Acorn Energy, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a quarterly filing. Acorn is a holding company whose operating business, OmniMetrix, provides wireless monitoring and control products and services for power-generation equipment and cathodic-protection systems on gas pipelines.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $5.922 million | $5.490 million |
| Gross profit / margin | $4.131 million / 70% | $3.590 million / 65% |
| Operating loss | $(310,000) | $(699,000) |
| Net income (loss) attributable to Acorn shareholders | $69,000 | $(618,000) |
| Operating cash flow | $464,000 provided | $1.221 million used |
| Cash at year-end | $2.063 million | $1.247 million |
- Revenue increased 8%. Power Generation (PG) revenue rose 16% to $4.988 million; Cathodic Protection (CP) revenue fell 23% to $934,000.
- Monitoring revenue increased 15% to $3.819 million, supported by more monitored units. Hardware revenue was $2.103 million, down 3% overall; CP hardware sales were affected by long sales cycles and COVID-19.
- Gross margin improved as monitoring became a larger share of revenue and hardware margins increased. Monitoring gross margin was 84% in both years.
- 2020 net income included a $421,000 gain from forgiveness of OmniMetrix’s Paycheck Protection Program (PPP) loan. Excluding that gain, Acorn remained loss-making at the operating level.
- At December 31, 2020, current assets were $3.797 million and current liabilities $3.892 million, or negative working capital of approximately $95,000. Current liabilities included $3.214 million of deferred revenue, which the company said requires no significant cash outlay to recognize.
- Year-end debt included $149,000 under OmniMetrix’s receivables line of credit. It was repaid in February 2021, and the facility expired on February 28, 2021. Operating lease liabilities totaled $542,000.
- Net cash increased $816,000 in 2020: $464,000 from operations, $101,000 used in investing, and $453,000 from financing, including net PPP proceeds of approximately $421,000.
Changes, outlook, and notable items
- OmniMetrix reported quarterly net income beginning in Q2 2020. For the full year, its segments recorded $549,000 of income before tax; Acorn corporate costs were $894,000.
- Backlog was approximately $4.5 million at year-end, primarily deferred revenue; approximately $3.2 million was expected to be recognized in 2021.
- Management expected positive OmniMetrix operating cash flow in 2021, said it did not expect the subsidiary to need working-capital support that year, and forecast a moderate increase in R&D spending and approximately 15% higher SG&A, including costs for an expanded sales team and technology and operations investment. These are expectations, not guarantees.
- OmniMetrix introduced an annunciator product for generator dealers in 2020. The company continues developing next-generation PG and CP products and exploring additional product lines.
- The SBA approved forgiveness of OmniMetrix’s $419,800 PPP loan plus accrued interest. Acorn did not seek forgiveness of its separate $41,600 PPP loan and repaid it in October 2020.
- COVID-19 disrupted sales activity, particularly CP opportunities, and may continue to affect customers, suppliers, staffing, and delivery schedules. Certain specialized electronic components have limited alternatives.
Risks, controls, and contingencies
- Liquidity and profitability: Acorn reported a history of losses and relies on OmniMetrix performance and cash generation. Management stated cash and expected operating cash would fund operations for at least 12 months from issuance; consolidated cash was approximately $1.812 million on March 11, 2021. Further funding may be needed if performance or cash needs differ from expectations.
- Internal controls: Management concluded internal control over financial reporting and disclosure controls were not effective at December 31, 2020 because of material weaknesses tied to limited subsidiary resources and IT-system capabilities. Management reported no resulting material misstatement, but remediation was ongoing and dependent on resources and business conditions.
- Business concentration and competition: Monitoring fees, customer renewals, third-party cellular networks, and sales of generators and pipeline systems influence revenue. Larger competitors, including generator manufacturers, may have greater resources and channel reach. Two customers accounted for 32% of year-end receivables.
- Technology and operations: Risks include product upgrades as cellular networks evolve, data-system interruption or loss, specialized supply shortages, and potential product liability. The company said it lacked significant product-liability insurance coverage.
- Capital markets: Shares trade on OTCQB, with limited liquidity and potentially high price volatility. Acorn reported no plans to pay common-stock dividends in the foreseeable future; future fundraising could dilute shareholders.
- The auditor issued an unqualified opinion on the financial statements, but stated it was not engaged to audit internal control effectiveness. Revenue recognition and going-concern assessment were identified as critical audit matters. No legal proceedings were reported.
Most important facts for investors to verify
- Whether 2021 revenue conversion supports the $3.2 million deferred-revenue recognition expectation and the reported backlog.
- Whether operating cash flow can fund Acorn’s corporate costs and OmniMetrix’s working capital after repayment and expiration of the credit facility.
- Progress in remediating the material weaknesses in financial-reporting controls and improving IT capabilities.
- Whether PG growth can continue and CP sales recover despite long sales cycles, competition, and pandemic-related constraints.
- The effect of higher planned SG&A and R&D spending on profitability, and the continuing impact of the one-time PPP forgiveness gain on comparisons with 2020 net income.