Acorn Energy, Inc. (ACFN) Q4 2020 Earnings Report, Transcript and Summary

Good day and welcome to the Acorn Energy Fourth Quarter and Year End 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn 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 2021 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 our 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 2021, 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 the Risk Factors on Acorn’s Form 10-K as filed with the Securities and Exchange Commission. Now, I will hand the call over to Acorn’s CEO, Jan Loeb. Jan?

Thank you, Tracy, and good morning to those joining our call. I'd like to start today by saying that I am very proud of the OmniMetrix team and grateful for how they rose to the challenges we faced over the past year. Despite significant business challenges posed by COVID-19, Acorn was able to achieve profitability on a net income basis in the fourth quarter and positive cash flow for the quarter and full year. These are very significant milestones for our company and ones that we have been working toward for several years. What's even more important is that we believe Acorn is on track to achieve profitability and positive cash flow on a consolidated basis for the full year 2021 and moving forward. This is particularly significant for Acorn because we have nearly $70 million of net operating loss carryforwards, or NOLs. These NOLs will shelter our future net income from federal taxes for the foreseeable future, positively impacting our operating cash flow and benefiting our future cash balances and financial positioning. Further, we no longer have any debt as we paid off our line of credit last month. What this means for our shareholders is we now have a growing cash-generating and self-funding business with attractive margins and recurring revenue streams. This should make our public equity more attractive to a broader base of investors and puts us in a stronger position to pursue value-enhancing investments and opportunities. Importantly, throughout 2020 and the ongoing spread of the pandemic, we were able to remain fully operational without any employee furloughs. We did, however, experience an interruption in all business development dialogues, particularly within our Corrosion Protection or CP business as prospective customers halted procurement discussions and in-person sales meetings. Nevertheless, the strength of our value proposition and business model enabled Acorn to achieve year-over-year GAAP revenue growth in 2020 and to maintain our cash basis sales at 2019 levels. We also further improved our gross margins to 69.8% in 2020 versus 65% – 65.4% in 2019, reflecting an improvement in hardware margins and an increase in higher-margin monitoring revenue as a percentage of total revenue. In addition, the personal challenges we all faced with the spread of COVID, some also faced the unpredictable damaging impacts of mother nature, 2020 and the beginning of 2021 has been another period of severe weather patterns from wildfires in California to extreme cold in Texas. Severe weather continues to disrupt and expose the national problem of aging power grids. This increasing incidence of power outages is a driver of backup generator power installations, even in places that historically have not been large markets for us. California, for example, has not historically been a big market for generators, which may now be a big market opportunity for generator OEMs, thereby growing the base of potential endpoints to offer our monitoring and control products and services. These trends, combined with the very limited penetration of backup generator monitoring in both commercial, industrial and consumer settings as well as the growing base of people who work remotely, are important demand drivers underlying our long-term growth outlook. It is estimated that as little as 15% of backup power generators are currently monitored, which support our long-term growth yield. In the near term, we believe we have a strong foundation upon which to achieve further top line and bottom line growth in fiscal 2021. As business conditions gradually return to a more normalized state, particularly in our dialogues with natural gas pipeline operators. In the latter part of 2020, we were able to begin reengaging in sales dialogues with large companies, and we are working to build on that activity this year. To that end, we recently added a new sales engineer to support business development efforts in our pipeline Corrosion Protection segment so that we were