Acorn Energy, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Dollar figures are in U.S. dollars; financial statement amounts are generally in thousands unless otherwise stated. Acorn is a holding company whose continuing operations are primarily OmniMetrix, which provides wireless monitoring for power-generation equipment and cathodic-protection systems on gas pipelines. The 2017 results exclude DSIT’s operating revenue and expenses because Acorn had accounted for its 41.2% DSIT interest using the equity method since April 2016.
Key financial results and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $4.350 million | $8.659 million |
| Gross profit / margin | $2.447 million / 56% | $3.525 million / 41% |
| Operating loss | $1.911 million | $3.053 million |
| Net income (loss) attributable to Acorn shareholders | $(1.169) million | $145,000 |
| Operating cash used | $1.676 million | $4.519 million |
| Cash and cash equivalents at year-end | $481,000 | $222,000 |
| Working capital | $1.183 million | Not stated here |
OmniMetrix revenue rose 21% to $4.350 million: power-generation monitoring revenue was $3.355 million, up 16%, and cathodic-protection revenue was $995,000, up 46%. Hardware revenue increased 25% to $2.115 million and monitoring revenue increased 18% to $2.235 million. OmniMetrix gross margin improved to 56% from 53%; monitoring gross margin was 84%. OmniMetrix recorded an operating loss of $783,000, while Acorn corporate SG&A was $1.128 million. Fourth-quarter 2017 revenue was $1.124 million, up 8% year over year and 4% sequentially.
Year-end total assets were $9.222 million, total liabilities were $8.470 million, and total equity was $752,000. Current liabilities included $313,000 of bank credit, $1.690 million due to directors, $1.624 million due to DSIT, and $2.753 million of deferred revenue. The filing reports that working capital included the $5.8 million DSIT investment and OmniMetrix deferred revenue; deferred revenue generally does not require significant additional cash outlay to recognize.
Acorn used $1.632 million of cash in continuing operating activities in 2017. Investing activities provided $679,000, mainly from release of escrow deposits; financing activities provided $1.237 million, primarily from director loans. OmniMetrix’s receivables-based credit facility had a $313,000 balance and $182,000 additional availability at year-end. Its stated effective borrowing rate was 17.3%, and the facility was due to expire October 31, 2018.
Changes versus the prior comparable period
- Consolidated revenue fell 50%, principally because DSIT’s results were no longer consolidated. The reported 2016 revenue included $5.074 million of DSIT revenue through April 21; the remaining DSIT interest contributed $450,000 of equity-method income in 2017.
- Comparing OmniMetrix alone, revenue and gross profit increased, and its gross margin rose three percentage points. Its loss narrowed from $1.190 million to $783,000.
- Consolidated operating loss narrowed by $1.142 million. Corporate SG&A declined 43%, reflecting lower costs, including the absence of about $460,000 of former-CEO severance costs recorded in 2016 and a $167,000 settlement benefit in 2017.
- Acorn moved from attributable net income of $145,000 in 2016 to a $1.169 million attributable net loss in 2017. The 2016 result included a $3.543 million gain on the partial DSIT sale; 2017 included a $308,000 impairment of the DSIT investment and $698,000 of discontinued-operations income, mostly from GridSense deconsolidation.
- Cash used in operating activities decreased from $4.519 million to $1.676 million; the 2016 figure included $956,000 used by discontinued operations.
Outlook, developments and risks
- DSIT sale after year-end: Acorn sold its remaining 41.15% DSIT interest on February 14, 2018 for $5.8 million gross. It assigned $1.6 million due to DSIT to the purchasers and incurred approximately $460,000 of transaction costs and $388,000 of withholding tax. Acorn repaid $1.3 million of director loans and $128,000 of accrued interest. It reported approximately $2.4 million of corporate cash at March 16, 2018 and believed available cash and financing would fund operations for at least twelve months from issuance of the statements.
- Management expectations: Acorn expected OmniMetrix to expand its customer base in 2018 and not require Acorn working-capital support, but acknowledged this was not assured. Management expected moderate R&D growth, quarterly OmniMetrix SG&A broadly near late-2017 levels, and continued efforts to reduce corporate costs. Backlog at December 31, 2017 was approximately $3.6 million, mostly deferred revenue, with about $2.8 million expected to be completed in 2018. These are expectations, not guaranteed results.
- Profitability and funding: OmniMetrix had a history of losses and might not achieve sustained profitability. Acorn cautioned that slower-than-expected growth or additional cash needs could require further borrowing, a strategic partner, asset sale, or equity financing; financing may not be available on acceptable terms. The OmniMetrix credit facility also carries a high effective rate and was scheduled to expire in October 2018.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2017 because of material weaknesses, attributed to limited subsidiary resources and IT capabilities. Management reported no resulting material misstatement in the 2017 financial statements and planned remediation as resources permitted. The auditor’s opinion covered the financial statements, not internal-control effectiveness.
- Other risks and unusual items: One customer represented approximately 27% of year-end receivables, though the filing says the customer paid on usual terms. The company cited competition, customer renewals, cellular-network dependence, data-security and data-loss risks, key-person dependence, and limited OTCQB share liquidity. OmniMetrix used only part of its leased facility and had previously recorded an impairment related to underutilization. GridSense was liquidated and deconsolidated in 2017; Acorn recorded a $660,000 gain on deconsolidation. No legal proceedings were reported.
Important facts for investors to verify
- Whether OmniMetrix can sustain revenue growth, improve profitability, and generate cash without further Acorn funding.
- The post-sale cash position and remaining obligations after DSIT transaction costs, taxes, director-loan repayment, and the DSIT payable assignment.
- Renewal or replacement of OmniMetrix’s receivables-based credit facility, including borrowing costs, availability, and minimum-balance requirements.
- Progress in remediating the disclosed material weaknesses in internal control over financial reporting.
- Revenue-recognition and deferred-revenue assumptions, including the reported $3.6 million backlog and expected 2018 completion amount.
- Exposure to the concentrated receivable, customer retention and competition risks, and the potential dilution from outstanding options and warrants or future financing.