Acorn Energy Inc (ACFN) 2020 Q2 法說會逐字稿

Good day, everyone. Thank you for holding, and welcome to Acorn Energy's Second Quarter 2020 Conference Call. (Operator Instructions) Please note, this event is being recorded.

I'd 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 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 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'll now hand the call over to Jan Loeb, CEO of Acorn. Jan?

Thank you, Tracy, and good morning. In our second quarter, Acorn achieved 7% year-over-year revenue growth, a gross margin of 70%, and we approached breakeven on a consolidated net income basis, with a net loss attributable to Acorn shareholders of $33,000 or $0.00 per share. This is the best bottom line operating performance that we've achieved in many years, and it was achieved during the pandemic. With these results, I am optimistic about the future of our business and proud of our OmniMetrix team.

I would like to take this opportunity to publicly thank our entire OmniMetrix team for their individual and collective efforts over the past several months as we worked through the challenges of COVID-19, both personally and professionally. As a company, the health and safety of our employees and customers is paramount as we continue to adhere to CDC guidelines in our daily operations in our 21,000 square foot facility and at client sites.

Our business, which provides remote monitoring and control services for equipment and infrastructure support for government, health care and other critical services, is classified as essential by the state of Georgia. As such, we have remained fully operational throughout the pandemic without any employee furloughs.

We started the year with a bullish outlook for growth, but by the end of Q1 and into early Q2, we were seeing lower sales volumes, mainly due to reduced hardware sales activity as businesses were either closed or focused on other aspects of their operations in attempting to function successfully through the pandemic.

As many of you know, cash basis sales is a performance-tracking measure we use to supplement our GAAP reported revenue and revenue growth trends. Cash basis sales are different from GAAP revenue because we defer and recognize revenue from hardware sales over a 3-year period, and we defer and recognize revenue from monitoring contracts over the period of service, which typically is 1 year.

We invoice upon hardware shipments and monitoring renewal periods, which creates the difference between cash sales and GAAP recorded revenue. Cash sales gives us insight on the volume of business closed in the -- a period. In Q2 2020, cash basis sales was essentially flat at $1.47 million as compared to $1.468 million in Q2 2019. We are satisfied with this result because we were able to maintain our sales volume level despite very challenging business development conditions caused by COVID-19 and related shutdowns and delays.

In our biggest segment, Power Generation, which focuses on the monitoring of standby generators for commercial and residential accounts, our cash basis sales increased $77,000 or 6% in Q2 2020 over Q2 2019.

In our small Cathodic Protection, or CP, segment focused on the monitoring and control of the electric current running in gas pipelines, cash basis sales declined by $75,000 or 31% due to restrictions on travel and sales interactions.

In the CP segment, our clients are generally larger corporations where, in many cases, sales meetings have been postponed due to social distancing and other restrictive policies currently in place. Additionally, CapEx budgets in the CP segment are also being impacted by energy price volatility and supply-and-demand disparities that continue to negatively impact this business.

Prior to the COVID disruptions, our expanded sales team was making considerable progress building a solid pipeline of customer trials. The sales cycle in the CP segment is typically 12 to 18 months but is likely to lengthen, in many cases, due to meeting and travel restrictions. However, we remain focused on converting these customer trials into deployments over time.

Now more than ever, remote monitoring control has a very compelling value proposition as our technology and services enable our customers to manage mission-critical industrial equipment much more cost effectively and safely, as we can substantially reduce the number of people and travel required to manage disparate assets over wide areas. These benefits are gaining even greater appreciation with mandated personal safety requirements, travel limitations and social distancing mandates related to the pandemic, in addition to the increasing frequency of severe weather events. We believe this equips us with a more fact-based justification to the need and benefits of our products and provides a substantive platform to support our expanding sales and marketing efforts, particularly given the very low penetration of remote monitoring and control solutions in our target markets.

Now let's turn back to a few financial highlights, after which, Tracy will provide more specifics to our financial performance and position. And then we'll open the call to your questions. I mentioned that we achieved 7% revenue growth over Q2 2019 and a gross margin of 70%. Most significantly, our gross profit grew 13% in Q2 2020, outpacing revenue growth due to the strength in our high-margin, recurring monitoring services revenue, which grew 19% in the quarter. This performance underscores the attractiveness and resilience of our monitoring service business and the strategy we've been executing for the past few years to refocus Acorn's resources on building this compelling business.

Turning to business development initiatives. In the second quarter, we launched our new Smart Annunciator product, which provides customers with status updates on critical electric systems. And last month, we forged our first distribution relationship outside of North America, targeting Continental Europe with the Italian company, Mel Systems, which will market our AirGuard monitoring solution in Italy as well as other countries in Europe. It will take some time to build out this distribution relationship and to customize our solution for the European market, but we believe this is an exciting new growth opportunity for our company.