able to adequately support an expected increase in business development efforts. We also added an additional sales engineer in our larger power generation segment to support expected growth from our focus on the commercial and industrial market segments. Our growth prospects are also driven by OmniMetrix cutting-edge technology and solutions and our ongoing investment in new product development and innovation. During 2020, we launched our new Smart Annunciator solution, which revolutionize circuit annunciator monitoring by refining a 5-inch touchscreen LCD display on the device, which combined with our remote monitoring technology, provides real-time SaaS and lower mission-critical circuitry. In late 2020, we also upgraded and launched our next-generation OmniPro data management software used in our pipeline Corrosion Protection solutions. This software builds upon our product capabilities to enhance the value and effectiveness of our Hero2 Rectifier Monitor and our Patriot test station monitors, while also relying customers to import non OmniMetrix data. This value-added solution solves a key pain point for our pipeline customers by enabling the centralized tracking of critical data and assets on a hardware agnostic basis. We are excited to be reengaging with customer prospects regarding this important new solution. We are also focused on adding sales support behind our AirGuard, air compressor monitoring solution, which is still in its early stages of commercialization, having been first launched in 2019. And in order to deliver greater value to our customers and maintain our technology leadership position in the remote monitoring marketplace. We plan to continue our investments in R&D and new product development, and we expect to launch additional product enhancements and new products this year. Turning back to our financials, Acron was successful in substantially strengthening our financial position in 2020, increasing cash by $816,000 to over $2 million at year-end, reflecting $464,000 in operating cash flow and net Paycheck Protection Program loan proceeds of $421,000, partially offset by investments in software and new products. Our strength in the balance sheet provides a solid foundation to support organic growth as well as partnerships or possible tuck-in acquisitions of a technology or product that would strengthen our remote monitoring solutions portfolio. In any scenario, we would closely evaluate any opportunity to ensure that it meets our criteria of being accretive to earnings, cash flow and shareholder value, either immediately or certainly within a reasonable period of time. Having forged a strategy that focused Acorn's future on the potential of our OmniMetrix business, we have been extremely pleased by its performance and resiliency, particularly over the past year. We believe this strength is due to the value, return on investment and even the environmental benefits that remote monitoring solutions deliver versus resource-intensive physical inspection and the significant limits of periodic on-site evaluations. Our clear value proposition, combined with continued low levels of penetration for remote monitoring and IoT services in commercial and industrial markets, continue to suggest there remains substantial long-term growth opportunities for our business. As our economy stabilizes and as our larger pipeline of industrial customers get back to normal procurement dialogue cycles, we believe Acorn is poised to aggressively execute and growth opportunities across our expanding base of solutions. All of the reasons I've highlighted, our Board and management and team remain confident in the potential for Acorn to achieve an annual growth trajectory of at least 20% in 2021 and for years to come, while also maintaining positive operating cash flow and achieving profitability on an annual basis. Given the opportunities we have identified, our strong capital position, our knowledge and experienced team and the tangible value we provide to our customers, I am very enthusiastic about our business and about our prospects going forward. We also think we are in somewhat of a sweet spot with the new administration in Washington: firstly, because of our clean tech business model and the expected renewed focus on environmental issues in green policy incentives; and secondly, our large NOL position could become an even more valuable asset, corporate tax rates were to be increased. With that overview, I'll turn the call back to Tracy Clifford, our CFO, to review our financials in greater detail.

