Acorn Energy, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unless otherwise noted, financial amounts below are in thousands of dollars. Acorn is a holding company whose operating business, OmniMetrix, provides remote monitoring products and services through Power Generation (PG) and Cathodic Protection (CP) segments. Acorn sold its remaining DSIT interest in 2018.
Financial performance and liquidity
- Q3 revenue: $1,386, up 4% from $1,337 in Q3 2018. Gross profit was $922 and gross margin was 67%, compared with $831 and 62%. Operating loss improved to $121 from $230. Net loss attributable to Acorn shareholders was $121, versus net income of $4.
- Nine-month revenue: $4,090, up 8% from $3,776. Gross profit rose 14% to $2,644; gross margin increased to 65% from 61%. Operating loss narrowed to $585 from $1,142. Net loss attributable to Acorn shareholders was $557, compared with $1,756 in 2018.
- Revenue mix: Nine-month monitoring revenue increased 21% to $2,417, while hardware revenue declined 6% to $1,673. PG revenue was $3,143 and CP revenue was $947. Management attributed monitoring growth to a larger installed base; hardware sales were affected by sales-team vacancies.
- Cash flow: Nine-month operating cash outflow was $933, compared with $2,263 in 2018. Investing used $1,010, including $950 for the OmniMetrix minority-interest purchase and $60 for software. Financing provided $2,329, primarily from the rights offering. Cash, cash equivalents and restricted cash increased by $386 to $1,649; unrestricted cash was $1,338.
- Liquidity and debt: Working capital was negative $295, including about $2,900 of current deferred revenue. At September 30, OmniMetrix had $143 outstanding on its receivables-based credit facility and $251 available to borrow. The facility carries an effective borrowing cost reported at 15.5% for the nine-month period and requires a $150 minimum loan balance for two years. Management said cash, expected operating cash generation and available credit should fund operations for at least 12 months.
- Other balance-sheet items: Total assets were $4,482; total liabilities were $5,066; total equity was a deficit of $584. Deferred revenue totaled $4,365, of which $2,881 was expected to be recognized over the following year. Acorn reported $492 of contractual cash obligations.
Material changes and notable items
- In June, Acorn completed a rights offering, issuing approximately 9.98 million shares at $0.24 per share and raising $2,186 net of expenses. Shares outstanding were 40,393,259 at November 9, 2019.
- On July 1, Acorn paid $1,273 to repurchase a 19% interest in OmniMetrix Holdings, increasing ownership from 80% to 99%; OmniMetrix’s CEO retained 1%. The payment included $323 of accrued dividends owed to a former Acorn director. The cash flow statement reports $950 for the purchase of the non-controlling interest; investors should review the transaction accounting and cash-flow presentation.
- Nine-month gross profit included a $29 accrual for a long-term purchase commitment relating to discontinued technology. Excluding it, management reported gross profit of $2,673 and a 65% margin.
- Corporate SG&A declined 34% year over year to $679 for nine months, while OmniMetrix SG&A increased 5% to $2,130. Research and development expense increased 5% to $420.
- Acorn adopted the lease accounting standard in 2019 and recorded a $44 lease liability and right-of-use asset at adoption; the lease liability was $25 at September 30.
Outlook, risks and controls
- No formal revenue or earnings guidance is provided. Management said it was adding sales resources and expected continued sales-team expansion. It also cited planned investment in sales, marketing, next-generation products, software monitoring options and a new ERP system, and expected OmniMetrix SG&A to increase.
- Management identified risks including credit losses, reliance on management and key personnel, quarterly results variability, competition and execution of the growth strategy. About 23% of receivables were due from two customers; $151 of the $181 due from them at September 30 had been collected by November 9.
- Disclosure controls and procedures were deemed ineffective because of previously identified material weaknesses, attributed to insufficient resources at OmniMetrix and limited IT capabilities. The filing reported no material change in internal control over financial reporting during the quarter.
- Deferred revenue is substantial but, according to management, recognizing it does not require significant cash outlay. The filing also notes restricted cash of $311, which is not available as ordinary operating cash.
Important facts for investors to verify
- Whether the company’s operating cash generation and credit availability are sufficient given negative working capital and ongoing corporate cash use.
- The credit facility’s actual borrowing cost, minimum-balance requirement, availability and November 9 balances, which differ from September 30 figures.
- The terms, accounting and governance implications of the related-party preferred-stock repurchase and the rights offering backstop involving directors and the CEO’s management entity.
- Progress in remediating the material weaknesses in financial reporting controls.
- Whether monitoring growth, sales-team additions and planned investments can offset weaker hardware sales and higher operating costs.