Acorn Energy, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; filed November 14, 2016. Unless otherwise noted, financial amounts below are in thousands of dollars.
Business context
Acorn is a holding company whose continuing operating business is OmniMetrix, providing remote monitoring for power-generation equipment and corrosion-protection systems. After selling a portion of its DSIT Solutions interest in April 2016, Acorn retained 41.2% and accounts for DSIT under the equity method rather than consolidating it. Acorn also ceased GridSense operations and sold its assets in July; GridSense is reported as discontinued operations. USSI, previously a discontinued operation, entered Chapter 7 bankruptcy in 2015.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $942 | $4,402 | $7,618 | $12,217 |
| Gross profit / margin | $524 / 56% | $1,823 / 41% | $2,937 / 39% | $4,734 / 39% |
| Operating loss | $(624) | $(949) | $(2,699) | $(3,733) |
| Net income (loss) attributable to Acorn shareholders | $652 | $(2,756) | $113 | $(8,674) |
| Basic and diluted earnings (loss) per share | $0.02 | $(0.10) | $0.00 | $(0.33) |
- The Q3 profit included $1,187 of income from discontinued operations, including a $944 net gain on the GridSense asset sale. The nine-month result included a $3,543 net gain from the DSIT transaction; these items materially affect comparisons.
- Revenue fell 79% in Q3 and 38% year to date, principally because DSIT ceased to be consolidated after April 21. OmniMetrix revenue increased 20% in Q3 and 18% year to date; its nine-month revenue was $2,544. Acorn reported its share of post-sale DSIT income as $63 for the period from closing through September 30.
- OmniMetrix’s nine-month gross margin was 51%, versus 58% a year earlier. Management cited a one-time $130 monitoring-revenue adjustment and a greater mix of lower-margin residential generator monitoring; it said recurring monitoring revenue margins remained above 80%.
- Net cash used in operating activities was $3,881 for the nine months ($3,009 from continuing operations). Investing activities provided $5,059, principally from DSIT-related proceeds and releases of restricted deposits; financing activities used $863. Cash and cash equivalents at September 30 were $104 in continuing operations and $396 in discontinued operations.
- At September 30, total assets were $8,599, total liabilities $6,507, and total equity $2,092. Current assets of $2,145 compared with current liabilities of $4,863; management reported negative working capital of $2.7 million, including $2.0 million of OmniMetrix deferred revenue.
- Reported short-term debt and current maturities were $47 at September 30; the $2,000 Leap Tide loan was repaid in April. OmniMetrix’s receivables-based facility had a $47 balance at quarter-end and approximately $240 outstanding on November 9. Its amended terms required a minimum $150 balance for at least one year from October 1.
Material changes, outlook and risks
- DSIT sale: Acorn received gross proceeds of approximately $4,913, placed $579 in escrow, and recorded a $3,543 gain including the deconsolidation effect. Acorn may receive its pro-rata share of a $1,000 earn-out over three years if targets are achieved; it is not recognized unless earned. DSIT backlog was $21.8 million at September 30, and Acorn reported total backlog of $24.1 million including OmniMetrix.
- GridSense wind-down: The asset sale generated $1,000 gross proceeds, including $100 in indemnity escrow. At October 31, the liquidator had disbursed approximately $535 to creditors, including $500 to Acorn, and about $24 remained available excluding escrow. Acorn said recovery of additional amounts was uncertain.
- Going concern: Management said the company lacked sufficient cash flow to fund operations for the next 12 months. Cash was approximately $230 at October 31 after transfers from GridSense. Additional financing, asset sales, a strategic partner, or related-party funding may be needed; availability and acceptable terms are not assured. The filing states these conditions raise substantial doubt about Acorn’s ability to continue as a going concern.
- Outlook: No formal revenue or earnings guidance was provided. Management expected OmniMetrix R&D to remain near current levels, SG&A to remain relatively stable, and corporate quarterly G&A to approximate Q3 levels, subject to professional fees. Management cited product redesign efforts intended to reduce costs and improve margins.
- Other risks and unusual items: Acorn had $357 of remaining former-CEO severance obligations; contractual cash obligations totaled $756, including debt, leases, and severance. A single customer accounted for approximately 11% of accounts receivable. The company disclosed ineffective disclosure controls due to material weaknesses linked to limited subsidiary resources, staff turnover, and IT limitations. Management reported no material change in internal control during the quarter.
Investor verification priorities
- Confirm the company’s cash position, funding runway, and progress in securing financing after October 31, 2016; assess the stated going-concern uncertainty.
- Verify cash recovery from GridSense liquidation and the release conditions and timing for the DSIT and GridSense escrow deposits.
- Separate continuing-business performance from DSIT deconsolidation and one-time sale/discontinued-operation gains when assessing earnings and revenue trends.
- Review OmniMetrix’s borrowing terms, required minimum facility balance, collateral provisions, and ability to fund working capital.
- Assess DSIT’s backlog, project margins, earnings, and any potential earn-out against Acorn’s 41.2% ownership and equity-method accounting.
- Track remediation of the disclosed material weaknesses and any further share issuance or dilution; shares outstanding were 29,322,574 at November 11, 2016.