Acorn Energy, Inc. (ACFN) Q1 2020 Earnings Report, Transcript and Summary

Good day everyone. Thank you for holding, and welcome to Acorn Energy’s First Quarter 2020 Conference Call. All participants are in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to hand the conference over to Tracy Clifford, CFO of Acorn Energy and COO of its OmniMetrix 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 provisions of the Private Securities Litigation Reform Act of 1995. There are no assurances that Acorn or OmniMetrix will be able to achieve their growth goals in 2020, nor in 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 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 will 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 are 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, OmniMetrix operations have been classified essential by the State of Georgia, enabling us to continue to operate throughout the pandemic. Though we have moved on to reduce on-site 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 18th. 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 GAAP basis. As COVID-19 responses began to significantly impact our new equipment sales due to travel and business activities restrictions. So far in Q2, we are 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 great 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 investment. With 1.9 million in cash as of May 10th, including loan proceeds received by Acorn and OmniMetrix 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 costs 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 costs 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 our cost structure as we make prudent investments in product development, and sales and marketing to ensure OmniMetrix’s 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 gross margins. We continue to achieve solid gross margins, with our Q1 2020 gross margin rising to 69% versus 62% in Q1 2019. The increases in gross margins primarily reflects a favorable mix of higher margin, margin revenue compared to product sales. 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 overtime 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, 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 with flat on a cash basis in Q1 2020 versus Q1 2019. And 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 gains 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-months 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 overtime. 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 Air Guard 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 for 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 will 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 will be discussing GAAP basis performance as presented in our filed financial statements. OmniMetrix’s 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 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 in the energy sector as previously discussed. Gross profit grew 12% to $922,000 in Q1 2020 versus $821,000 in Q1 2019, 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 Q1 2020 versus 62% in Q1 2019 or 64% after you adjust for the inventory charge in 2019. OmniMetrix’s total operating expenses increased 11% to $973,000 in Q1,2020 versus $879,000 in Q1 2019, 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 OmniMetrix’s reported our first quarter 2020 operating loss of 51,000 versus an operating loss of 58,000 in Q1 2019. At the corporate level G&A increased 7% to 223,000 in Q1 2020 from 209,000 in Q1 2019. 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 OmniMetrix’s. Net loss attributable to Acorn’s shareholders was 283,000 or $0.01 per share in Q1 2020 versus net loss of 237,000 or $0.01 per share in Q1 2019. Turning to cash flow on a consolidated basis, cash generated from operating activities was 242,000 in Q1 2020 verses cash used in operating activities of 325,000 in Q1 2019. Mainly due to the increased accounts receivable collections in first quarter of 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 OmniMetrix in April under the CARES Act. That concludes my review of the financial results and now I would like to turn the call back to the operator so we can take questions from our investors. Operator.

[Operator Instructions] And our first question comes from Peter Rabover of Artko Capital. Peter please proceed.

Hey Jan. So I wanted to kind of focus some of my questions on your monitoring revenue piece. So that is 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 - maybe volume of subscriptions and average price and what has been the driving dynamic? And then, I guess in that same vein, I don’t know if that helps or not, but, maybe a way to think even though hardware sales are volatile, clearly, each dollar of hardware sales add something to the monitoring revenue segment, because it sounds like you are outpacing your disconnect rate. 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 would really appreciate it.

Okay, good morning Peter. Thank you for your question and your support of the Company. Our monthly, because that is where we look at, our monthly monitoring revenue ranges anywhere from approximately $10 to $30 a month, depending if you are a residential owner, again, we don’t sell directly to the owner, but we sell to the dealer who sells to the residential owner, if you are a commercial and industrial user of our monitoring system. So that is kind of the range $10 to $30 a month. You are correct that for every piece of hardware we sell, we typically sell it with a one-year contract. And we have a 90% plus renewal rate, because once the monitor is embedded in the generator, there is really no reason for anybody to change the monitor, it could go to somebody else because that cost more than over a year’s worth of monitoring the difference is just not worth it. So, the renewal rate in the businesses is quite good. There should always be growth in monitoring. I mean, there are some disconnects, typically our disconnects are not because somebody doesn’t want the service, but somebody moves from house A to house B, and the new owner doesn’t even know that there is 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 rates on a monitoring. Does that answer most of your questions?

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

The average person is well over five-years. So 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 maybe from the competitive/sales position, I assume your 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?

And usually I commissioned to pay the dealers is a net price. So that doesn’t come off as expense. Our main expense is a 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 are 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 - what I’m trying to get at, because you sell primarily through the dealer network and your competitors are OEMs that have their own monitoring hardware and software built in. And so I’m just curious whether that is a nice selling point that you are 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. 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 is a positive revenue generator for dealers that their other suppliers do not provide them.

Yes. 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 even know that the incentives themselves are the number one differentiator between us and our competitors. I think the number one differentiator is that our dealers want to control the end customer and they don’t want the OEM to be in touch with their end customer. Because the dealers want to sell them service and parts and maintenance, which is the most profitable part of the dealers business. So the OEM gets inside with the customer, the OEM can start selling parts directly to the customer. So, I think that is 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 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. We have had a couple of quarters since the PG&E [debacle] (Ph) in California. And I know it is 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 and if not that is not a problem, but just curious.

Right. We have not yet seen that. And typically, I would not expect to see it. I mean firstly the dealers have to get set up. There were not that many dealers out there, because it wasn’t such a big market so 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. Sorry. And I guess just like maybe one last question, but this is part of my ignorance on this, but is there any way to participate in the battery storage business for you guys, you know, as more and more storage costs lower and more and more people have solar or battery packs installed in their house that to monitor those sorts 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 Jan and keep up the good work. Thanks.

Thank you.

[Operator Instructions] Our next question comes from [Richard Sosa] (Ph) a Private Investor. Richard please proceed.

Hey Jan, 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 maybe go into when you did make some of these products in-house and why you changed and why you are looking to change back?

So it is a question of using our team efficiently in this environment. So, I have 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, post-COVID 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 keep the cost in-house.

That is something that is 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 is it.

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

Right. And last quarter, probably March call you had mentioned that, one of the risks was that you would be unable to get some parts possibly. Is that kind of risk on a way or obviously you could still worried about it, but it is probably not too big of a worry now, everything getting back to normal?

Correct. We have not had any problem right now with that.

Okay. Thank you.

Thank you.

[Operator Instructions] At this time, we have no further questions. I will now turn the call back over to Jan Loeb 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 will also consider any shareholder value enhancing opportunities, including those that may occur as a result of the challenging economic environment and will 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.