Business context and reporting period
Acorn Energy, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. Acorn is a holding company whose continuing operations are conducted through OmniMetrix, which provides remote monitoring and control products and services for power generation equipment (PG) and cathodic protection systems on gas pipelines (CP). Acorn sold its remaining interest in DSIT in February 2018; DSIT is no longer part of continuing operations.
Financial results and key metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $5.490 million | $5.087 million |
| Gross profit / margin | $3.590 million / 65% | $3.122 million / 61% |
| Research and development | $559,000 | $542,000 |
| Selling, general and administrative expense | $3.730 million | $3.986 million |
| Operating loss | $699,000 | $1.406 million |
| Net loss attributable to Acorn shareholders | $618,000; $0.02 per share | $2.001 million; $0.07 per share |
| Cash used in operating activities | $1.221 million | $2.423 million |
All amounts are U.S. dollars. PG revenue was $4.282 million, up 17%; CP revenue was $1.208 million, down 16%. Monitoring revenue rose 23% to $3.327 million, while hardware revenue fell 9% to $2.163 million. Monitoring gross margin remained 84%; hardware gross margin improved to 38% from 36%.
At December 31, 2019, cash and cash equivalents were $1.247 million, total assets $4.984 million, and working capital was negative $164,000. Deferred revenue totaled $4.495 million, including approximately $3.004 million classified as current. Cash declined by $16,000 during 2019: operating activities used $1.221 million, investing activities used $1.115 million, and financing activities provided $2.320 million. The company reported $136,000 outstanding under OmniMetrix’s receivables-backed credit facility, with $291,000 available to borrow. Operating lease liabilities were $595,000. Acorn reported $1.555 million of corporate cash as of March 20, 2020; the filing states that cash, expected operating cash flow and available borrowing should fund operations for at least 12 months.
Material changes and notable transactions
- Revenue increased 8%, primarily due to growth in monitored units and recurring monitoring fees. PG growth was partly offset by lower CP revenue; management attributed sales weakness in part to unfilled sales positions during much of 2019, which were filled by year-end.
- Gross margin improved with the larger share of higher-margin monitoring revenue and improved hardware margins. Acorn’s consolidated operating loss narrowed by $707,000.
- Corporate SG&A fell 30% to $876,000, partly because 2018 included one-time bonuses and transition consulting fees. OmniMetrix SG&A increased 5% to $2.853 million.
- A June 2019 rights offering issued 9.976 million shares at $0.24 per share and raised approximately $2.184 million net. Approximately $1.628 million came from related parties. Acorn used $1.273 million to repurchase a 19% OmniMetrix holding, increasing its ownership from 80% to 99%.
- Acorn recorded a $50,000 gain in 2019 related to the final Israeli tax settlement on the 2018 DSIT sale. Approximately $371,000 of tax refunds held in Israel were transferred to the U.S. after year-end.
Outlook, risks and other matters
- Management expected OmniMetrix to generate positive operating cash flow in 2020 and not require additional Acorn working-capital support, but gave no assurance. Backlog was approximately $4.5 million, primarily deferred revenue; management expected about $3.0 million to be recognized in 2020.
- Management expected moderate growth in R&D spending in 2020 for product redesign and expansion. It anticipated OmniMetrix SG&A to increase approximately 15%, including costs of a fully staffed sales team and IT/ERP investment; corporate G&A was expected to remain broadly stable, except for support of OmniMetrix growth.
- Acorn has a history of losses and cash use. OmniMetrix’s receivables facility is capped at the lesser of 75% of eligible receivables or $1 million and carries a stated effective borrowing cost of approximately 15% at the filing date. Acorn also disclosed approximately $4.506 million due from OmniMetrix for advances, accrued interest and expenses; repayment depends on OmniMetrix generating sufficient cash.
- The filing identifies the COVID-19 pandemic as a material uncertainty for demand, employee availability and supply continuity. Some electronic components are application-specific, and alternatives may be limited; disruptions could delay shipments or raise costs.
- Management concluded that internal control over financial reporting and disclosure controls were not effective at year-end because of material weaknesses associated with limited staffing and IT capabilities at OmniMetrix. Management said it intended to strengthen controls as resources permitted. The auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal controls.
- Other risks include competition from generator manufacturers and larger monitoring providers, customer retention and recurring-fee renewals, reliance on third-party cellular networks and data systems, customer receivable concentration, key-person dependence, limited OTCQB trading liquidity, and potential dilution from future securities issuance. No legal proceedings were reported. The company does not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Whether OmniMetrix achieves positive operating cash flow and reduces its dependence on Acorn and costly receivables financing.
- Backlog composition, timing of revenue recognition, monitoring-fee renewal rates, and whether PG growth can offset continued weakness in CP and hardware sales.
- Progress in remediating the disclosed material weaknesses, including improvements to staffing, IT systems and financial reporting controls.
- Actual effects of COVID-19 on component availability, customer demand, workforce capacity and shipment schedules.
- The dilution and related-party implications of the 2019 rights offering, including the use of proceeds to repurchase the OmniMetrix interest.
- Customer concentration in receivables: two customers accounted for approximately 35% at year-end, with one customer representing 18% and another 14%.