Thanks, Jan. This morning, we released our 2020 fourth quarter and year-end results in a press release and also filed our 2020 10-K with the SEC. I'll review some financial highlights compared to the comparable fourth quarter and full year of 2019. OmniMetrix revenue grew 8% to $5.9 million in 2020 from $5.5 million in 2019 due to a 15% increase in monitoring revenue. This was offset by a 3% decrease in hardware revenue. Monitoring growth reflects an increase in the number of units being monitored, while the decline in hardware sales reflects business development disruptions caused by COVID-19, particularly in our Corrosion Protection segment. Revenue in Q4 2020 was 14% higher than Q41 2019 as a result of increases in both monitoring and hardware revenue. In accordance with GAAP, hardware sales are deferred and recognized to revenue over the estimated life of the unit, which is three years, thus 2020 revenue on a GAAP basis includes amortization of hardware sales made in 2020 as well as in the prior two years when we enjoyed strong sales increases. Gross profit grew 15% to $4.1 million in 2020, with a higher percentage of revenue coming from monitoring, which is a higher gross margin and also due to a favorable change in the product mix of hardware. Gross margin on hardware increased to 44% in 2020 from 38% in 2019, reflecting a more cost-efficient product mix in the Corrosion Protection segment as well as to reduce cost on new power generation products. Gross margin on monitoring revenue remained strong at 84% in both 2020 and 2019. In quarter four 2020, gross profit grew 17% over quarter four 2019 to $1.1 million and gross margin increased 1% to 69% from 68% in Q4 2019. OmniMetrix' total operating expense increased 4% to $3.6 million in 2020, primarily due to an 11% increase in research and development expense and a 3% increase in SG&A expenses. This increase in R&D was for continued development of next-generation products as well as potential new product lines. In Q4 OmniMetrix's operating expenses increased 4% to $888,000 as compared to the prior year quarter. OmniMetrix's operating income increased to $580,000 in fiscal 2020 versus operating income of $177,000 in the prior year period, principally due to increased revenue and higher gross margin offset by slightly higher operating expenses. In Q4 OmniMetrix operating income increased to $222,000 compared to $89,000 in Q4 2019 attributed to the same drivers as the annual increases. Acorn's corporate SG&A costs increased 2% to $890,000 from $876,000 for the full year 2020 compared to 2019 and increased 8%, $213,000 from $197,000 in the fourth quarter of 2020 compared to the fourth quarter of 2019, both the increased full year and the fourth quarter increase was due to higher professional fees. Acorn recognized a gain of $421,000 in 4Q 2020 and the full year 2020 on the forgiveness of OmniMetrix’s Paycheck Protection Program loan. Including the gain net income attributable to Acorn shareholders improved to $69,000 or zero cents per share in 2020 as compared to a net loss of $618,000 or $0.02 loss per share in 2019. Q4 2020 net income attributable to shareholders improved to $417,000 or $0.01 per share from a net loss of $61,000 or zero cents per share in Q4 2019. Excluding the Paycheck Protection Program gain Acorn would have recorded consolidated Q4 net income before non-controlling interest of $2,000. As you may know, Acorn uses cash basis sales as a performance measure to supplement our GAAP revenue growth trends. Cash basis sales differ from GAAP revenue because we differ 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 is typically one-year. We invoice upon hardware shipment or monitoring renewal, and our terms are typically 30-days. Cash sales are typically greater than GAAP revenue during periods expansion when we are able to be active in new business generation. Given the impact of COVID-19 on our pace of new hardware sales during 2020 our full year cash sales only modestly exceeded GAAP revenue in the same period, which we view as a positive outcome. For the full year our cash basis sales has held steady at $6 million in fiscal 2020 and fiscal 2019. Cash sales were also flat for the second half of 2020 versus the second half of 2019. In Q4 our cash basis sales were $1,517,000 versus $1,557,000 in Q4 2019. We're encouraged that we're able to maintain our cash sales throughout 2020 at 2019 levels, despite the impact of the pandemic. And we do expect that cash basis sales will once again, exceed GAAP revenue as the impact of the pandemic recedes and we return to more normal business practices and sales trends in 2021. As it relates to cash sales across our two segments comparing fiscal 2020 to 2019 cash basis sales increased by $169,000 to $5.2 million in our power generation segment. While our CP segment declined $162,000 to $807,000. Cash generated from operating activities improved to $464,000 in 2020, including $164,000 generated in 4Q. At year-end 2020, consolidated cash increased to $2.1 million from $1.2 million at December 2019. The increase of $816,000 is due to cash generated from operating activities plus the PPP net proceeds offset by some investments in software and development. OmniMetrix's outstanding balance on its credit line was $149,000 as of December 31, 2021. And as Jan previously mentioned, we paid this line off in full in February. And given the strength of our consolidated balance sheet, we elected not to renew the line and we'd let it expire on February 28 in accordance with its terms. We believe the company's current cash and expected cashflow from operations provides sufficient liquidity to finance the company's existing operations into the foreseeable future. That concludes my remarks. And now I'll turn the call over to the operator and give you an all an opportunity to ask any questions you may have. Operator?

