Acorn Energy, Inc. — Q3 2020 Form 10-Q
Business context and period. For the quarter and nine months ended September 30, 2020. Acorn is a holding company whose operating business, OmniMetrix (99%-owned), provides remote monitoring products and services through Power Generation (PG) and Cathodic Protection (CP) segments. Financial figures below are in thousands of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,517 | $1,386 | $4,323 | $4,090 |
| Gross profit / margin | $1,077 / 71% | $922 / 67% | $3,021 / 70% | $2,644 / 65% |
| Operating loss | $(23) | $(121) | $(319) | $(591) |
| Net loss attributable to Acorn shareholders | $(32) | $(121) | $(348) | $(557) |
| Basic and diluted loss per share | $(0.00) | $(0.00) | $(0.01) | $(0.02) |
- Revenue mix: Q3 monitoring revenue was $970, up 15% year over year; hardware revenue was $547, up slightly from $539. For the nine months, monitoring revenue rose 17% to $2,823, while hardware revenue fell 10% to $1,500.
- Segments: Q3 PG revenue was $1,262 and CP revenue $255; nine-month revenue was $3,633 and $690, respectively. For the nine months, CP revenue declined from $947 in 2019, primarily reflecting longer sales cycles and COVID-related sales disruption.
- Cash flow: Nine-month operating cash flow was positive $300, versus negative $933 in 2019. Investing used $97 and financing provided $516. Cash and cash equivalents were $1,966 at September 30, compared with $1,247 at year-end 2019; subsequent cash was approximately $2,006 at November 9.
- Liquidity and debt: Working capital was negative $364. Current assets were $3,920 and current liabilities $4,284. The balance sheet showed $171 of short-term credit and $463 of PPP loans ($256 current and $207 noncurrent). OmniMetrix’s credit line had $253 available at September 30; the filing reports $165 available and $136 outstanding at November 9. Operating lease liabilities totaled $565.
- Deferred revenue/backlog: Deferred revenue was $4,646, of which $3,289 was expected to be recognized within twelve months. The company reported approximately $4.6 million of backlog, primarily deferred revenue.
Changes versus the prior comparable period
- Quarterly revenue increased 9%; nine-month revenue increased 6%. Growth came from monitoring, while nine-month hardware revenue declined, particularly in CP.
- Gross margin improved to 71% in Q3 and 70% for the nine months, versus 67% and 65%. Management attributed the nine-month improvement mainly to a greater share of higher-margin monitoring revenue; monitoring gross margin remained 84%.
- Operating and net losses narrowed year over year, though Acorn remained loss-making overall. OmniMetrix generated segment income before tax of $335 for the nine months, offset by $682 of unallocated corporate costs.
- Nine-month cash flow from operations improved to a $300 inflow from a $933 outflow in 2019. The 2019 financing comparison included $2,186 of net rights-offering proceeds; no rights-offering proceeds were received in 2020.
Outlook, risks, and unusual items
- Management said available cash, expected operating cash generation, and borrowing capacity should fund current operations for at least twelve months from issuance of the statements. It noted negative working capital but said deferred revenue requires no significant cash outlay to recognize.
- Management expected moderate R&D expense increases for product redesign and expansion, and estimated OmniMetrix annual SG&A costs would rise approximately 10% during 2020. Corporate overhead was not expected to change materially absent growth-related needs.
- COVID-19 had caused minimal adverse impact to date, according to management, but travel restrictions slowed equipment-sales closures and lengthened CP sales cycles. Risks include further restrictions, workforce disruption, supply-chain constraints for specialized components, and reduced customer demand.
- OmniMetrix’s $419.8 PPP loan was forgiven by the SBA on November 5, 2020. Acorn elected not to seek forgiveness of its $41.6 PPP loan and repaid it on October 22, 2020.
- On May 5, 2020, 2,142,857 warrants with a reported book value of $1,018 expired; the warrant balance fell to 35,000. The company also reported $4,604 due from OmniMetrix to Acorn for intercompany loans, interest, dividends, and expenses; repayment depends on OmniMetrix generating sufficient cash.
- Disclosure controls and procedures were reported ineffective because of material weaknesses previously identified, including insufficient subsidiary resources and limited IT-system capabilities. Management reported no material change in internal control during the quarter.
- Other commitments include $632 of undiscounted operating lease payments and a one-year data-hosting agreement totaling $148.
Important facts for investors to verify
- Whether operating cash generation and the available credit line continue to support the stated twelve-month liquidity outlook, particularly given negative working capital and corporate cash use.
- Progress in remediating the disclosed material weaknesses in disclosure controls and internal control over financial reporting.
- Whether monitoring growth offsets weaker hardware and CP sales, including the status and timing of the CP pipeline amid COVID-related sales-cycle delays.
- Collection trends and customer concentration: two customers represented approximately 16% and 10% of September 30 receivables; 89% of their combined balance was collected by November 9.
- The timing and conversion of the $4.6 million deferred-revenue backlog, and the cash requirements associated with related product and service obligations.