ACORN ENERGY, INC. quarterly report, Q2 FY2022

Full document

Acorn Energy, Inc. — Q2 2022 Form 10-Q

Business context and period: Acorn is a holding company whose operating subsidiary, OmniMetrix, provides remote monitoring and control systems and services. Its reportable segments are Power Generation (PG) and Cathodic Protection (CP). This unaudited filing covers the quarter and six months ended June 30, 2022; amounts below are approximate and in U.S. dollars unless noted.

Financial performance and position

  • Q2 revenue: $1.621 million, up 1% from $1.611 million a year earlier. Gross profit was $1.246 million, with a 77% gross margin versus $1.222 million and 76% a year earlier. Operating loss was $222,000; net loss attributable to Acorn shareholders was $223,000, compared with net income of $2,000 in Q2 2021.
  • First-half revenue: $3.372 million, up 2% from $3.316 million. Gross profit was $2.504 million, with a 74% gross margin versus $2.432 million and 73%. Operating loss was $344,000 and net loss attributable to Acorn shareholders was $346,000, compared with operating income of $31,000 and shareholder net income of $22,000 in first-half 2021.
  • Revenue mix: First-half PG revenue was $2.825 million, down 0.4%; CP revenue was $547,000, up 14%. Hardware revenue rose to $1.416 million from $1.291 million, while monitoring revenue fell to $1.956 million from $2.025 million.
  • Expenses and margins: First-half R&D rose 16% to $410,000 and SG&A rose 17% to $2.387 million. The company recorded a $51,000 software impairment after deciding to terminate an ERP customization project. Q2 SG&A rose 16% to $1.205 million and R&D rose 21% to $212,000.
  • Cash flow: First-half operating cash flow was negative $194,000, versus positive $83,000 in 2021. Investing activities used $269,000, primarily for technology, versus $42,000. Cash declined $463,000 to $1.259 million at June 30, 2022; cash was $1.143 million on August 9.
  • Liquidity and obligations: Working capital was negative $455,000. Current liabilities included $3.642 million of deferred revenue, which management says does not require significant cash outlay to recognize. Total deferred revenue/backlog was $5.635 million. The balance sheet reported no conventional borrowings; operating lease liabilities were $390,000, and the company disclosed $920,000 of open purchase-order commitments payable through 2022.
  • Balance sheet: Total assets were $5.823 million, total liabilities $6.578 million, and total deficit $755,000. Accounts payable and accrued expenses totaled $496,000. The filing does not present a conventional debt balance.

Changes, outlook, and risks

  • Revenue was nearly flat in Q2; management attributed the result partly to sales timing after stronger first-quarter sales and cited inflation, rising interest rates, and gas prices as factors affecting purchasing. Monitoring revenue declined, in part due to connections discontinued as 3G technology was sunset.
  • Management said business travel had resumed and sales were returning toward projected levels. It expected a moderate increase in R&D expense during the rest of 2022. The company stated that cash and expected operating cash generation should support current operations for the foreseeable future, including the twelve months after issuance of the statements; it may seek financing for additional investment.
  • A July 2022 partnership involving OmniMetrix, CPower, and PSS aims to enable residential standby generators to provide grid relief in ERCOT. The company did not expect revenue from the partnership until 2023.
  • OmniMetrix terminated the ERP customization project effective June 30 and recorded the $51,000 impairment. It also gave notice ending its software development and licensing agreement at the initial term’s expiration on August 19, 2022, and was negotiating more favorable terms. The customer portal launch was expected by year-end 2022; a new Azure cloud infrastructure launched May 1, 2022.
  • Risks include possible COVID-19 effects on workforce, supply chains, and demand; reliance on specialized electronic components with limited alternatives; competition, key-person dependence, credit losses, and variability in quarterly results. Management reported that disclosure controls were not effective because of previously identified material weaknesses tied to limited resources and IT system capabilities at OmniMetrix. No material change in internal control over financial reporting was reported during the quarter.

Important facts for investors to verify

  • Whether operating cash generation can support the parent company’s cash use and fund planned investment, given negative working capital and the cash decline.
  • Whether revenue growth resumes and monitoring revenue stabilizes following the 3G sunset, and how the PG and CP segments perform.
  • Whether SG&A and R&D growth, the ERP impairment, and the software-partner negotiations affect future margins or costs.
  • The timing and commercial contribution, if any, of the ERCOT demand-response partnership and the new cloud infrastructure and customer portal.
  • Management’s remediation of the material weaknesses in disclosure controls and the status of the specialized-component supply chain and purchase commitments.