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Richard Sosa, who is a private investor. Please go ahead.

Hi Jan how are you doing?

Good morning, Richard.

First of all, congratulations. As you know, I've held this stuff for what seems like over 10% of my life. So congratulations on your first quarter profit on an operating basis and the cashflow basis. You've been talking about this for many years and it's been a long road and it's great to finally see it. So definitely congratulations to you and your entire team.

Thank you.

So I had two questions. The last year you had talked a little bit about a slowdown in the industrial markets and both of your end markets, have you seen any kind of pickup in the first quarter specifically on the generator side?

The slowdown that you are referring to in the commercial and industrial side is really from the OEM side. So for example, Generac has said that their commercial industrial side generated sales has slowed because their residential side has picked up and has been growing very significantly. We have not seen a drop in the commercial industrial side because that has been our focus, like the residential side has a very low penetration rate. So, our focus is commercial and industrial. And since that's our focus, we've seen consistent growth in that area. The residential side of our businesses we're not so focused because there is significant competition from the OEMs on the residential side. That business has been growing for the OEMs, but from our standpoint, our focus is commercial and industrial, and that continues to grow very nicely for us.

And you, talked a little bit about the new administration and a new potential friendly administration. It makes a lot of sense, you have a democratic administration. It would make sense that OmniMetrix is a darling in their eyes, helps companies be more efficient, helps generators be more efficient, helps pipelines be more efficient, all of that is very good. Have you heard anything specific to like a specific policy that could benefit OmniMetrix?

We've not heard yet of any specific policies. But just in general, we're saying since green is going to be a focus and the administration has said it's going to be a focus and going to zero emissions, so remote monitoring is certainly an area that allows companies to do that, but you get closer to that goal. So we think we're in the right spot. But we've not seen or heard any direct policies that would impact us today.

That's great. I do have one more question, but I'll go back in the queue and let anyone go if there's somebody there.

We actually don't have anybody in the question queue currently, Richard, if you'd like to ask your next question.

Oh, that's great. Sure. So I noticed you did a presentation with Roche in December, and I see that you are attending a conference, virtual conference this week, later this week with Maxim I believe, is this something you plan to do over next few months to be, I mean, you've done a great job telling your story, obviously. But are you going to do more of these and get in front of new investors?

If we're invited, it certainly would be hope that I can do that. I think our story – I think, we've reached a milestone, which we've tried as you noted before, is to get to profitability on a consolidated basis. And I think that now that we've reached that milestone, our next milestone is to show that we have significant growth potential and the profitability that that growth can bring. As you know we have a 70% gross profit margin on our business. So as our gross ramps up the profitability story becomes a very large one. And so, I hope to bring focus to that over the next year or so. And conferences will help me accomplish that.

That's great, Jan. Congratulations. And I look forward to your continued success at Acorn/OmniMetrix.

Thank you, Richard.

The next question comes from Peter Rabover with Artko Capital. Please go ahead.

Hey Jan congratulations on reaching profitability and cash flow positive. I wanted to get some questions on the metrics for the hardware. The relationship between the hardware and the recurring revenue. And so, I think, Tracy might have said it, but what were the hardware sales this quarter $650,000 or something? Am I correct on that or…

Tracy? Tracy you want to handle that?

Tracy, this is the operator, your line might be muted if you're speaking, we cannot hear you.

Yes. I'm sorry. I'm sorry Peter, could you repeat your question?

What were the hardware…

Is it hardware sale, or hardware cash sale?

Yes, I guess – I guess an increase in deferred revenue, what are the metrics you guys use to track hardware sales?

