Acorn Energy, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated financial statements; amounts below are in U.S. dollars, generally in thousands unless noted.
Business context
Acorn is a holding company whose continuing operating business is OmniMetrix, which provides remote monitoring for power-generation equipment and corrosion-protection systems. Acorn owns 80% of OmniMetrix. It also owns 41.2% of DSIT Solutions and accounts for DSIT under the equity method following the April 2016 sale of part of its DSIT stake. GridSense is in liquidation and reported as a discontinued operation.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $1,096 | $4,761 |
| Gross profit / margin | $614 / 56% | $1,631 / 34% |
| Operating loss | $(337) | $(1,359) |
| Loss before discontinued operations | $(335) | $(1,640) |
| Net loss attributable to Acorn shareholders | $(220), or $(0.01) per share | $(2,975), or $(0.11) per share |
| Net cash used in operating activities | $(364) | $(1,123) |
Q1 2017 revenue and gross profit reflect continuing operations; the prior-year comparison includes DSIT’s consolidated results. OmniMetrix revenue rose 30% to $1,096, gross profit increased to $614, and gross margin improved to 56% from 51%. Its PG and CP revenue was $898 and $198, respectively. Acorn recorded $36 of its share of DSIT’s Q1 net income.
At March 31, cash and cash equivalents were $663; escrow deposits were $579. Working capital was reported as $4.3 million, including $5.1 million for continuing operations. Total assets were $9.3 million and total equity was $1.6 million. Short-term credit was $274; amounts due to directors and DSIT were $1,107 and $1,241, respectively. The filing says those balances are due on the earlier of April 30, 2018 or a sale of Acorn’s DSIT investment.
Financing activities provided $798, including $900 in director loans, partly offset by $102 of net repayments on OmniMetrix’s credit facility. The company’s cash declined through operations; it reported $330,000 of non-escrow corporate cash on May 10, while another note reports $333,000. Management also cited a possible additional director loan of up to $1.0 million beginning July 7, 2017 and expected receipt of up to $579,000 of DSIT-transaction escrow funds in October 2017.
Changes, outlook and material risks
- Comparability: Consolidated revenue fell 77%, primarily because Acorn no longer consolidates DSIT. OmniMetrix itself grew revenue 30%, driven by higher hardware sales and monitoring revenue. Its SG&A rose 20% to $718, mainly due to marketing and payroll costs.
- Loss improvement and unusual items: Acorn’s attributable loss narrowed substantially, but comparisons were affected by GridSense’s $1,386 loss in Q1 2016 versus $65 income in Q1 2017, lower corporate costs, and the absence of prior-year DSIT consolidation. Q1 2017 corporate expense included a $167 benefit from settling a professional-services invoice; management said future corporate expense would approximate Q1 levels without that benefit. Q1 2016 corporate costs included former-CEO severance and accelerated stock compensation.
- Funding and going concern: Management stated that available cash and expected sources were expected to fund operations only through Q1 2018 and that the company lacked sufficient cash flow for the next 12 months. The filing says these conditions raise substantial doubt about Acorn’s ability to continue as a going concern. If DSIT shares cannot be sold or other funding obtained, Acorn may be unable to fund corporate operations or support OmniMetrix. Potential funding routes include loans, equity financing, or a sale, partial sale, or strategic partner for OmniMetrix; none is assured.
- Debt terms: Director loans totaling $900 funded in February carry 12.5% interest, increasing to 16.5% after February 15, 2018, and mature at the end of April 2018. OmniMetrix’s receivables-based facility had a $274 balance at quarter-end and a $386 balance on May 10; its stated borrowing cost includes a 1% monthly service charge.
- Contingency: GridSense’s buyer disputes release of escrow funds and has asserted claims that Acorn considers untimely and without merit. The dispute remained unresolved. GridSense had approximately $244 of remaining creditor claims at March 31 against approximately $12 of available cash, excluding escrow.
- Controls: Management concluded disclosure controls were not effective because of previously identified material weaknesses, including insufficient subsidiary resources, employee turnover, and limited IT capabilities. No material change in internal control was reported during the quarter.
- Business outlook: Management reported expected continued OmniMetrix growth and said it did not expect R&D or SG&A expenses to materially change in coming quarters. These expectations are not a formal earnings or revenue forecast.
Investor verification points
- Verify the timing, amount, and net proceeds of any sale of Acorn’s DSIT stake, and whether those proceeds will cover obligations due in 2018.
- Confirm the availability and terms of the additional director financing and the expected DSIT-transaction escrow release; the filing gives differing May 10 cash figures of $330,000 and $333,000.
- Assess OmniMetrix’s ability to sustain revenue growth, margins, and cash generation while meeting its credit-facility requirements.
- Track the GridSense escrow dispute, liquidation recoveries, and remaining creditor claims.
- Monitor remediation of the disclosed material weaknesses and the company’s stated going-concern uncertainty.