We also hope to launch a new OmniMetrix software product upgrade later this year, which will offer more features and value to our customers, solidifying our leadership position in the remote monitoring and control market. And we will have more to say after the launch.

In the meantime, despite the COVID-related business development challenges in the near term, we see an abundance of market opportunities. Historically, new standby generator monitoring sales have been positively impacted by natural disasters and emergencies, such as hurricanes and storms, that disrupt power system and highlight the importance and value of standby power and remote monitoring to ensure generators can be relied upon to be called into service without delay and to operate for as long as necessary without interruption.

Similarly, we believe the pandemic can also stimulate generator and remote monitoring demand as reliable electrical access for home offices has become more important.

Some of you may have been impacted by the tropical storm that went up the East Coast last week. Although not a hurricane, this storm left millions of people without power, some for upwards of a week. We expect the aging of the U.S. power grid infrastructure will continue to be an issue and to drive our backup power generation and monitoring for many years. This is one of the many underlying trends that support our confidence in achieving our long-term annual average growth rate of 20%.

For several years, we have stressed our goal to advance Acorn to achieve cash flow breakeven and then profitability on a consolidated basis. I'm very proud to report that we came very close to achieving that goal in the second quarter despite COVID-related challenges. And we're optimistic that we will be able to continue to build on the financial performance of the business to achieve positive cash flow and profitability over the next few quarters.

Of critical value as we approach profitability is the fact that Acorn has a very large net operating loss carryforward, which would shield future income from income taxes, benefiting both net income and cash flow. We believe we are on solid footing for next year, with an expectation that the economy will be more fully reopened and business activity will be -- will at least begin to normalize. It's too early to establish specific goals for 2021, but we certainly hope to be in the black from a consolidated earnings and cash flow standpoint in 2021. We believe we have the resources to endure the current COVID-induced downturn, and we remain confident in the value of our remote monitoring services and the long-term growth potential within a still largely untapped market.

Given the opportunities we see, our healthy cash position and my confidence in the OmniMetrix team, I'm very enthusiastic about our business and what we can do going forward.

Now I'll turn the call back to Tracy Clifford, our CFO, to go over more Q2 financials in more detail. Tracy?

Thank you, Jan. Today, we released our second quarter and year-to-date results in a press release issued this morning. And we also filed our 10-Q with the Securities and Exchange Commission yesterday evening. I'll review some of the highlights from our GAAP basis results as reported.

OmniMetrix' Q2 revenue increased, as Jan mentioned, approximately 7% over Q2 '19 to $1.5 million on strength in our largest segment, Power Generation, which grew 19% or $205,000. This increase was partially offset by a decline of $114,000 or 36% in our smaller Cathodic Protection segment, reflecting the overall challenges that Jan discussed in the energy sector and delayed sales interactions related to COVID-19.

Gross profit grew 13% to $1,022,000 in Q2 '20 versus $901,000 in Q2 '19. The increase in gross profit was principally attributable to a revenue mix that included more monitoring revenue, which has a significantly higher gross margin than hardware. Consequently, gross margin improved to approximately 70% in Q2 '20 versus 65% in Q2 '19.

Operating expenses decreased 5% at OmniMetrix to $822,000 in Q2 '20 versus Q2 '19 primarily due to decreased travel expenses related to COVID-19 restrictions and also a decrease in legal fees. However, we anticipate that the full year 2020 OmniMetrix SG&A cost will increase approximately 15% over 2019 as a result of our fully staffed sales team and continued IT infrastructure investments and other expenditures for growth. With higher gross profit, coupled with lower quarterly operating costs, OmniMetrix reported a Q2 '20 operating profit of $200,000 versus an operating loss of $40,000 in Q2 '19.

At the corporate level, G&A decreased 9% to $222,000 in Q2 '20 from $243,000 in Q2 '19 due to decreased traveling expenses and a reduction in insurance costs but was flat to Q1 '20, which was $223,000. Management does not expect corporate G&A expense to change materially for the full year 2020 other than expenses that may be required to support growth at OmniMetrix.

Net loss attributable to Acorn shareholders improved to $33,000 or 0% per share -- $0.00 per share in Q2 '20 as compared to a net loss of $199,000 or $0.01 per share in Q2 '19. For the first 6 months of 2020, Acorn's net loss attributable to shareholders improved to $316,000 or negative $0.01 per share versus $436,000 or $0.01 per share also in the first 6 months of 2019.

In terms of cash flow, on a consolidated basis, we generated $78,000 from operating activities in the 6 months ended June 30, 2020, as compared to a use of cash of $423,000 in the first half of 2019. The improvement was due to increased receivable collections as well to a reduced net loss.