Sure. We typically use metrics across our product lines as well because the gross margin differs by product. As it relates to cash sales, compared to the hardware sales, as I was stating, the hardware is amortized over three years of hardware sales, or actually amortized over three years. So, the cash, that is the difference between the cash sales metric and the actual GAAP revenue that we recognized. So there's actually three years of amortized sales coming into the GAAP revenue on a monthly basis. So that kind of explains the difference. As our hardware sales increase, of course, the layers of GAAP revenue that are amortized in will also increase.

Right. So I'm sorry, but what was the number of both the GAAP…

Our full consolidated sales across – I don't believe I gave hardware sales separately on the cash basis. Our full hardware sales and monitoring sales for cash basis were $6 million in both 2020 and 2019.

Sorry I was asking for the quarter, what were the hardware sales for the quarter?

Let me just pull that for you. Give me just a moment.

Okay. Let me ask this question. So while she is looking, I guess, do you guys have kind of a good idea on – and I think I sort of did it in the past, but I don't want to send this number without – doesn't come out and correct, but for every x amount of dollars of hardware sales whether cash or GAAP, what is your monitoring revenue base increased by?

You can't really use that number because our hardware sales, for example, rectifier sale is about we'll call it $1,800 a unit and the generator monitor sale is maybe $300 a unit. So you just can't say each dollar you'd have to you look at the units.

Okay.

Not units in total versus a volume – volume sales number.

Okay. Do you have an ARR number for the monitoring revenue?

So, you could say kind of on average for every unit we sell, it's approximately $150 a year in monitoring revenue, on average.

Right. Do you have like an average hardware – I mean, I guess I'm just trying to get better metrics to kind of highlight the value of the company in terms of given your high renewal rate, so an increase in hardware, which, I think, was like $400,000 or $500,000 for the last – for 2020, which was clearly a down year. Sounds like fourth quarter was at least $600,000, $700,000. Just trying to get gauge what the ARR base for the monitoring revenue which is like the – which is what really drives the gross margins, the gross profits, and the value of the company?

Yes, I don't know that we can give it to you here.

Okay, fair enough.

Peter, just to circle back to your question, the hardware sales in fourth quarter 2020 were $416,000 compared to $545,000 in quarter four 2019.

Really?

And again, that's across both segments.

I mean, your year-to-date number in the third quarter for hardware sales was 1.5 and for this quarter, it's 2.15. So I'm just kind of confused on what the GAAP is.

Those are going to be accessories. I can put together a reconciliation for you and we can circle back.

Okay. Fair enough. We can circle back. I'm just trying to gauge how the hardware sales are going basically.

Okay.

I guess my second question would be what the – you guys are, you have $2 million in cashflow, you are cashflow positive. And I guess, I know it's a small amount, like $2 million on a – but the market cap is not that big. So, I'm just curious what your plans with the cash flow going forward are?

So, we would use it to support our growth, number one. I mean, obviously we've said in our remarks that we expect the least 20% growth in revenue in 2021 and beyond. So, we'll need some working capital increases, inventory receivables, et cetera. So as we hopefully ramp up our growth, I would say that the cash right now would be used to support the growth of the company.

Okay. Thank you. That's all I have.

Thank you

[Operator Instructions]

Operator are there any more questions?

It appears we have no more questions. So this concludes our question-and-answer session. I would now like to turn the conference back over to Jan Loeb, for any closing remarks.

We are all well-positioned to return to normal growth trends and to reach sustainable, consolidated, net profitability in fiscal 2021. We'll continue to look for growth opportunities in the markets we serve or complimentary accretive opportunities. Once again, I thank you for your interest in Acorn. We appreciate the support of our shareholders, and I'm happy to speak with investors about the company. Please visit Maxim Group's website for information on their Emerging Growth Virtual Conference 2021, which is taking place this week. On the Maxim website, you can register to view our presentation, which will be available this Thursday March 18. You can also 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 this call.

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