Acorn Energy, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Dollar amounts are in thousands unless otherwise noted. Acorn is a holding company with businesses in sonar and security systems (DSIT), smart-grid distribution automation (GridSense), and machine-to-machine monitoring (OmniMetrix). USSI is reported as discontinued operations.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $4,776 | $5,168 | $14,201 | $14,345 |
| Gross profit / margin | $1,431 / 30% | $1,933 / 37% | $4,615 / 32% | $4,639 / 32% |
| Operating loss | $(2,617) | $(1,530) | $(7,263) | $(7,573) |
| Net loss attributable to Acorn shareholders | $(2,756) | $(3,849) | $(8,674) | $(13,680) |
| Basic and diluted loss per share | $(0.10) | $(0.17) | $(0.33) | $(0.62) |
For the first nine months, continuing-operations operating cash flow was $2,749; discontinued operations used $1,792, leaving total operating cash flow of $957. Investing activities used $5,244, including a $5,439 net increase in restricted deposits. Financing activities provided $106. Cash and cash equivalents declined $4,341 to $532 at September 30.
At period-end, total assets were $27,658 and total equity was $2,468. Current assets of $18,156 were below current liabilities of $19,270; management reported negative working capital of approximately $1.1 million. Restricted deposits totaled $6,556 and are not equivalent to freely available cash. Current bank credit and maturities were $3,060; the Leap Tide loan had $2,000 principal due August 13, 2016 and was carried net of discount at $1,564. The loan bears 10% interest and is secured, with subsidiary guarantees and pledged intellectual property.
Material changes and business performance
- Q3 revenue fell 8% year over year, and gross margin declined from 37% to 30%; the Q3 operating loss widened to $2,617, including $712 of GridSense impairment charges. Nine-month revenue was down 1%, while the operating loss improved modestly. The lower nine-month shareholder net loss largely reflects smaller USSI discontinued-operation losses.
- DSIT revenue rose 12% to $10,068 for nine months; its gross margin improved to 35% from 28%. DSIT’s backlog was $22.7 million, including remaining work on a multi-year naval sonar and trainer project.
- GridSense revenue declined 41% to $1,984 for nine months, and its gross margin fell to negative 6%, reflecting lower sales and unexpected deployment costs. Acorn recorded $1,562 of goodwill and intangible impairment during the period, including $712 in Q3; GridSense goodwill and intangibles were fully written off.
- OmniMetrix revenue increased 7% to $2,149 for nine months, with gross margin steady at 58%. Its monitoring business remained dependent on financing from Acorn.
- USSI ceased operations, its assets were acquired by its secured bank at a $725 credit bid after an auction received no offers, and USSI filed for Chapter 7 on September 30. Acorn deconsolidated USSI and recorded a $401 loss on deconsolidation.
Liquidity, outlook, risks and unusual items
- Funding risk: Acorn said expected DSIT support did not materialize as anticipated and it no longer expected significant additional funding from DSIT. It warned that if alternative funding is unavailable, it may be unable to fund corporate operations or continue historical support for GridSense and OmniMetrix, potentially affecting its ability to continue operations and the carrying values of subsidiaries. As of November 12, corporate operations held approximately $140 of unrestricted cash, excluding subsidiary cash.
- Leap Tide financing terms: The $2,000 loan matures in August 2016. The lender received 850,000 initial shares and monthly rights to additional shares while the full principal remains outstanding. Acorn must increase authorized shares by March 31, 2016; failure is an event of default that could allow acceleration and a lender put at $0.40 per share or vested right. Acorn’s cash settlement option is generally $0.30 per share or right.
- Subsequent financing: On October 16, a director invested $500 for a 10% preferred interest in OmniMetrix Holdings. The preferred shares accrue a 10% annual dividend and have conversion and anti-dilution provisions. OmniMetrix repaid Acorn $346 of prior loans following the transaction.
- Management outlook: No consolidated revenue or earnings guidance was provided. Management expected DSIT gross margins to remain around current levels, historically 35%–40%, and identified DSIT collections and project milestones as important to funding. It noted GridSense’s sales pipeline had grown but warned that orders and their timing were uncertain; its utility sales cycles are long. OmniMetrix was pursuing strategic partners and expected to need additional financing.
- Contingencies and other risks: DSIT was uncertain whether the BIRD Foundation would seek recovery of approximately $379 previously funded for a joint project, following USSI’s shutdown. Foreign-exchange exposure includes approximately $2.9 million of net non-U.S.-dollar monetary liabilities in Israel; about $4.9 million of backlog was not denominated in U.S. dollars. Receivables and unbilled revenue were concentrated among a small number of customers.
- Controls: Management concluded disclosure controls were ineffective due to previously identified material weaknesses, including limited subsidiary resources, employee turnover, and IT limitations. Management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Acorn can secure sufficient liquidity, and the availability and timing of cash transfers from DSIT after project milestones, billing, and collections.
- Whether Acorn amends its charter by March 31, 2016 to meet Leap Tide’s share authorization requirement, and how the loan, share rights, and potential cash settlement affect dilution and repayment obligations.
- Whether GridSense sales recover and its deployment-related costs, negative margins, and continuing funding needs improve.
- Whether DSIT converts its backlog and unbilled revenue into billings and cash on schedule, and whether any BIRD Foundation recovery claim arises.
- The status of the ineffective disclosure controls and material weaknesses, and the practical availability of restricted deposits for operating needs.