Acorn Energy, Inc. — Q3 2021 Form 10-Q
Business and period: Acorn is a holding company whose operating business is OmniMetrix, which provides wireless remote monitoring and control systems and services. Its segments are Power Generation (PG) and Cathodic Protection (CP). This unaudited report covers the three and nine months ended September 30, 2021; amounts below are in U.S. dollars, generally thousands.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,706 | $1,517 | $5,022 | $4,323 |
| Gross profit / margin | $1,242 / 73% | $1,077 / 71% | $3,674 / 73% | $3,021 / 70% |
| Operating income (loss) | $25 | $(23) | $56 | $(319) |
| Net income (loss) | $25 | $(31) | $51 | $(347) |
| Net income (loss) attributable to Acorn shareholders | $23 | $(32) | $45 | $(348) |
| EPS attributable to Acorn shareholders | $0.00 | $0.00 | $0.00 | $(0.01) |
- Cash flow: Nine-month operating cash flow was $323, compared with $300 in 2020. Investing used $221, including $214 for technology; financing used $149, principally repayment of the credit line. Cash decreased $47 to $2,016 at September 30, 2021.
- Liquidity and obligations: Working capital was approximately $13. Current assets were $4,215 and current liabilities $4,202, including $3,458 of current deferred revenue, which management says requires no significant cash outlay to recognize. Cash was approximately $1,928 as of November 8. No short-term credit or other borrowings remained at quarter-end; the $149 credit-line balance was repaid in February 2021 and the facility was not renewed. Operating lease liabilities were $471; the filing also reports approximately $1.3 million of open purchase-order commitments payable through 2022.
- Balance sheet: Total assets were $5,858 and total liabilities $6,271; total deficit was $413. Deferred revenue totaled $5,111, of which $3,458 was classified as current.
Changes and operating drivers
- Revenue increased 12% in Q3 and 16% for the nine-month period year over year. Hardware revenue growth was the largest driver: nine-month hardware revenue rose to $1,992 from $1,500, while monitoring revenue increased to $3,030 from $2,823.
- PG generated $4,283 of nine-month revenue, up 18%; CP generated $739, up 7%. Management attributed PG hardware growth in part to replacement of units affected by the 3G technology sunset, more industrial and commercial customers, accessories, and Hero-2 units. Monitoring revenue benefited from more installed billable connections, partly offset in Q3 by 3G-related disconnections.
- Gross margin improved to 73% for both the quarter and nine-month period. Management cited customer mix, accessory and monitoring sales, and data-plan restructuring. R&D and SG&A increased: nine-month R&D was $532 versus $453, and SG&A was $3,086 versus $2,887.
- Acorn’s nine-month operating result turned positive, but the operating subsidiary’s income continued to be substantially offset by corporate overhead. Segment income before tax was $759 for the nine months, offset by $708 of corporate headquarters costs, yielding consolidated pretax income of $51.
Outlook, risks, and notable items
- Management said cash plus expected operating cash generation should fund current operations for the foreseeable future, including the 12 months after issuance. It may seek a new credit line or other financing for additional investments; no specific revenue or earnings guidance was provided.
- Management reported minimal COVID-19 impact to date, continued monitoring revenue and customer retention, and said equipment sales had been below anticipated growth because of travel and meeting restrictions. It said travel had resumed and sales were returning toward projected levels. Future pandemic effects remain uncertain; risks include supply-chain disruption, restricted customer access, and delays in sales cycles, particularly CP’s stated 12–18-month cycle.
- Management expects a moderate increase in R&D expense for the remainder of 2021 and anticipated higher annual OmniMetrix SG&A from staffing, sales travel, and IT spending. The customer-portal interface project was expected to finish by year-end 2021; technology infrastructure enhancements were expected to launch around May 1, 2022. Approximately $114 had been invested in the initiative during the first nine months and was capitalized pending launch.
- A sublease covering 1,900 square feet commenced October 1, 2021, for $2,375 per month through September 2025. Management expected no net rent due to the landlord for the first 12 months after offsets, and approximately $6.7 annually thereafter.
- Disclosure controls and procedures were deemed ineffective because of previously identified material weaknesses, attributed to insufficient subsidiary control resources and limited IT capabilities. Management reported no material change in internal control during the quarter.
Most important facts to verify
- Whether revenue growth, improved margins, and billable monitoring connections continued after September 30, including the effects of 3G sunsets and hardware replacement demand.
- Whether cash generation supports operations despite only $13 of reported working capital, corporate cash use, and $1.3 million of purchase-order commitments.
- Timing, completion, and future amortization of the portal and infrastructure projects, and whether the expected R&D and SG&A increases affect profitability.
- Progress in remediating the material weaknesses in disclosure controls and internal controls over financial reporting.
- Potential COVID-19, supply-chain, customer-concentration, and long CP sales-cycle effects; the filing notes one customer represented about 12% of receivables, with the approximately $98 balance collected by November 8.