Acorn Energy, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results are consolidated; the operating business is OmniMetrix, which provides remote monitoring products and services for power-generation equipment and cathodic-protection systems. Unless noted, amounts are in thousands of dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,468 | $1,377 | $2,806 | $2,704 |
| Gross profit / margin | $1,022 / 70% | $901 / 65% | $1,944 / 69% | $1,722 / 64% |
| Operating loss | $(22) | $(203) | $(296) | $(470) |
| Net loss attributable to Acorn shareholders | $(33) | $(199) | $(316) | $(436) |
| Basic and diluted loss per share | $(0.00) | $(0.01) | $(0.01) | $(0.01) |
- Revenue grew 7% in Q2 and 4% in the first half. First-half monitoring revenue increased 18% to $1,853, while hardware revenue declined 16% to $953. Growth in monitoring units and revenue was partly offset by weaker hardware sales, particularly in cathodic protection.
- Higher monitoring mix supported margins: first-half monitoring gross margin was 84%, while hardware gross margin was 40%. Q2 gross profit rose 13% year over year.
- For the first half, operating expenses were $2,240, including $293 of R&D and $1,947 of SG&A. OmniMetrix generated operating income of $149 in management’s company-level presentation, but Acorn corporate expenses of $445 resulted in a consolidated operating loss of $296.
- Operating cash flow was $78 in the first half, compared with cash used of $423 in 2019. Investing activities used $91, including $88 for software. Financing provided $526, including $462 of PPP loan proceeds, $45 of net line-of-credit borrowing, and $19 from option exercises. Cash increased $513 to $1,760; the prior-year ending cash-and-restricted-cash balance was $3,237.
Financial position and liquidity
- At June 30, 2020, cash was $1,760, current assets were $3,714, and current liabilities were $3,996, producing negative working capital of $282. Total assets were $5,221; total liabilities were $6,146; total deficit was $925.
- Current liabilities included $3,115 of deferred revenue. Total deferred revenue was $4,485, primarily expected to be recognized over time; the company said recognition does not require significant cash outlay. Backlog, primarily deferred revenue, was approximately $4.5 million.
- Debt included $462 of PPP loans and $181 outstanding under OmniMetrix’s receivables-based credit facility; $122 was available under that facility at June 30. The credit facility’s effective borrowing rate was approximately 15%. PPP forgiveness was expected by management but was not assured; $180 of PPP debt was classified current and $282 non-current.
- Management reported approximately $1,775 of cash at August 9 and believed available cash, operating cash generation, and borrowing capacity would fund current operations for at least 12 months from issuance of the statements.
Material changes and outlook
- Q2 net loss attributable to shareholders narrowed to $33 from $199; first-half loss narrowed to $316 from $436. Lower losses reflected improved gross profit and reduced Q2 SG&A, partly offset by corporate overhead and finance expense.
- COVID-19 had caused minimal adverse impact to date, according to management. Recurring monitoring revenue and customer retention continued, but travel restrictions slowed equipment sales and lengthened the sales cycle, especially for cathodic-protection projects, which can take 12–18 months to close. Management identified potential workforce, supply-chain, customer-demand, and facility-shutdown risks.
- Management expected moderate R&D expense increases during 2020 for product redesign and expansion. It anticipated annual OmniMetrix SG&A to increase approximately 15%, reflecting a fully staffed sales team and IT investment; corporate quarterly overhead was not expected to change materially.
- On April 24 and 30, Acorn and OmniMetrix received PPP loans of $41.6 and $419.8, respectively. Management intended to use proceeds for eligible expenses and expected full forgiveness, but disclosed no assurance forgiveness would be obtained. Without forgiveness, monthly payments would be $2.33 and $23.51, respectively.
- On May 5, 2,142,857 warrants with a reported book value of $1,018 expired. The filing records this as a transfer between equity accounts, not as operating income. The company also entered a 12-month data-hosting and business-continuity contract costing $148, an increase of $21 from the prior term.
- Disclosure controls and procedures were deemed ineffective due to previously identified material weaknesses related to insufficient subsidiary resources and limited IT capabilities. Management reported no material change in internal control over financial reporting during the quarter.
Key investor verification points
- Track whether PPP loans are forgiven and confirm any resulting repayment obligations.
- Monitor cash generation, the high-cost credit facility, and the company’s ability to sustain operations despite negative working capital and recurring corporate expenses.
- Assess whether monitoring growth can offset hardware weakness and COVID-related delays, particularly in the cathodic-protection sales pipeline.
- Review remediation of the disclosed material weaknesses and any subsequent change in disclosure-control effectiveness.
- Check customer concentration: one customer represented approximately 22% of accounts receivable at June 30; the company reported collection of that customer’s $157 balance by August 9.