Acorn Energy - Q1 2023

Transcript

Operator (participant)

Good morning, welcome to the Acorn Energy 2023 first quarter conference call. At this time, all participants are in a listen-only mode. After some prepared remarks, we will conduct a question and answer session. As a reminder, today's conference is being recorded. I will now turn the call over to Tracy Clifford, CFO of Acorn Energy, and COO of its OmniMetrix operating subsidiary. Ms. Clifford, you may begin.

Tracy Clifford (CFO and COO)

Thank you. Welcome, everyone, to today's call. As a reminder, many of the remarks that follow and answers to 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 2023 and future years is subject to risks associated with disruptions to business operations and customer plans, resulting from the company executing its operating strategy, maintaining high customer renewal rates, and growing its customer base, as well as from changes in technology, changes in the competitive landscape, and changes in the financial and economic environment. Forward-looking statements are based on management's beliefs, and the assumptions made using information currently available 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 management's growth goals for 2023 or future periods. The company undertakes no obligation to disclose revisions to such forward-looking statements to reflect events or circumstances occurring after today. A full discussion of the risks and uncertainties that may affect the company is included in our 10-K under Risk Factors and filed with the Securities and Exchange Commission. A reconciliation of non-GAAP financial measures to correspond to GAAP measures will be provided in today's press release available in the investor relations section of the company's website at acornenergy.com. I'll now turn the call over to Jan Loeb, CEO of Acorn and our OmniMetrix operating subsidiary. Jan?

Jan Loeb (President and CEO)

Thank you, Tracy. Good morning, thank you all for joining our call. It's been less than 2 months since our Q3 call, so I'll keep my comments brief and leave plenty of time for your questions. We are pleased to report that our monitoring revenue returned to growth in Q1 2023, following negative year-over-year comparisons in 2022, principally due to the impact of the sunsetting of 3G wireless technology. With this transition behind us, Q1 2023 monitoring revenue modestly over Q1 2022, providing the first quarter of year-over-year growth since Q4 2021. As we've mentioned in the past, the wireless provider's sunsetting of legacy 3G wireless technology required our customers to upgrade to next-generation LTE wireless systems. This wireless network upgrade drove an increase in retention sales of new remote monitoring equipment in 2022.

However, it also had a negative impact on our base of monitoring endpoints. As a small percentage of customers either chose to not upgrade and thus had their annual monitoring service lapse or they switched to a competitor's product, such as an OEM solution. Due to this cycle, our Q1 2023 hardware revenue decreased 4.7% compared to Q1 2022. Reflecting the offsetting impact on hardware and monitoring, Acorn's total revenue was flat at $1.75 million in Q1 2023. Note that monitoring revenue gross margins are approximately double those on hardware. Also, we consider monitoring revenue to be annual recurring revenues or ARRs, because setting aside unusual events such as sunsetting, 80%-90% of monitoring service plans renew upon expiration.

In terms of monitoring ARR growth with its high profitability enabled us to trim our Q1 2023 net loss to $85,000 from a net loss of $123,000 a year ago. Given these trends and our high-margin contribution, we believe Acorn is on a trajectory to achieve profitability based on our growth goals. Digging down to cash basis, historically our first quarter tends to be the slowest quarter, with business building into Q2, followed by Q3 as the strongest quarter, and Q4 being our second strongest quarter. 2022 was an anomaly to this pattern as hardware sales were higher than normal in Q1 2022 due to the positive impact of sunsetting units as previously discussed.

Rather than our weakest quarter, Q1 2022 was a very strong quarter in terms of cash basis revenue and why cash basis sales declined 9.9% in Q1 2023. We do expect this year to return to a more normal pattern, with Q1 likely our weakest quarter and sales building in Q2 and Q3. We continue to be optimistic that our business can achieve 20% annual cash basis revenue growth in 2023. If we are able to meet our growth goals, we expect to achieve positive cash flow, enabling us to cover corporate overhead at breakeven until we get on a consolidated basis.

