Acorn Energy, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial statements are unaudited; amounts below are in thousands of U.S. dollars unless stated otherwise.
Business context and reporting period
Acorn is a holding company whose operating business is OmniMetrix, providing remote monitoring for power-generation equipment and pipeline corrosion-protection systems. Acorn also owns 41.2% of DSIT Solutions and accounts for it as an equity-method investment; DSIT is no longer consolidated following the April 2016 sale of a portion of Acorn’s interest. GridSense is reported as a discontinued operation following the decision to cease its operations and liquidate its assets.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,045 | $1,915 | $2,141 | $6,676 |
| Gross profit / margin | $594 / 57% | $782 / 41% | $1,208 / 56% | $2,413 / 36% |
| Operating loss | $(507) | $(716) | $(844) | $(2,075) |
| Net loss attributable to Acorn shareholders | $(491) | $2,436 net income | $(711) | $(539) |
| Operating cash flow | Not provided separately | Not provided separately | $(771) | $(2,911) |
Q2 2016 and the first-half 2016 comparison include a $3,543 gain on the DSIT sale, which drove reported 2016 income despite continuing operating losses. Reported revenue and margins are also affected by DSIT’s deconsolidation, so they are not directly comparable; OmniMetrix first-half revenue increased 34% to $2,141 and its gross margin rose to 56% from 49%.
At June 30, Acorn reported cash and cash equivalents of $317, including $192 of non-escrow corporate cash, and an escrow deposit of $579. By August 8, non-escrow corporate cash was less than $30. Working capital was reported as $1,400 overall, or $2,300 for continuing operations; the latter includes the $5,727 book value of the DSIT investment and escrow funds. First-half cash use was $771 in operations, partly offset by $809 of financing, including $900 of director loans. Cash increased by $88 during the period.
Debt and obligations included $285 of OmniMetrix short-term credit at June 30 ($378 on August 7), $1,163 due to Acorn directors, and $1,429 due to DSIT. Director loans accrue interest at 12.5% annually, rising to 16.5% after February 15, 2018; the company had an additional director commitment of up to $1,000 that had not been drawn as of the filing. OmniMetrix’s receivables-based credit facility has a $500 limit and an effective borrowing rate reported at 19.75%.
Material changes and operating developments
- Consolidated first-half revenue declined 68%, chiefly because DSIT revenue was no longer consolidated. OmniMetrix’s revenue increased from $1,602 to $2,141; management cited growth in hardware sales and monitoring revenue. Units sold increased 17% for power-generation products and 358% for corrosion-protection products.
- OmniMetrix first-half gross profit rose to $1,208 from $782, with margin improving to 56% from 49%. Management attributed the improvement to product mix and the impact of a one-time $130 negative monitoring-revenue adjustment in 2016.
- DSIT reported first-half revenue of $8,062 and net income of $169; Acorn recognized $69 as its share of DSIT income. Acorn’s backlog was $20.7 million, including $17.7 million at DSIT and $3.0 million at OmniMetrix; DSIT backlog is not consolidated revenue.
- Corporate first-half SG&A decreased to $448 from $1,480. Management cited lower costs following the former CEO’s departure and a $167 benefit from settling a professional-services invoice. The filing also reports $18 of first-half stock-based compensation versus $234 a year earlier.
- GridSense generated $65 of discontinued-operations income in the first half, compared with a $1,610 loss in 2016. The remaining escrow from its asset sale was released in July 2017, according to the filing.
Outlook, risks, and unusual items
Management expected available cash, a potential October 2017 receipt of up to $579 from the DSIT share-sale escrow, director borrowing availability, and lower OmniMetrix cash needs to fund operations through the first quarter of 2018. However, Acorn stated it did not have sufficient cash flow for the next 12 months and that substantial doubt existed about its ability to continue as a going concern. Loans from directors and amounts due to DSIT are due by the earlier of April 30, 2018 or a sale of Acorn’s DSIT investment. Acorn was pursuing a sale; failure to sell or secure additional financing could impair its ability to fund corporate operations and OmniMetrix. Potential funding sources include related- or third-party loans, an OmniMetrix sale or strategic partner, or equity financing, with no assurance of availability on acceptable terms.
Other notable risks include the high-cost OmniMetrix credit facility, customer concentration (two customers represented approximately 30% of accounts receivable), and material weaknesses in disclosure controls and procedures. Management attributed control weaknesses to insufficient resources, turnover, and limited IT capabilities at subsidiaries; it reported no material change in internal control over financial reporting during the quarter. Stockholders approved authority for a reverse stock split between one-for-ten and one-for-twenty, at the board’s discretion, before August 8, 2018. No specific earnings or revenue guidance was provided.
Important facts for investors to verify
- Whether Acorn sold any DSIT shares, received the escrow proceeds, or drew the remaining director financing after the filing date.
- Current unrestricted cash, cash burn, and the timing and repayment terms of director and DSIT balances due in 2018.
- Whether OmniMetrix can sustain revenue and margin growth while meeting working-capital needs under its high-cost credit facility.
- The status and potential financial impact of the disclosed control weaknesses and any remediation actions.
- How DSIT backlog, results, and any potential sale proceeds affect Acorn’s reported financial position and liquidity.