Acorn Energy, Inc. — Q1 2023 Form 10-Q
Business and period: The filing reports unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Acorn is a holding company whose OmniMetrix subsidiary provides remote monitoring and control products and services in Power Generation (PG) and Cathodic Protection (CP).
Financial results and liquidity
- Revenue: $1.749 million, essentially unchanged from $1.751 million. Monitoring revenue increased 3.4% to $1.024 million; hardware revenue declined to $725,000.
- Segments: PG revenue rose 4.3% to $1.507 million; CP revenue fell 20.9% to $242,000. Segment income before tax was $199,000 for PG and a $48,000 loss for CP.
- Profit and margins: Gross profit increased 5% to $1.316 million; gross margin improved to 75% from 72%. Operating loss was $95,000 versus $122,000. Net loss attributable to Acorn shareholders was $85,000 versus $123,000. Reported loss per share rounded to $0.00 in both periods.
- Expenses: R&D rose 8% to $214,000; SG&A increased 1% to $1.197 million. Interest income was $11,000; income tax expense was zero.
- Cash flow: Operating activities used $83,000, versus $221,000 provided in Q1 2022. Investing activities used $26,000, principally for technology; warrant exercises provided $5,000. Cash declined $104,000 to $1.346 million. Cash was $1.543 million as of May 9, 2023.
- Balance sheet: Total assets were $6.014 million. Current liabilities were $4.711 million and working capital was negative $580,000; management notes that $4.047 million of current deferred revenue does not require significant cash outlay to recognize. Total stockholders’ deficit was $1.074 million.
- Debt and obligations: The filing does not report conventional borrowings. Operating lease liabilities were $308,000; other contractual obligations were $37,000, and open purchase-order commitments were $731,000. Total contractual cash obligations were $1.097 million.
Changes, outlook, and risks
- Gross margin improved mainly because monitoring services carry higher margins and product mix shifted toward higher-margin commercial and industrial products. PG growth was offset by lower CP and hardware revenue.
- Backlog was $6.2 million at quarter-end, primarily deferred revenue, compared with $5.7 million a year earlier; $4.0 million was expected to be recognized during 2023. Deferred revenue totaled $6.216 million, of which $4.047 million was scheduled for recognition in the 12 months ending March 31, 2024.
- Management expects a moderate increase in 2023 R&D spending as it develops next-generation products, redesigns products, and explores product lines. Management believes cash and operating cash generation will fund current operations for 12 months from issuance of the statements; it may seek financing for additional investment.
- Risks include negative working capital, reliance on cash generation, quarterly variability, credit and customer concentration, competition, and dependence on management and key personnel. One customer represented about 21% of receivables at March 31; the company reported collecting the full $160,000 outstanding from that customer by May 9.
- Disclosure controls and procedures were deemed ineffective because of previously reported material weaknesses, attributed to limited subsidiary resources and IT capabilities. The filing reported no material change in internal control during the quarter.
- Unusual items: $3,000 of inventory was written off. The CEO exercised 35,000 warrants at $0.13 per share, generating $5,000; the filing also reports $17,000 of stock-based compensation.
Important facts to verify
- Whether operating cash flow and cash balances support management’s 12-month liquidity assessment, especially given negative working capital and purchase commitments.
- Whether PG growth can continue and CP revenue stabilize after its 20.9% year-over-year decline.
- Backlog conversion, deferred-revenue recognition, and margins as the product and service mix changes.
- Progress in remediating the disclosed material weaknesses in financial reporting controls.
- The timing and cash impact of $731,000 in open purchase orders and the company’s potential need for financing to fund growth.