It is important to note, as we have on prior conference calls, that Acorn has over $70 million of net operating loss carryforwards that would largely shield future profitability from tax liabilities and therefore benefit our cash flows as we become profitable. Our confidence in achieving our annual growth goal is based on the business trends we have seen to date in 2023 in terms of sales discussions, forecasts, and new business leads, including our continued testing activity on a few sizable potential opportunities. We also believe our business will benefit from the increasing focus on environmental issues, including severe weather patterns, as well as the business benefits of our industry-leading solutions. We have a solid and growing base of high-margin commercial and industrial customers, which we expect to be the foundation of our growth in 2023.

Commercial and industrial companies face many challenges, including rising labor and fuel costs, increasing environmental pressures, budget constraints, and ROI goals. Comnet solutions can have a positive impact across all these areas for a broad array of businesses. Increasingly, customers are attracting to the reduced carbon footprint of remote monitoring as they see opportunities to minimize their environmental impact. We believe this trend, combined with our compelling ROI, will support our business development efforts as we go looking forward. One solution that we're really optimistic for in 2023 is our remote AC mitigation disconnect solution for gas pipelines that we call RAD. Pipeline operators install devices to protect their assets from AC voltage created by overhead power lines. These voltages increase the risk of corrosion. The existing devices also have a need to be periodically disconnected and reconnected, which is done by hand.

This requires additional manpower and many hours to complete. Our RAD product connects via cellular or satellite networks and is used to remotely disconnect and reconnect these devices. This eliminates the need for this to be done manually, as well as ensuring the existing devices are functioning properly. The RAD reduces company expenditures whilst dramatically increasing employee safety and being environmentally friendly by saving truck trips. Our RAD solution went into customer trials in late 2022, and we hope to convert some of these trials into orders later this year. We also hope to see initial customer activity in 2023 for our demand response program in partnership with CT Energy. The program compensates generator owners for making their generator available to retail energy loads when called upon by the participating grid operator.

Comnet provides the enabling technology for demand response, as it allows standby generators to be automatically turned on to provide electric relief during periods of extreme demand. This added power supply is designed to help grid operators avoid rolling brownouts or blackouts. Standby generator demand response programs are helpful for C&I and residential customers that have deployed new enhanced energy efficient generators. We expect to see these programs begin in 2023 with initial deployments then grow in the coming years. Importantly, we expect the added value of our monitoring and control solutions for demand response to deliver roughly twice the profit margin of our traditional monitoring offerings. In addition to near-term opportunities in 2023, secular trends should continue to benefit our business longer term.

An aging power grid, lack of investment in new power supplies, growth of electric vehicles, and other corporate electrification strategies will put further stress on the grid, as well as increasing prevalence of severe weather events, all of which increase the benefits of standby power generation with remote monitoring control. Acorn closed Q1 2023 with $1.3 million of cash, no debt, and a business that is approaching positive operating cash flow. We believe we are very well positioned to fund our current growth and pursue potential external opportunities. We continue to evaluate potential bolt-on opportunities. Fortunately or unfortunately, public and private valuations have come down, and we do have the flexibility and the opportunity to do deals in our space that would be accretive to our business and benefit our shareholders.

Finally, in the past, I have said that we were looking to hire a West Coast sales manager, which we recently did, and who starts next week. We feel he has the background to help jump-start our efforts on the West Coast, which is a large and growing market for backup power generation. In March, we added a new director to our board, long-time shareholder Peter Rabover of Artko Capital LP. He is a committed shareholder, and we are confident Acorn will benefit from his experience and leadership. With that, I'll pass the call back to Tracy for her review of the financials and insights on our operations. Tracy?

Tracy Clifford (CFO and COO)

Thanks, Jan. I wanted to note that we filed our 10-K this morning. I'll run through some key elements related to our reported results. Then we can turn it back to the operator for any investor questions. The remarks that follow will compare Q1 of this year to Q1 of last year for income statement items. The balance sheet items will generally compare March 31, 2023 to December 31, 2022. The numbers I discuss are compiled on a GAAP basis, except for cash basis revenue, which as Jan mentioned, we reconcile to GAAP revenue in today's press release. Q1 2023 recorded revenue was flat versus Q1 2022 at approximately $1.75 million in each period. Our primary wireless provider, AT&T, stopped offering 3G wireless units in February of 2022, impacting the prior year period, as Jan previously noted.

