Acorn Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in thousands of U.S. dollars unless otherwise stated. Acorn is now principally a holding company for OmniMetrix, which provides remote monitoring products and services for power-generation equipment and cathodic-protection systems. Acorn sold its remaining 41.15% interest in DSIT in February 2018.
Financial performance
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $1,337 | $3,776 | $1,085 quarter; $3,226 nine months |
| Gross profit and margin | $831; 62% | $2,312; 61% | $629; 58% quarter; $1,837; 57% nine months |
| Operating loss | $(230) | $(1,142) | $(531) quarter; $(1,375) nine months |
| Net income (loss) attributable to Acorn shareholders | $4 | $(1,756) | $236 quarter; $(475) nine months |
| Operating cash flow | Not separately presented | $(2,263) | $(1,322) nine months |
- Nine-month revenue rose 17%; monitoring revenue increased 22% to $1,990 and hardware revenue rose 12% to $1,786. Management attributed monitoring growth to more units being monitored.
- Nine-month gross margin improved to 61%, primarily from higher-margin product mix and lower unit costs. Monitoring gross margin was 84%; hardware margin increased to 36% from 29%.
- Nine-month operating expenses were $3,454, including $399 of R&D and $3,055 of SG&A. Corporate SG&A included $150 of one-time bonuses related to the DSIT sale and $20 of former-CFO transition consulting fees.
- Nine-month net loss included a $607 loss on the DSIT sale, partly offset by a $222 third-quarter gain related to the refund of 2016 Israeli withholding tax. In 2017, discontinued operations contributed $698 for the nine months; there was no such income in 2018.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $1,422, plus $300 of restricted cash. Current assets were $3,895 and current liabilities $4,290, resulting in negative working capital of $395. Total assets were $4,557; total equity was a deficit of $953.
- Cash increased by $941 during the first nine months: operating activities used $2,263, DSIT-sale proceeds provided $4,971 net of transaction costs, and financing activities used $1,754. Financing uses included repayment of $1,300 in director-loan principal and $340 owed to DSIT.
- OmniMetrix’s receivables-based credit facility had a $199 balance at September 30 and an effective interest rate reported as approximately 18%. It expired October 31; the company did not renew it and the balance was paid in full on November 6. OmniMetrix was seeking replacement financing on more favorable terms.
- Acorn reported cash of approximately $1,195, excluding restricted cash, on November 8. Management believed available cash, expected operating cash generation and borrowing—assuming a favorable replacement credit line could be secured—would fund operations for at least 12 months. The filing cautions that replacement financing and Acorn’s capacity to fund OmniMetrix were uncertain.
- Contractual cash obligations totaled $658, including $199 of debt, $136 of operating leases and $323 due to the former director/investor. OmniMetrix also owed Acorn approximately $3,739 of intercompany advances, repayable only when it has sufficient cash; this amount is eliminated in consolidation.
Material changes, outlook and risks
- The DSIT sale generated $5,800 gross proceeds. Acorn used proceeds to repay DSIT and director obligations. The $300 restricted cash balance relates to an Israeli tax refund; Acorn agreed not to transfer the funds out of Israel while the tax authority reviews its position. The filing says management expects the review to finish by the end of 2019, but the funds may remain restricted until review completion or December 31, 2022, whichever comes first. Additional 2017 and 2018 withholding-tax refunds were requested but not recognized as benefits.
- Management expected a nominal increase in OmniMetrix SG&A in Q4 2018 due to position changes and potential investment in technology and sales personnel. It provided no specific revenue or earnings guidance.
- Deferred revenue/backlog was approximately $3.9 million at September 30, primarily to be recognized over future periods. Management noted that recognizing this deferred revenue does not require significant cash outlay.
- Acorn adopted ASC 606 on January 1, 2018 using the modified retrospective method, recording a $152 cumulative adjustment to opening retained earnings for capitalized sales commissions. Hardware revenue and related costs are recognized over an estimated three-year unit life.
- Management concluded disclosure controls and procedures were not effective because of previously identified material weaknesses, including insufficient resources at OmniMetrix and limited IT capabilities. No material change in internal control over financial reporting occurred during the quarter.
- Other noted exposures include dependence on successful replacement financing, restricted tax-refund cash, concentration of approximately 25% of receivables among three customers, and the company’s continuing operating losses and negative working capital.
Important facts for investors to verify
- Whether OmniMetrix secured replacement credit financing, on what terms, and whether operating cash generation supports management’s 12-month liquidity assessment.
- Status of the Israeli tax-authority review, restrictions on the $300 refund, and the requested 2017 and 2018 tax refunds.
- Whether monitoring-unit growth and improved gross margins continue, and whether planned technology and sales investments affect costs or results.
- Progress in remediating the disclosed material weaknesses and improving disclosure controls.
- Reconciliation of ongoing consolidated losses with the near-break-even Q3 result, including the effect of the $222 DSIT-related gain and discontinued operations in the prior-year comparison.