Acorn Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Dollar amounts below are in millions unless noted. Acorn is a holding company whose continuing operations are its 80%-owned OmniMetrix subsidiary, providing Power Generation and Cathodic Protection monitoring. Acorn sold its remaining 41.15% interest in DSIT in February 2018 and no longer reports DSIT results under the equity method.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1.230 | $1.045 | $2.439 | $2.141 |
| Gross profit / margin | $0.736 / 60% | $0.594 / 57% | $1.481 / 61% | $1.208 / 56% |
| Operating loss | $(0.544) | $(0.507) | $(0.912) | $(0.844) |
| Net loss attributable to Acorn shareholders | $(0.538) | $(0.491) | $(1.760) | $(0.711) |
| Loss per share, basic and diluted | $(0.02) | $(0.02) | $(0.06) | $(0.02) |
- For the six months, monitoring revenue rose 20% to $1.299 million and hardware revenue rose 8% to $1.140 million. Revenue growth was attributed to more monitored units and increased hardware sales. Gross-margin improvement reflected product mix and lower unit costs; monitoring margin eased from 85% to 83%.
- Six-month SG&A increased 20% to $2.133 million, while R&D declined 3% to $0.260 million. Corporate expenses included $0.150 million of one-time bonuses related to the DSIT sale; management also cited prior-year settlement benefits and CFO transition costs.
- Six-month net loss included an $0.829 million loss on the DSIT sale. Acorn received $5.8 million gross proceeds, paid or accrued $0.441 million of transaction costs, and paid $0.388 million of withholding taxes. Sale proceeds funded repayment of DSIT and director obligations.
- Operating cash use was $1.908 million for the six months; investing provided $4.971 million, primarily from the DSIT sale; financing used $1.763 million, including repayments of director and DSIT loans. Cash increased $1.300 million to $1.781 million at June 30.
- At June 30, current assets were $3.885 million and current liabilities $4.240 million, resulting in negative working capital of approximately $0.355 million. Total equity was negative $0.939 million. Short-term credit outstanding was $0.190 million; additional facility availability was $0.130 million. Separately, $0.343 million was due to an OmniMetrix investor/director, and contractual cash obligations totaled $0.697 million.
Material changes, outlook and risks
- Acorn’s backlog, primarily deferred revenue, was approximately $3.7 million. Equipment revenue and related costs are recognized over an estimated three-year unit life; monitoring fees are generally prepaid and recognized over the service period.
- Management said current cash, expected operating cash generation and available credit were expected to fund Acorn and subsidiary operations for at least 12 months. However, it cautioned that the OmniMetrix credit facility may not be sufficient for working-capital needs and that additional financing may be needed; availability and terms were uncertain. Cash was approximately $1.543 million on August 8, 2018.
- The receivables-based credit facility permits advances against eligible receivables, subject to a $1.0 million cap, and had a stated effective rate of 17.8% at June 30. The filing gives differing descriptions of the minimum interest-rate floor in different sections.
- Management reported disclosure controls and procedures were not effective because of previously identified material weaknesses, including insufficient control resources at OmniMetrix and limited IT-system capabilities. No material change in internal control over financial reporting was reported during the quarter.
- About 28% of accounts receivable was due from two customers. A director’s preferred-stock dividend rate was reduced to 8%, with scheduled payments of $0.180 million in the year ending June 2019 and $0.323 million in the year ending June 2020, subject to the credit facility. OmniMetrix also owed Acorn approximately $3.5 million, repayable only when it generates sufficient cash.
- There was no numerical earnings or revenue guidance. Management said it was evaluating possible investment in technology and additional OmniMetrix sales personnel in the second half of 2018.
Important facts for investors to verify
- OmniMetrix revenue growth, segment margins and the sustainability of improved gross margins.
- Cash burn, available borrowing capacity, credit-facility pricing and whether additional financing will be required.
- Progress remediating the disclosed material weaknesses and improving disclosure controls.
- Timing and enforceability of payments owed to the director, and repayment prospects for amounts OmniMetrix owes Acorn.
- DSIT-sale accounting and transaction costs, and the impact of deferred revenue and the ASC 606 adoption on comparability.