Notably, Q1 2022 hardware revenue and cash basis revenue were higher than they otherwise would have been, creating less favorable top-line comparisons in Q1 2023. Hardware revenue was down 4.7%, and cash basis revenue was down 9.9%. However, on a more favorable note, the impact of some spending now completed, our higher margin and recurring monitoring revenue returned to year-over-year growth. Given the higher percentage of high-margin monitoring revenue in our mix, our Q1 2023 gross profit margin increased to 75.2% of sales compared to 71.8% in Q1 2022, enabling us to generate $48,000 additional gross profit.

Total operating expenses increased 2.2% to $31,000 in Q1 2023, reflecting a 1% increase in engineering expense and an 8% increase in R&D expense. Nominal increase in estimated expense is due in part to timing of audit fees and tax appeal level, which were higher this year compared to prior year period, in addition to a decrease in consulting fees. We do expect SG&A to increase in the remainder of 2023 due to increased personnel costs from staff additions. R&D expense increased mainly due to Q4 2022 salary increases to our engineering team and the continued development of next generation monitoring and control products and re-escalation of new product lines. We believe we have the best technology and products in the industry due to quality of the OmniMetrix team and innovative culture.

This has allowed us to grow our market share, particularly in the commercial and industrial segment, where we continue to introduce new solutions. Net loss attributable to stockholders increased to $85,000 versus a loss of $123,000 in Q1 2022 as gross and profit outpaced operating costs. On a per share basis, our net loss is $0.00 a share in both periods. Turning to cash flow, the company used $83,000 of cash in operating activities in Q1 2023, primarily due to our net loss, and we used $26,000 in investing activities for minor hardware and software technology upgrades. We continue to invest in development of the new monitoring and data customer interface called OmniView 2.0, which is planned for launch later this year.

In terms of the balance sheet, it recently increased to $803,000 from $789,000 at year-end and $674,000 at March 31, 2022. We're still maintaining sufficient inventory to mitigate potential delays in product delivery to fulfill large volume orders in this strategic support expected growth. We expect to report year-end consolidated cash of $1.3 million at quarter end and $1.5 million as of May 9. We believe our balance sheet provides solid support to continue executing on our growth strategy. As many of you know, in accordance with GAAP, we report 5.9% of our hardware sales as deferred revenue. It amortizes ratably into revenue over a 24-period. Similarly, we defer monitoring revenue and amortize it over the term of the monitoring plan, which is typically 1 year.

The cash value of hardware and monitoring services, however, are invoiced at the time of the sale and collected on normal payment terms of 30 to 90 days. We just increased the backlog of deferred revenue. We want to point out that we ended Q1 2023 with a record backlog of $6.2 million versus $5.7 million in Q1 2022. We expect approximately 2/3 of this to be recognized as GAAP revenue in 2023. Overall, we are very excited for the rest of the year and for longer term opportunities in our business, particularly in an underserved commercial and industrial market for remote monitoring and control solutions. I look forward to updating you on our progress in the future. Thank you everyone for joining the call. Now we'll open the conference call to answer questions. Operator?

Operator (participant)

Thank you. We will now begin our question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to shuffle our roster. Again, if you would like to ask a question, please press star then one. As I'm showing no questions at this time, this concludes our question and answer session. I would like to turn the conference back over to Jim Lodge for any closing remarks.

Thank you everyone for your interest in Acorn Energy. We appreciate your support and I'm happy to speak to investors or prospective investors. Anybody who didn't want to ask a question on the call can certainly call us. You can set up a call with Case or myself or ask questions to our IR team whose contact information is in today's press release. Case and I look forward to updating investors on our Q2 conference call in August. Thank you again, and this concludes today's call.

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