Acorn Energy, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Dollar amounts below are in thousands unless noted. Acorn is a holding company whose continuing operations are primarily OmniMetrix, providing Power Generation (PG) and Cathodic Protection (CP) monitoring. Acorn sold its remaining 41.15% interest in DSIT Solutions on February 14, 2018.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $1,209 | $1,096 |
| Gross profit / margin | $745 / 62% | $614 / 56% |
| Operating loss | $(368) | $(337) |
| Loss before income taxes | $(420) | $(371) |
| Net loss attributable to Acorn shareholders | $(1,222) | $(220) |
| Basic and diluted loss per share | $(0.04) | $(0.01) |
| Operating cash flow | $(1,581) | $(364) |
Revenue rose 10%, led by monitoring revenue, up 18% to $642; hardware revenue was $567, up 2%. PG revenue was $886 and CP revenue was $323. Gross margin improved as hardware sales shifted toward higher-margin PG products; monitoring margin edged down to 83% from 86%. Research and development expense increased 40% to $129, reflecting development of next-generation monitors. Consolidated SG&A rose 15% to $984, although OmniMetrix SG&A declined; the prior-year corporate comparison included a $167 settlement benefit.
The $1,222 shareholder-attributable loss included an $829 loss on the DSIT sale and a $33 impairment charge, partly offset by $33 of DSIT equity-method income. The DSIT sale generated $5,800 gross proceeds; the company reported $4,971 of net investing cash proceeds. It used sale proceeds to repay $1,600 owed to DSIT and $1,428 of director loan principal and interest.
Balance sheet, liquidity and debt
At March 31, 2018, cash was $2,421, total assets $5,301, current liabilities $4,751, and total liabilities $5,660. Working capital was negative $10. Equity was in deficit by $359. Current assets included $2,758 of deferred revenue, which management said does not require significant cash outlay as it is recognized. Deferred revenue totaled $3,598, including $2,758 expected to be recognized by March 31, 2019.
Cash increased $1,940 during the quarter: operating activities used $1,581, investing activities provided $4,971, and financing activities used $1,450. Financing uses included repayment of $1,300 in director loans and $340 owed to DSIT, partly offset by $190 of net borrowing under OmniMetrix’s credit facility. The company had $503 outstanding on the facility and $69 of availability at quarter-end. The facility is receivables-based, capped at the lesser of 75% of eligible receivables or $1,000, and carries a stated base rate plus a monthly service charge; the filing gives differing current effective-rate figures of 17.3% in a note and 16.8% in MD&A. At May 8, the balance was approximately $160 with approximately $500 available.
Acorn reported approximately $1,950 of corporate cash at May 8. Management believes current cash, operating cash generation and available borrowing will fund Acorn and subsidiaries for at least 12 months, but said there is no assurance OmniMetrix’s facility will meet its 2018 working-capital needs and additional financing may be required. OmniMetrix also owed Acorn approximately $3,480, repayable only when it generates sufficient cash.
Material developments, outlook and risks
- The DSIT divestiture ended Acorn’s equity-method reporting of DSIT. The transaction produced a substantial one-time reported loss despite generating cash proceeds.
- Effective January 1, 2018, Acorn adopted ASC 606 using the modified retrospective method and recorded a $152 adjustment to retained earnings. Hardware revenue and related costs are recognized over an estimated three-year unit life, versus two years previously; monitoring fees are generally prepaid and recognized over the service period.
- Backlog, primarily deferred revenue, was approximately $3.8 million at March 31. Management reported Q1 revenue increased 8% from Q4 2017 and did not expect OmniMetrix SG&A or corporate G&A to materially change, apart from the announced executive bonuses. The filing provides no formal earnings or revenue guidance.
- After quarter-end, CEO Jan Loeb entered a consulting agreement through December 2019, with $12 monthly cash compensation beginning May 2018 and a $100 bonus related to the DSIT sale. He may earn additional $150 bonuses upon specified board-approved acquisition and financing transactions. Executive Chairman Christopher Clouser received a $50 sale-related bonus and an annual compensation increase.
- In May, a director-affiliated preferred-stock dividend was reduced from 10% to 8%, with amounts due and future dividends scheduled for payments of $140 in the year ending March 31, 2019, $280 in 2020 and $83 in 2021, subject to credit-facility and legal restrictions.
- Management concluded disclosure controls and procedures were not effective because of previously identified material weaknesses, attributed to insufficient resources at OmniMetrix and limited IT-system capabilities. No material change in internal control over financial reporting occurred during the quarter.
- Approximately 55% of quarter-end receivables were due from two customers; the company collected $441 of the $552 due from them in April. The facility’s high financing cost and limited availability, negative working capital, continuing operating cash use, and control weaknesses are important risks.
Investor verification checklist
- Confirm the final net cash proceeds, transaction costs, taxes and reported loss from the DSIT divestiture.
- Reconcile the credit facility’s stated effective interest rate (16.8% versus 17.3%) and verify availability and borrowing-base terms.
- Track OmniMetrix cash use, customer collections, facility headroom and any need for additional financing.
- Assess whether monitoring growth and improved hardware margins persist, and whether deferred revenue converts to revenue as expected.
- Review the remediation of material weaknesses and the effect of executive bonuses and director-related obligations on liquidity.