ACORN ENERGY, INC. quarterly report, Q1 FY2019

Full document

Acorn Energy, Inc. — Q1 2019 Form 10-Q

Unaudited results for the three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Dollar amounts are in thousands, except per-share data. Acorn is a holding company whose operating business is OmniMetrix, in which it owns 80%. OmniMetrix provides power-generation and cathodic-protection monitoring systems and services.

Financial performance

  • Revenue was $1,327, up 10% from $1,209. Monitoring revenue increased 19% to $766 as the monitored-unit base grew; hardware revenue declined 1% to $561.
  • Gross profit rose 10% to $821; gross margin was 62%, unchanged year over year. Results include a $30 accrual for a commitment related to discontinued technology. Excluding it, management reported gross profit of $851 and a 64% margin.
  • Operating expenses were $1,082, down from $1,113. R&D increased to $144 from $129; SG&A decreased to $938 from $984, as higher OmniMetrix spending was more than offset by lower corporate costs.
  • Operating loss improved to $261 from $368. Net loss attributable to Acorn shareholders was $237, or $0.01 per share, versus $1,222, or $0.04 per share. The prior-year loss included an $829 loss on the sale of Acorn’s remaining DSIT interest; the sale closed in February 2018.
  • Operating cash use was $325, compared with $1,581 in Q1 2018. Investing cash flow was zero versus $4,971 provided in Q1 2018 from DSIT sale proceeds. Financing provided $140, primarily from the credit line. Cash, cash equivalents and restricted cash totaled $1,078 at quarter-end, including $779 unrestricted cash and $299 restricted cash.
  • At March 31, total assets were $3,786 and total liabilities were $5,291; the company reported a total deficit of $1,505. Working capital was negative $1,178. Deferred revenue was $4,051, including $2,679 current, and management said recognition generally requires no significant additional cash outlay.
  • OmniMetrix had $140 outstanding on its receivables-based credit facility and $267 available to borrow at March 31. The facility permits borrowing up to the lesser of 75% of eligible receivables or $1,000; its stated effective borrowing cost was approximately 16%, and it requires a minimum balance of $150 for two years beginning March 2019.

Material changes and operating detail

  • Power Generation revenue increased to $996 from $886; Cathodic Protection revenue rose to $331 from $323. Segment gross profit was $686 and $135, respectively. CP reported a pre-tax loss of $85; PG reported pre-tax income of $23. Corporate costs contributed $199 to consolidated pre-tax loss.
  • Monitoring revenue increased to $766 from $642, while hardware revenue decreased to $561 from $567. Monitoring margin remained 83%; hardware margin increased to 38% from 37%.
  • Corporate SG&A fell to $209 from $313, while OmniMetrix SG&A increased to $729 from $671, mainly due to personnel investment. Management cited plans to invest in sales, monitoring software and an ERP system.
  • Backlog, primarily deferred revenue, was approximately $4.0 million at March 31. Acorn reported approximately $4.0 million owed to it by OmniMetrix for advances, interest and expenses.

Outlook, risks and contingencies

  • Management said existing cash, expected operating cash generation and credit availability should fund Acorn and OmniMetrix operations for at least the next 12 months. This assessment is management’s expectation, not a guarantee.
  • On May 6, 2019, Acorn filed an S-1 for a proposed rights offering targeting $2.4 million gross proceeds. Terms and timing were undetermined. Proceeds were intended to support a proposed buyout of the 20% OmniMetrix minority interest, growth investments and working capital.
  • The $30 discontinued-technology commitment accrual is unusual; management planned to seek a secondary-market buyer for related inventory but gave no assurance of recovery.
  • OmniMetrix accrued $20 in preferred dividends in Q1. A scheduled $40 payment was not made because funds were not legally available. The reported obligation to the former director/investor was $303, with scheduled payments through June 2020; additional future dividends were expected to accrue. Acorn planned to propose a buyout of the investor’s interest after the rights offering.
  • Disclosure controls and procedures were reported ineffective due to previously identified material weaknesses, attributed to limited subsidiary staffing and IT capabilities. Management reported no material change in internal control over financial reporting during the quarter.
  • Approximately 16% of receivables was due from one customer; the company reported collecting $97 of the $102 owed by that customer as of May 10, 2019. Other risks include the high-cost credit line and execution of planned growth initiatives.

Important facts for investors to verify

  • Whether the proposed rights offering was completed, on what terms, and how proceeds were used.
  • Whether operating cash generation and available borrowing were sufficient, particularly given negative working capital and the high-cost credit facility.
  • Progress on the proposed OmniMetrix minority-interest buyout and settlement of preferred dividends owed to the former director/investor.
  • Whether monitoring growth continued and whether the discontinued-technology inventory produced any recovery.
  • Remediation of the material weaknesses in disclosure controls and internal control over financial reporting.