Consolidated cash and cash equivalents were $1,760,000 at June 30 and $1,775,000 on August 9, including loan proceeds of $462,000 received by Acorn and OmniMetrix in April from the Paycheck Protection Program. Assuming substantially all of the loans are forgiven under the terms of the PPP, we expect to record a related gain later this year.

That concludes my review of financial results. And now I'd like to turn the call back to the operator so we can take questions from our investors. Operator?

(Operator Instructions) Our first question will come from [Richard Sosa], who's a private investor.

I just had a few questions. One, great quarter. I have been an investor since 2016 2016, and it's great to see -- it's definitely the best quarter since I've been an investor. So congratulations. Just first, you did mention, I believe on the last call, about manufacturing some of your devices in-house. Have you continued with that? Or how is the -- is there any progress?

Yes. As of right now, we've continued with that. But as sales have strengthened, we plan to go back to the normal structure over time.

Okay. And historically, the third and fourth quarter on a cash basis had been materially stronger. Do you believe that, that could be the case this year? I know this year is very different, and a lot of the drive in the past has been from some of your energy customers -- well, your larger customers, but do you see that as a possibility this year?

It's certainly a possibility. The unknown really is in the CP segment. Typically, in the fourth quarter, the CP segment has been stronger as some of our customers have budgets to spend and they spend it with us on corrosion protection equipment. It's hard to say with COVID-19, no meetings and oil price and gas price volatility, what will happen in the fourth quarter with their budgets.

So I would take a conservative approach, and that's what we're doing internally as to the CP segment and the fourth quarter.

Okay. And then just in terms of the sale of DSIT, have you received all of that cash back? And is it in the bank? Or is there anything left that you'd get back?

No. We've received all the cash, and it's in the bank.

Okay. And then just on the PPP money, do we expect that in the third quarter? Or is that -- would that just translate all into sales? Or how does that work? If you can comment.

Certainly. So the guidance that's out right now -- and certainly, the SBA is changing certain of the regulations on, it appears to be, a weekly basis. But we'll continue to report the proceeds of the loan as a liability until it's partly or wholly forgiven and we've been completely legally released. I do intend to do an assessment before the filing of the third quarter Q and actually before the end of the third quarter at 9/30, and seeing where we are on the 20 -- as far as the utilization of the proceeds. And if it appears at that time that we've utilized all the proceeds prior to 9/30, then I'm going to go ahead and file for the forgiveness prior to the end of the third quarter, even though we would have a somewhat extended period from that to do so if we've not yet used all the proceeds on the 24-week extended term at that time. As soon as we are legally released from either all or part of the loan, we would take it in as a gain on extinguishment of the loans. So it will be shown as a gain from loan forgiveness.

Our next question comes from Peter Rabover with Artko Capital.

Congratulations on getting to break-even cash flow and starting to generate cash flow. I wanted to just kind of follow up on the dynamic of the long-term growth. And as you're introducing new products, how should we think about the growth in terms of the volume versus price versus product mix growth? Is that -- I mean is there kind of like a split that you're thinking about? Or any color you can give us would be great.

I'd say that -- I don't want to say volume versus price, but I'll say that the Smart Annunciator product that we've just introduced is a higher-cost product than we've had in the past. So if the product is successful, which we think it will be and hope that it will be, I would think you would see a pickup in hardware sales over time in the PG segment. Smart Annunciator is in the PG segment, so I would see that we should have a pickup there. It has similar margins to our existing hardware product in the PG sector but just at a significantly higher price point.

So that's one thing that, I think, you can expect...

Is there a higher monitoring revenue component to that? Or is the...

There is -- no, there's a similar monitoring component. So the Annunciator is a product that incorporates our TG-PRO within the Annunciator. So it will have a similar monitoring revenue but higher hardware number.

When we launch our new software product, that will flip it a little bit to the other side. That will be more of a SaaS-type revenue versus a hardware sale. So that will flip the monitoring and the SaaS kind of revenue to that side. So we have different things going on. So it's hard for me to tell you that -- what one is going to be versus another as we have stuff in both categories, but those are some of the trends that you should expect to see over the next few years.

Okay. Great. And then I just had a follow-up. I know you had mentioned, obviously, some difficulty with getting new sales and converting leads into sales because of COVID lockdowns and all that. How has your, I guess, renewal rates with customers have been on the monitoring side? Has there been an impact there from the economic -- like other than the usual disconnect that you usually have, has there been an economic uptick or anything like that or no?

No. We've not seen any change in renewal rates or in collection of receivables. As you can see from our cash balances, things have been fairly strong in that area.

