Acorn Energy, Inc. — Q3 2022 Form 10-Q
Business and period: Acorn is a holding company whose OmniMetrix subsidiary provides remote monitoring and control products and services. Its segments are Power Generation (PG) and Cathodic Protection (CP). This unaudited report covers the three and nine months ended September 30, 2022; comparisons are with 2021. Dollar amounts below are in thousands unless noted.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,783 | $1,706 | $5,155 | $5,022 |
| Gross profit / margin | $1,215 / 68% | $1,242 / 73% | $3,719 / 72% | $3,674 / 73% |
| Operating income (loss) | $(210) | $25 | $(554) | $56 |
| Net income (loss) attributable to Acorn shareholders | $(210) | $23 | $(556) | $45 |
| Basic and diluted EPS | $(0.01) | $0.00 | $(0.01) | $0.00 |
- Cash flow: For the nine months, operating cash use was $311; investing cash use was $292, primarily technology investment; financing provided $5. Cash decreased $598 to $1,124.
- Liquidity: Current assets were $4,064 and current liabilities $4,604, resulting in negative working capital of $540. Current liabilities include $3,903 of deferred revenue, which management says does not require significant cash outlay to recognize. At November 8, cash was $967 and accounts receivable $1,334.
- Debt and obligations: The filing reports no outstanding borrowings; OmniMetrix’s credit line expired in February 2021 and was not renewed. Operating lease liabilities were $364; contractual cash obligations totaled $412, and open purchase orders were $786 through April 2023.
- Backlog: Deferred revenue, described as primarily backlog, totaled $6,053 at September 30; $3,903 was expected to be recognized in the following 12 months.
Material changes and operating drivers
- Nine-month revenue increased 3%; Q3 revenue increased 5%. PG generated $4,335 and CP $820 in the nine-month period. Hardware revenue grew, while monitoring revenue fell 4% for the nine months, partly due to discontinued 3G connections and customer rebates.
- Nine-month gross margin eased to 72% from 73%; Q3 margin fell to 68% from 73%. Management attributed pressure primarily to a $31 obsolete CP inventory write-off; Q3 monitoring margin also reflected rebates to two large customers.
- Operating expenses rose: nine-month R&D increased 20% and SG&A 16%. Higher personnel, consulting/software, travel, and trade-show costs contributed. The company recorded a $51 software impairment in Q2 after terminating an ERP customization project.
- OmniMetrix generated $516 of operating cash in the first nine months, while corporate headquarters used $827. Corporate costs contributed to consolidated losses despite operating income at OmniMetrix.
Outlook, risks, and unusual items
- Management said available cash, collections, and operating cash generation should fund current operating levels for the foreseeable future, including the 12 months following issuance of the statements. It may seek a new credit line or other financing for additional investment.
- Management expected a moderate increase in R&D expense for the remainder of 2022, citing engineering salary increases and continued product development. It did not expect corporate overhead to change materially.
- A partnership to support residential-generator demand response in Texas was announced; the company did not expect it to generate revenue until 2023. A customer portal launch was expected by year-end 2022; the Azure cloud migration was completed in May 2022.
- The software-platform agreement was terminated at its initial term and continued month-to-month through December 2022 at $1.5 per month while the parties negotiated future terms. Data-hosting service arrangements were terminated effective September 30, 2022.
- Risks include supply-chain disruption and limited alternative sources for specialized components, variable quarterly results, dependence on key personnel, competition, and customer credit risk. One customer accounted for 22% of Q3 invoice sales and 39% of period-end receivables.
- Controls: Management concluded disclosure controls were ineffective because of previously identified material weaknesses tied to limited staffing and IT-system capabilities at OmniMetrix. No material change in internal control was reported during the quarter.
Important facts for investors to verify
- Whether cash collections and OmniMetrix operations sustain the stated 12-month liquidity outlook, given negative working capital and declining cash.
- Whether monitoring revenue stabilizes after 3G-related disconnections and rebates, and whether gross margins recover from Q3 levels.
- How the $6,053 deferred-revenue backlog converts to recognized revenue and cash, and whether the large customer receivable is collected promptly.
- Progress on remediation of the disclosed material weaknesses and the status and economics of the software-platform agreement after December 2022.
- Whether the demand-response partnership and product-development investments produce revenue as expected; the filing provides no quantified revenue or earnings guidance.