Acorn Energy, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 27, 2019. This is an annual report, not a standalone fourth-quarter report.
Business context
Acorn is a holding company whose continuing operating business is OmniMetrix, in which Acorn owns 80%. OmniMetrix sells wireless monitoring and control equipment and services in two segments: Power Generation (PG), covering generators and other critical industrial assets, and Cathodic Protection (CP), monitoring corrosion-prevention systems on gas pipelines. Acorn sold its remaining 41.2% interest in DSIT in February 2018 and no longer reports DSIT results on the equity method. GridSense is a discontinued operation and was deconsolidated in 2017.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $5.087 million | $4.350 million |
| Gross profit / margin | $3.122 million / 61% | $2.447 million / 56% |
| Operating loss | $1.376 million | $1.911 million |
| Net loss attributable to Acorn shareholders | $2.001 million | $1.169 million |
| Net loss per share | $0.07 | $0.04 |
| Cash used in operating activities | $2.423 million | $1.676 million |
- Revenue grew 17%. PG revenue was $3.656 million, up 9%; CP revenue was $1.431 million, up 44%. Monitoring revenue increased 21% to $2.712 million; hardware revenue increased 12% to $2.375 million.
- Gross margin improved primarily because of higher hardware margins, including PG hardware margin rising from 21% to 32%. Monitoring gross margin remained 84%.
- OmniMetrix reported a segment loss before tax of $206,000, versus a $871,000 loss in 2017; PG was profitable at $117,000, while CP recorded a $323,000 loss. Corporate headquarters costs were $1.274 million before the DSIT sale loss.
- Cash and cash equivalents were $973,000 at year-end, plus $290,000 of restricted cash. Working capital was negative $651,000; deferred revenue included $2.734 million current and $1.327 million long-term.
- Acorn reported no debt at December 31, 2018. OmniMetrix’s receivables-backed credit line had been repaid and expired in October 2018; it was reinstated in March 2019 with availability up to the lesser of 75% of eligible receivables or $1 million. The filing cites a current effective borrowing rate of about 16% and a $150,000 minimum balance.
- Deferred revenue backlog was approximately $4.1 million at year-end, with about $2.7 million expected to be recognized in 2019. The filing states that recognizing deferred revenue does not require significant cash outlay.
Material changes and unusual items
- Acorn received $5.8 million gross from the DSIT sale and recorded a $607,000 net loss on the transaction in 2018, after transaction costs, withholding taxes, and a tax-related offset. Sale proceeds funded, among other things, repayment of director loans and DSIT balances.
- 2018 net loss worsened despite improved operating results, partly because 2017 included $698,000 of discontinued-operation income, principally a $660,000 GridSense deconsolidation gain, while 2018 included the DSIT sale loss.
- Acorn adopted ASC 606 in 2018 using the modified retrospective method, recording a $152,000 cumulative adjustment to retained earnings. Equipment-related revenue and costs are generally recognized over an estimated three-year unit life; monitoring fees are recognized over the service period.
- At year-end, $290,000 of cash was restricted in Israel pending review by the Israeli Tax Authority of Acorn’s tax position. Acorn expected the review to conclude by the end of 2019; the filing says the funds could remain restricted until review completion or, by statute, December 31, 2022. Further 2017 and 2018 withholding-tax refunds were requested but not recognized as benefits pending receipt.
Outlook, commentary and risks
- Management expected sufficient liquidity to fund operations for at least 12 months from issuance of the financial statements, based on available cash, expected operating cash generation and OmniMetrix’s credit line. It also cautioned that additional funding could be needed if growth falls short or operating needs increase.
- Management expected OmniMetrix to generate positive operating cash flow in 2019 and not require Acorn funding, but provided no assurance. OmniMetrix had incurred operating losses since Acorn’s acquisition.
- For 2019, management anticipated a moderate increase in R&D spending and approximately 23% growth in OmniMetrix SG&A, reflecting planned hiring in sales and IT and an ERP implementation. Corporate G&A was not expected to change materially, except for support of OmniMetrix growth.
- Risks include continuing losses and cash consumption, dependence on monitoring-service renewals and third-party cellular networks, competition from equipment manufacturers and larger providers, limited funding access, and reliance on key personnel. Acorn’s OTCQB-listed shares have limited liquidity and were subject to penny-stock trading rules.
- Management concluded that internal control over financial reporting and disclosure controls were ineffective at December 31, 2018 because of material weaknesses, attributed to limited personnel resources and IT-system capabilities at OmniMetrix. Management reported no material financial-statement misstatements but had not yet completed remediation.
- Other items to monitor include the Buford facility lease ending December 31, 2019, a related-party OmniMetrix preferred-stock dividend obligation, and possible dilution from outstanding options and warrants. The filing reports no legal proceedings.
Important facts for investors to verify
- Whether OmniMetrix achieves positive operating cash flow and can fund growth without further Acorn support or expensive borrowing.
- Whether customer additions and renewals sustain monitoring revenue growth, and whether the CP segment improves from its 2018 loss.
- Availability and actual usage terms of the reinstated credit line, including its effective cost and minimum-balance requirement.
- Outcome and timing of the Israeli tax review, release of restricted cash, and any additional withholding-tax refunds.
- Progress in remediating internal-control material weaknesses, including staffing and IT-system improvements.
- How the expected 2019 SG&A and R&D increases, facility move, and deferred-revenue recognition affect cash generation and margins.