Our next question will come from James McIlree with Bradley Woods.

I apologize if you went over this in your commentary, but do you have an estimate for how much COVID impacted your hardware sales in the quarter?

No. We don't have an estimate. But you can tell -- historically, CP has -- is a growing segment within our company and -- because we started it from a fairly low base, so in the early years, had very strong growth on a percentage basis. Last year, we had some turnover in the salespeople. But -- so you can tell a little bit throughout -- just looking at the trends -- the expected trends in CP versus where we are, you can make an estimate as to what it is, but we don't really look at that.

Okay. And did you have or do you have currently issues on parts to manufacture the units? Is there any supply chain issues that you're working through?

Currently, no. There were at the beginning, in March, we had some delays. But today, we're -- we have no delays whatsoever.

Got it. And I think you said -- I think I heard you say that you think COVID or the grid resiliency is going to have a beneficial impact for you. Is that something that's backed up by evidence you've seen so far? Or is that more of a -- just based on kind of your view of the market?

The -- no, it's backed by evidence. If you looked at Generac, which is the largest manufacturer of generators, in their second quarter results, they had very strong results, in particular in the residential area. So they clearly are seeing an uptick in that.

And then if you look -- there have been a number of studies done as to the amount of -- it's obviously a short-term study, the amount of electrical usage at homes since the stay-at-home orders were put into place, and the electrical usage is up significantly. I mean just think about if a person's at home all day with his computer or going to refrigerator, having the air conditioning on, just the electrical usage at a home is up substantially. And I think I saw a -- one particular study in New York City, apartments was up 7%. So electrical usage is certainly up because of COVID.

Yes. No, there's -- certainly in my house, it is. Okay.

And it's not only just the usage. It's also the need and importance. So if you're now working at home, you can't afford to be down for 2 days. So I think backup power becomes more important, not just because of the usage but because of the requirement to be up.

And I think complementary to that is there has been an increase in home improvement costs and investments. More people that are working from home are spending money on their home. And there has been some guidance posted out there on the -- folks are investing a lot more in their homes and their home offices. So I think we're going to see more generators and alternative backup solutions as a result of that as well.

Yes. That's an interesting point, particularly if you're not spending it on the restaurants and commuting and parking, and things like that. Yes, I can see that.

Exactly.

(Operator Instructions) Our next question will come from [Jack Mayer], who is a private investor.

Congratulations on what I think that seems to have been a wonderful quarter. I wondered if you could expand a little bit more on this European initiative. Any particular reason that you started in Italy? Or it's just that this distributor is centered in Italy? Any particular reason that you started with the air compression? Why not PG? Why not something else? If you can comment at all on the competitive landscape there as opposed to the U.S., anything that you can do to expand on it.

We love Italy. Well, it's a great place to visit. The Mel approached us. They had heard about our air compressor solution. And they had done their research, and our product was the best in the market. So they approached us about purchasing our product and distributing it within Europe. So really, it wasn't that we were out looking for a European strategy. They came to us and they liked -- and their business is mainly air compressors. So that's why they chose our air compressor monitor versus our PG monitor.

But they are big in Europe. And we'll see what happens. It's a little difficult in Europe for us in terms of monitoring, setting up monitoring and meeting our customer service, which is -- it's just a superior customer service to most of our competitors. It's hard to do it in Europe because of the time differential. So there are a couple of things we're doing a little different. And that's why I said in my remarks that it will take a little bit of time to develop this completely. But it's a beachhead and I think an interesting one.

And in terms of what you know about competition in Europe, is there anything that's structurally different than here?

Structurally, no.

I'm showing no further questions at this time. So this will conclude our Q&A session. At this time, I would like to turn the conference back to Jan Loeb for any closing remarks.

Thank you. The current environment remains challenging from a growth standpoint, but we are well positioned from a balance sheet and capital standpoint to navigate the pandemic. And we are well positioned for 2021, assuming business conditions begin to normalize. We will continue to look for growth opportunities in the markets we serve and complementary opportunities and to make investments in product development to meet market demand where we see it.

We would also consider any external acquisition opportunities that might arise as a result of the challenging economic environment, if it will be accretive to profitability and to shareholder value.

I just would also like to mention that we are planning to have our Annual Shareholder Meeting on September 14, 2020. And it will be -- you can come in person or virtual via Zoom, and the link will be made available on our website ahead of time. And you can certainly contact our Investor Relations team for information. And we'll put out a press release about that in the coming weeks.

Once again, I thank you for your interest in Acorn. We generally -- genuinely appreciate the support of our shareholders, and I'm happy to speak with investors about the company. Please contact our Investor Relations with any questions or a separate call with me. Thank you again for your time today. Operator, I believe this concludes our call.

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