Acorn Energy, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unless stated otherwise, figures below are in millions of dollars; the filing presents financial statements in thousands. The company is a holding company whose continuing operating businesses are OmniMetrix’s power-generation and corrosion-protection monitoring activities. Following its April 21 sale of part of DSIT, Acorn retained a 41.2% interest and accounts for DSIT under the equity method. GridSense is reported as discontinued operations.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 | Prior-year comparison |
|---|---|---|---|
| Revenue | $1.915 | $6.676 | Q2: $4.105; six months: $7.815 |
| Gross profit / margin | $0.782 / 41% | $2.413 / 36% | Q2: $1.669 / 41%; six months: $2.911 / 37% |
| Operating loss | $(0.716) | $(2.075) | Q2: $(1.294); six months: $(2.784) |
| Net income (loss) attributable to Acorn shareholders | $2.436 | $(0.539) | Q2: $(3.149); six months: $(5.918) |
| Operating cash flow | Not separately presented | $(2.911), including $(2.363) from continuing operations | Six months 2015: $4.040 |
| Cash and cash equivalents | $0.623 at June 30; management identified about $0.518 as non-escrow corporate cash | $0.124 at December 31, 2015 | |
| Working capital | Negative $3.3; negative $1.6 for continuing operations | — | |
| Debt and other obligations | $0.123 short-term debt/current maturities; $0.978 due to DSIT. Leap Tide’s $2.0 loan was repaid in April. | — |
Material changes and significant transactions
- Reported revenue fell 53% in Q2 and 15% in the first half, principally because DSIT was consolidated only through April 21, 2016. The change in consolidation makes reported periods less comparable as an indication of continuing operations.
- OmniMetrix first-half revenue increased 18% to $1.602 from $1.363, while gross profit declined to $0.782 from $0.816 and gross margin fell to 49% from 60%. Management attributed the margin decline partly to a one-time $0.130 deferred-revenue adjustment and a greater mix of residential generator monitoring.
- Acorn received $4.913 gross proceeds from the DSIT transaction, placed $0.579 in escrow, paid about $0.266 in Israeli withholding tax and incurred about $0.184 in transaction costs. The statements report a $3.543 gain on the DSIT sale, net of taxes and transaction costs, and $0.025 of post-sale equity-method income. Acorn may receive its pro-rata share of a $1.0 earn-out over three years if targets are met; it was not recognized as a gain.
- Net income attributable to shareholders was positive in Q2 despite a $0.716 operating loss, primarily because of the DSIT transaction gain. First-half attributable loss also reflects $1.610 of discontinued-operation losses, principally GridSense.
- Acorn issued 1.531 million shares to Leap Tide under loan share rights and 0.466 million shares upon conversion of a director loan and interest. Common shares issued increased from 28.128 million at year-end to 30.124 million at June 30.
Liquidity, outlook, risks and other items
- Going concern: Management stated it did not have sufficient cash flow for the next 12 months and disclosed substantial doubt about Acorn’s ability to continue as a going concern. It said further funding is necessary for corporate operations and OmniMetrix; potential sources include loans, asset or business sales, a strategic partner or equity financing, with no assurance funding will be available on acceptable terms.
- Cash use and financing: Operating activities used $2.911 in the first half; investing activities provided $4.159, primarily reflecting DSIT-related proceeds and releases of restricted deposits. Financing activities used $0.787. At June 30, OmniMetrix had $0.123 outstanding on its receivables-based facility; the lender had imposed a $0.300 sublimit on a stated $0.500 facility. The filing gives an effective advance rate of approximately 19.5% and reports an August 8 balance of about $0.042.
- GridSense subsequent sale: On July 12, GridSense assets were sold for $1.0 gross. GridSense paid about $0.240 of accrued severance and payroll costs. Remaining proceeds, after transaction costs and a $0.100 indemnity escrow, are subject to creditor claims and liquidation; Acorn said the amount, if any, it will recover cannot be determined. Management expected to record an approximately $1.0 gain before transaction costs in Q3.
- Management and costs: Former CEO John Moore resigned in January; the company disclosed $0.425 in aggregate severance payments beginning August 2016 and up to $0.017 in medical-cost reimbursement. The new CEO serves under a consulting agreement through January 2017. Management expected OmniMetrix SG&A to remain relatively stable, R&D near current levels, and corporate quarterly G&A for the remainder of 2016 to approximate Q2 levels, depending on professional fees; these are expectations, not formal earnings guidance.
- Operations and backlog: DSIT announced a $7.1 order in June and reported a $24.9 backlog at June 30; OmniMetrix backlog was $2.5, primarily deferred revenue. DSIT backlog and operations are not consolidated after the sale. Management said the Rafael partnership could support DSIT’s growth, but this is forward-looking commentary.
- Controls and other risks: Management concluded disclosure controls were not effective because of previously identified material weaknesses, citing limited subsidiary resources, employee turnover and IT-system limitations. Stockholders authorized the board to effect a one-for-ten to one-for-twenty reverse split before July 21, 2017. The filing also notes customer concentration: about 22% of accounts receivable was due from two customers.
Important facts for investors to verify
- Acorn’s near-term cash position, monthly cash burn and ability to secure funding before liquidity is exhausted.
- Whether, and how much, GridSense liquidation proceeds will be available to Acorn after creditor claims, escrow and transaction costs.
- The performance conditions and potential timing of the DSIT earn-out, as well as the value and liquidity of Acorn’s remaining DSIT interest.
- OmniMetrix’s normalized revenue and gross margin excluding the deferred-revenue adjustment, and its access to working-capital financing.
- Progress remediating material weaknesses in disclosure controls and internal control over financial reporting.
- The final share count and potential dilution from outstanding options, warrants and any future financing; also whether the board will exercise the authorized reverse-split authority.