billion how much is monitored at all because when we’re going into a new customer sometimes there monitored by competitor and sometimes their new to monitoring overall. So $1 billion is the total addressable market that we’re looking at and then there's another question about how much of that market is monitored by anyone let alone on the metrics. With respect to the Power Generation side those are in the triple digit hundreds of millions of dollars markets just in the U.S. looking across just the commercial and industrial side banks, hospitals, cell towers, datacenters, just those alone is enough and has been enough to keep us all very busy. And we see that continuing especially after the storms that that we all went through in the past couple months that unfortunately is always a good indicator for our growth and you hate to see growth on the back of going through hard times but that is typically catalyst for more awareness and more demand not only for the generators but for the monitoring as well.

Right well it’s very exciting it sounds like there is a lot of monitoring opportunities out there?

Various we’ve been very busy.

What do you do when a sensor alarms how do you contact the customer?

Well and that’s part of our intellectual property so it's much of that is already automated so while we do have a team that is looking over the network of all our connections the owners of the equipment as well as the folks providing preventative maintenance for the equipment are receiving emails and/or text messages which is customizable per however they like to see it that lets them know. Number one diagnostically is their problem yes or no and what's the problem so that we can be efficient in fixing it. On an another tier up prognostically the equipment is helping now but the trend with let's say the battery voltage that's been trending down. So if you don't do something in the next five days the equipment is no longer going to be healthy. So on a prognostic level we’re also helping customers how to schedule maintenance and to make sure that they don't have a failures.

[Operator Instructions]. Our next question comes from Christopher Grosvenor with Morgan Stanley. Please go ahead.

Definitely some positive signs here on the quarter so congrats and looking forward to seeing more in the future quarters just one quick question here on gross margin on OmniMetrix. Kind of wondering how you guys think about maybe looking at a year or two how you think about gross margin are you looking at maybe 60% 65% what kind of visibility do you have into that number?

Walter do you want to handle that?

We are expecting to see gross margins to improve gradually in the years to come for a couple reasons one the margin on the monitoring is quite attractive and the percentage of monitoring relative to total revenue or focus on continuing to increase that. And then secondly we've continued to in our next-generation of products continue to take more and more cost out of that to make them more efficient and push the margin up further on equipment as well. So if the numbers you mentioned are in range of what we’re looking at over the next couple of years.

Our next question comes from Jack Mayer, a Private Investor. Please go ahead.

Can you comment and it sounds like you're having at least very preliminary discussions with multiple parties and in DSITs if I understood correctly?

Yes.

Right so the general preliminary sense do you feel that you are going to be able to realize that in the range of your carrying value for that asset – very general sense does that based on your discussions does that seem like an achievable goal?

Look I guess you could say fortunately, unfortunately it’s on our balance sheet and that’s the number. So when people look at us I am talking potential purchasers that’s the number that they focus on yeah if that the asset is worth more than that, but that’s the number that potential purchase is focus on and it just too early to tell you whether that number that we settle on but it's certainly a number since it’s a public and it’s only the public number out there that that’s the number that people are focused on.

But you’re not getting reactions like that’s out of line or something like that?

No we’re not getting reactions like that and I don’t see how we could get reactions like that because that number is based on what we sold the first half of the business to Rafael 4 so there's president again it doesn't mean that number we’re going to get we obviously….

No, I understood and I appreciate that. And you obviously have there- it is a minority stake et cetera et cetera so that I am sure that’s part of your challenge in selling it but…?

Yes.

Right so I am saying the question is reflecting all those things I take it that we’re just saying is no it’s a reasonable number and we’ll see it where it goes.

That's fine. Once you say that.

[Operator Instructions] I am seeing no further questions at this time. I'd like to turn the conference back over to Jan Loeb for any closing remarks.

Thank you all for your interest in Acorn I believe Acorn represents an attractive platform for building shareholder value. There is still work to be done but we feel we have made great strides in the past two years in moving the company in the right direction and remain confident in our ability to execute on our plans. I'm grateful for the support of our investors and pleased to speak with any shareholders or potential investors. Please contact our Investor Relations team to set up a call with me or to ask any questions you may have. Thank you again for your time today and with that operator, we can end today's call. Thank you.

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