Acorn Energy, Inc. — Q1 2020 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Acorn is a holding company whose operating business, OmniMetrix (99%-owned), provides remote monitoring products and services in Power Generation (PG) and Cathodic Protection (CP).
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $1.338 million | $1.327 million |
| Gross profit / margin | $922,000 / 69% | $821,000 / 62% |
| Operating loss | $274,000 | $267,000 |
| Net loss attributable to Acorn shareholders | $283,000; $0.01 per share | $237,000; $0.01 per share |
| Operating cash flow | $237,000 provided | $325,000 used |
| Cash and cash equivalents at March 31 | $1.416 million | $1.247 million at Dec. 31, 2019 |
| Working capital at March 31 | Negative $529,000 | — |
| Short-term credit at March 31 | $139,000 | $136,000 at Dec. 31, 2019 |
All financial statement amounts are in thousands except per-share data. Acorn invested $90,000 in software and patent filings. Cash increased by $169,000 during the quarter. At March 31, the company reported $54,000 available under OmniMetrix’s receivables-based credit facility; the facility’s effective borrowing rate was approximately 15%. Deferred revenue was $4.486 million, including $3.093 million expected to be recognized over the following 12 months. The company reported a $4.5 million backlog, primarily deferred revenue.
Material changes and operating trends
- Revenue was nearly flat year over year. Monitoring revenue rose $129,000, while hardware revenue fell $118,000.
- PG revenue increased to $1.109 million from $996,000; CP revenue declined to $229,000 from $331,000. Management attributed the CP hardware decline partly to sales-team staffing and the longer sales cycle, and said COVID-19 restrictions further affected CP sales activity.
- Gross margin improved as monitoring made up a larger share of revenue; monitoring gross margin was 84% versus 83%, and hardware gross margin was 39% versus 38%. The 2019 comparison included a $30,000 nonrecurring cost-of-sales accrual; excluding it, 2019 gross profit would have been $851,000 and margin 64%.
- Operating expenses rose to $1.196 million from $1.088 million. SG&A increased 10% to $1.041 million, and R&D rose to $155,000 from $144,000. The larger operating loss and higher finance expense contributed to the increase in Acorn-attributable net loss.
- Common shares outstanding were approximately 39.7 million at March 31, compared with a weighted average of 29.6 million in Q1 2019. The filing reports 2.143 million warrants expired on May 5, 2020.
Outlook, risks, and unusual items
- Management said OmniMetrix had not experienced material negative COVID-19 impacts through the filing date, continued monitoring-service collections and retained its customer base, but equipment sales were below anticipated growth. Management viewed the essential-business designation and demand for backup power and remote monitoring as supportive, while noting uncertainty about future effects.
- Management expected moderate R&D growth and approximately 15% annual OmniMetrix SG&A growth in 2020, reflecting product development, a fully staffed sales team, and IT investment. It did not expect corporate G&A to change materially, apart from possible growth-support costs.
- Acorn received $41,600 and OmniMetrix $419,800 in PPP loans after quarter-end. Management expected to meet forgiveness requirements but stated forgiveness was not assured; if not forgiven, repayments would be required. The filing reports cash of approximately $1.881 million as of May 10, including approximately $461,000 in PPP proceeds.
- Management believed available cash, operating cash generation, and credit availability would fund current operations for at least 12 months. However, working capital was negative, OmniMetrix owed Acorn approximately $4.559 million, and additional financing needs or availability were uncertain.
- COVID-19 risks include disruption to employees, suppliers, and customer demand; certain specialized components may have limited alternatives. Other disclosed risks include customer credit exposure, dependence on key personnel, competition, and variable quarterly results.
- Disclosure controls and procedures were concluded to be ineffective because of previously identified material weaknesses involving limited staffing and IT capabilities at OmniMetrix. Management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether PPP loans were forgiven, and the resulting repayment obligations and cash balance.
- Whether monitoring growth and CP sales recovery offset COVID-19-related sales-cycle and supply-chain risks.
- Whether management’s 12-month liquidity assessment remains supported by operating cash flow, credit availability, and the facility’s high borrowing cost.
- Progress in remediating the disclosed material weaknesses in internal controls.
- The status and collectability of the $4.559 million due from OmniMetrix to Acorn and the concentration of receivables from one customer.