Acorn Energy, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial amounts are in thousands of dollars unless stated otherwise. Acorn is a holding company whose operating business, OmniMetrix, provides Power Generation (PG) and Cathodic Protection (CP) remote-monitoring systems and services.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,377 | $1,230 | $2,704 | $2,439 |
| Gross profit / margin | $901 / 65% | $736 / 60% | $1,722 / 64% | $1,481 / 61% |
| Operating loss | $(203) | $(544) | $(464) | $(912) |
| Net loss attributable to Acorn shareholders | $(199) | $(538) | $(436) | $(1,760) |
| Basic and diluted loss per share | $(0.01) | $(0.02) | $(0.01) | $(0.06) |
- Revenue growth was led by monitoring: six-month monitoring revenue rose 21% to $1,570, while hardware revenue was nearly flat at $1,134. PG revenue increased to $2,053; CP revenue declined to $651.
- Six-month reported gross profit includes a $30 accrual for a long-term commitment related to discontinued technology. Excluding it, management reported gross profit of $1,752 and a 65% margin; recovery from resale of the related inventory is uncertain.
- Operating expenses for the first half were $2,186, including $283 of R&D and $1,903 of SG&A. Consolidated losses narrowed substantially year over year, partly because 2018 included an $829 loss on the DSIT sale and higher corporate expenses.
Cash, liquidity, and capital
- At June 30, cash and cash equivalents were $2,933, with restricted cash of $304. Working capital was $828; total assets were $6,065 and total equity was $501, versus a deficit of $1,230 at year-end 2018.
- For the first six months, operating cash flow was $(423), investing cash flow was zero, and financing cash flow was $2,397. Financing included $2,206 net proceeds from a June rights offering and $191 of net credit-line borrowing. Cash, cash equivalents, and restricted cash increased by $1,974 to $3,237.
- OmniMetrix had $191 outstanding under its receivables-based credit facility at June 30, with $312 available. The facility has a $1 million cap and a minimum-balance arrangement; management reported an effective borrowing rate of about 16% during the period.
- On July 1, Acorn used $1,273 of rights-offering proceeds to repurchase a 19% interest in OmniMetrix Holdings, increasing ownership from 80% to 99%. The payment included $323 owed for accrued dividends to the former director-investor. Remaining offering proceeds were intended for sales and marketing, product development, and working capital.
- Management stated that cash, expected operating cash generation, and available borrowing were expected to fund Acorn and OmniMetrix for at least the next 12 months. Cash excluding restricted funds was approximately $1,577 at August 9, 2019.
- Deferred revenue was $4,136 at June 30, primarily reflecting future hardware and monitoring revenue; $2,691 was scheduled for recognition in the year ending June 30, 2020. Management noted that recognizing this revenue does not require significant cash outlay.
Material changes and management commentary
- Second-quarter revenue rose 12% year over year, while the six-month increase was 11%, driven by a growing installed base of monitored units and focused sales initiatives. Management cited a not-fully-staffed sales team as a factor in hardware sales performance.
- OmniMetrix’s six-month SG&A increased 7% to $1,451, mainly from personnel investment. Corporate SG&A fell 42% to $452, primarily due to reduced personnel, board, and professional-service costs. The company plans continued investment in sales, monitoring software, next-generation products, and an ERP system.
- Backlog, primarily deferred revenue, was approximately $4.1 million at June 30. No formal financial guidance was provided.
Risks, contingencies, and unusual items
- Disclosure controls and procedures were reported as ineffective due to previously identified material weaknesses, including insufficient resources at OmniMetrix and limited IT capabilities. No material change in internal control over financial reporting was reported during the quarter.
- Approximately 24% of accounts receivable was due from two customers; the company reported collecting $173 of the $193 due from them by August 9.
- The credit facility’s effective cost is high, and its minimum-balance provisions may require interest and service charges based on at least $150 outstanding even when actual borrowings are lower.
- Forward-looking risks identified include credit losses, dependence on management and key personnel, quarterly variability, competition, and execution of the growth strategy. The filing says actual results may differ materially from expectations.
- Acorn adopted the lease standard on January 1, 2019 and reported a $38 lease obligation at June 30. The company also disclosed a $7 equipment purchase under an installment agreement.
Important facts for investors to verify
- Whether monitoring growth and expansion plans translate into sustained revenue and operating cash generation.
- How much cash remained after the July 1 $1,273 minority-interest repurchase, and the subsequent use of rights-offering proceeds.
- The cost and availability of the receivables-based credit facility, including its minimum-balance terms.
- Progress in remediating the material weaknesses in disclosure controls and financial reporting.
- Whether the discontinued-technology inventory can be resold and whether any further related costs arise.
- The timing and collectability of receivables concentrated in two customers, and the conversion of deferred revenue and backlog into recognized revenue.