Acorn Energy Inc (ACFN) 2017 Q3 法說會逐字稿

: 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 the call -- 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 capital, risks associated with executing our operating strategy, meeting performance milestones, risks associated with conducting business with government customers, possible cost overruns on fixed-priced projects and success in driving growth in the company's (inaudible).

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 in 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 controlled business, OmniMetrix. At corporate, we continue working to strengthen our financial position to support future growth, with a current 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 of our former GridSense subsidiaries. We took the final step in the liquidation process and helped improve our balance sheet by removing substantial nonrecourse GridSense 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 in growing OmniMetrix, which manages and protects its customer's high-value industrial assets through its unique remote monitoring and control technology.

OmniMetrix's solutions also deliver substantial cost reductions versus the alternative of regular site visits and on-site inspection. OmniMetrix's business consists of hardware monitoring equipment sales for new installations as well as ongoing monitoring service revenue.

The monitoring side of the business offers a very attractive combination of visibility from recurring service revenue along with very attractive gross profit margins and strong cash generation characteristics.

To supplement the organic growth, our OmniMetrix sales team is generating, we continue to seek attractively value-acquisition targets in the monitoring space as well as in related areas where we can identify similarly strong recurring and synergistic business models, with the potential to enhance shareholder value.

To provide some perspective on what we have accomplished over the past 2 years, I should point out that we have reduced corporate expense to just under $800,000 for the first 9 months of 2017 from $1.8 million in the prior-year period and $2.8 million in the first 9 months ended 2015. That's a greater than 70% reduction in 2 years. Moreover, our OmniMetrix business did $3 million revenue in 2015. While this year, we expect revenue of $4.4 million or approximately 45% growth over the 2-year period, and approximately 23% growth over 2016's revenue.

Also in 2015, Acorn provided $930,000 to OmniMetrix in financial support versus the $300,000 that OmniMetrix needed from us this year. Nearly a 30 -- nearly a 70% reduction.

We do not expect the need to provide further funds to OmniMetrix this year or going forward for their continued growth.

There's work to be done, yet, but we have already accomplished a good part of the heavy lifting.

As previously mentioned, we remain active in our efforts 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, while also bringing 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 shareholders.

Proceeds from the sale of our DSIT stake would be used to repay debt, support our working capital needs and help accelerate growth in our remote monitoring and control or similar business. We are currently in dialogues with several qualified and interested parties. Unfortunately, the process itself is highly unpredictable 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 financials. Michael?

:

Thank you, Jan. In April of 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 (inaudible) financial results for the 9-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 as compared to third quarter 2016 revenue. Such revenue in both periods was only from our OmniMetrix subsidiary.

Revenue for the first 9 months of 2017 was $3.2 million compared to $7.6 million in the prior-year period, which included $5.1 million of DSIT revenue.

Excluding DSIT from 2016's revenue, Acorn's revenue grew 27% in the first 9 months of 2017 versus the comparable 2016 period. Acorn's loss before discontinued operations narrowed 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 reported in the second quarter of 2017.

For the 9 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 $3.5 million on the sale of a portion of our DSIT interest. Excluding the gain, our loss before discontinued operations would have been $3.2 million in the 2016 period.

We generated net income of $236,000 in the third quarter of 2017 or $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 noncash gain of $660,000 from the removal of GridSense debt liability from the Acorn's 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 of 2016, a 20% improvement.

For the 9-month period of 2017, we used $1.3 million in cash in continuing operations compared to the use of $1.9 million in the first 9 months of 2016, excluding DSIT, a $0.6 million or 31% improvement.

Focusing on OmniMetrix, I would like to add some color on the business line. As previously noted, OmniMetrix's third quarter revenue rose 15% to $1.1 million, driven by strong growth in the pipeline-focused cathodic protection or CP business, which increased 84% to $272,000 versus $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 customers.

Looking at periods longer than 1 quarter, the PB -- PG business continues to grow in the 15% to 25% range. For the 9-months period ended in September, Power Generation revenue grew 23% and pipeline cathodic protection revenue 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 9 months of 2017, OmniMetrix reported a reduced operating loss of $578,000 versus (inaudible) in the first 9 months of 2016.

Let's see, on a standalone basis. Third quarter revenue increased 21% to $4.8 million, and first 9 months revenue increased 9% to $12.9 million. The improvements reflect revenue from the $7.1 million Blackfish Hull Mounted Sonar Systems contract secured in June of 2016 as well as from $6 million of new orders received in the second and third quarters of 2017 for developments of reduction products.

DSIT's gross profit increased to $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 9-months period ended 2017 relative to the prior year period.

Improvements were due to higher revenue and better margins in some nonnaval projects as well as reduced material costs in some of the naval projects.

For the first 9 months of 2017, Acorn recorded $258,000 as its share of DSIT's net income under the equity method, including a $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 of cash and $579,000 of escrow deposits from the DSIT transaction.

In October, the $579,000 of escrowed funds from the DSIT transaction were released. From the release funds we were required to pay withholding taxes of $41,000. Thus netting us $538,000.

During the third quarter, Acorn received an additional $400,000 in funds(inaudible)pursuant to loan commitments from certain board members of Acorn. A total of $600,000 in loan commitments remain available to Acorn at this time from a total of $1.9 million committed in February of 2017.

Borrowing is 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 for a 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. Towards 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 3 years, which will be key drivers of our future growth. We look forward to sharing more with you as we release those products.

While we did see some disruption in our business related to the recent hurricanes, the net effect of this situation has led to increased demand for stand-alone 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 (inaudible) for OmniMetrix. We are pleased with the progress and growing opportunities for OmniMetrix and we appreciate your continued interest.

With that, operator, let's open the call for questions.

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(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 just provide guidance for the quarter? Or did you say $4.4 million in revenues this year or is that last 12 months?

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

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

:

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

I noticed you only took out half of the loan from the directors. Is that -- could that lead me to believe that you're getting close to wrapping up the sale of your remaining interest of 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 release, we've 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 remarks that from DSIT's, we are talking to people. So we are certainly moving along with the process. One never knows where the process, how long it takes? But we're certainly moving down and talking to interested parties.

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

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Well, that's really a culmination of what we've been doing over the past 2.5 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 have done so far and...

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

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Today, we do. Yes.

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Our next question comes from [Steven Jackson], a private investor.

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I have a question about cash flow. I would like to know about OmniMetrix, when they'll be -- will it be cash flow positive in 2018? When will the company expect to be cash flow breakeven? Also, I'm wondering about acquisitions. What types of acquisitions, you've mentioned acquisitions in the past. What kind of acquisitions you think might fit? And would making an acquisition help you to get to profitability quicker, using the net operating losses. And along that same lines, with acquisitions, how are you going to finance acquisitions with the stock price depressed? Is that indicative of the need for a reverse split? Anything you can say on that would be appreciated.

:

Okay, that's a lot of questions. Let me try to take them in order. So yes, we certainly believe that OmniMetrix will be cash flow breakeven to positive in 2018. As you might've picked up from my remarks, I said that Acorn does not anticipate -- Acorn corporate does not anticipate putting any money into OmniMetrix which we've done ever since we've brought the asset many, many years ago. So that would be indicative of the fact that we believe that they'll be 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. A business that has the monitoring aspect to it is been liked (inaudible) just on it what we like best. Obviously, those are jolly good businesses and they don't necessarily come cheap. But that's the area that we're looking at. And because of our NOLs, yes, 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 there was one last question that you threw in there. Can you just remind me about that one?

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On the -- how you going to -- the share price is going to (inaudible)depressed obviously.

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Yes. I'm hopeful that once we sell DSIT and people recognize that we're a 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 1. Step number 2 is, I think is, if 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'll respond as well in terms of positive movement to stock price. And it'll be up to us to try to structure a right deal, whether it'd be some debt, some shares, whether we would sell some shares into the public markets at that point in time, we really have to see. In terms of a reverse split, while we have shareholder approval to do a reverse split (inaudible) one, we don't feel that a reverse split in and 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's more valuable to the company. So at the right time, we'll do that when we think it's truly accretive to shareholder value.

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All right. I have one question for Walter. Walter, how big are the various markets you're targeting for OmniMetrix? And in those markets, what percentage of each remains unmonitored?

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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 billion dollars, how much is monitored at all? Because when we're going into a new customer, sometimes they're monitored by a competitor and sometimes they're new to monitoring overall. So $1 billion to 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 OmniMetrix. 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, data centers, 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 we all went through the past couple of months, that unfortunately is always a good indicator for our growth and you hate to see growth on the back of people going through hard times. But that is typically for more awareness and more demand, not only for the generators but for the monitoring as well.

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Right. Well it's very exciting, it sounds like there's a lot of monitoring opportunities out there.

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There is. We've been very busy.

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What are you doing in sensor alarms, how do you contact the customer?

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Well, so -- 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 e-mails and/or text messages, which is customizable per however they like to see it that lets them know: Number one, diagnostically, is there a problem, yes or no? And what's the problem, so that we can be efficient in fixing it. On another tier up, prognostically, the equipment is healthy now but we're seeing a trend with let's say the battery voltage, that's been trending down. So if you don't do something in the next 5 days, the equipment is no longer going to be healthy. So on a prognostic level, we're also helping customers be more aware of how to schedule maintenance and to make sure that they don't have any failures.

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(Operator Instructions) Our next question comes from Christopher Grosvenor with Morgan Stanley.

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Definitely some positive signs during the quarter. So congrats and looking forward to seeing more of that in the future quarters. Just one quick question here on gross margin on OmniMetrix. Kind of (inaudible) think about may be looking out a year or 2, how do you think about gross margin there? You looking at maybe 60%, 65%, what kind of visibility do you have into that number?

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Walter, you want handle that?

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Sure. Yes, thanks for the question. We are expecting to see gross margins to improve gradually in the years to come, for a couple of reasons. One, the margin on the monitoring is quite attractive and the percentage of monitoring relative to total revenue, we're focused on continuing to increase that. And then secondly, we've continued to -- in our next generation of products, continued 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.

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Our next question comes from [Jack Mayer], a private investor.

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Jan, you commented on -- I mean, it sounds like you're having at least very preliminary discussions with multiple parties in DSIT, if I understood you correctly?

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That is correct.

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Right. So in a very general preliminary sense, do you feel that you're going to be able to realize something that's in the range of your carrying value for that asset? In a very general sense, is that based on your discussions? Does that seems like an achievable goal? Not asking whether you will do it?

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

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Okay. But you're not getting reactions like, I mean, that's out of line or something like that?

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No, we're not getting any 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 for. So there's precedent for that number. Again, it doesn't mean that, that's the number we're going to get. We obviously are...

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No, no, I understand that and I appreciate that. And you obviously have -- there -- it is a minority stake, et cetera, et cetera. So let's I'm sure that's part of your challenge in selling it. But...

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Yes.

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Right. So I'm saying what the question is reflecting all of those things, I take it. But what you're saying is it's a reasonable number? And we'll see where it goes?

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That's fine. You can say that.

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

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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 the past 2 years in moving the company in the right direction and remain confident in our ability to execute 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.

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