Acorn Energy, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Dollar figures below are in millions unless stated otherwise. Acorn is a holding company with three continuing businesses: DSIT (sonar and security solutions), GridSense (smart-grid monitoring and control), and OmniMetrix (remote monitoring of critical assets). US Seismic Systems, Inc. (USSI) is reported as discontinued operations after Acorn stopped funding it and USSI suspended operations.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $4.807 | $4.723 | $9.425 | $9.177 |
| Gross profit / margin | $1.665 / 35% | $1.276 / 27% | $3.184 / 34% | $2.706 / 29% |
| Operating loss | $(2.819) | $(3.428) | $(4.646) | $(6.043) |
| Net loss from continuing operations | $(2.947) | $(3.683) | $(4.729) | $(6.302) |
| Net loss attributable to Acorn shareholders | $(3.149) | $(5.527) | $(5.918) | $(9.831) |
| Attributable loss per share | $(0.12) | $(0.25) | $(0.22) | $(0.44) |
- Revenue increased 2% in Q2 and 3% for the first half. First-half project revenue was $6.304 million, product revenue $2.063 million, and service revenue $1.058 million.
- For the first half, DSIT revenue rose 14% to $6.452 million; GridSense revenue fell 27% to $1.610 million; and OmniMetrix revenue rose 3% to $1.363 million. First-half segment gross margins were 32% for DSIT, 17% for GridSense, and 60% for OmniMetrix.
- The lower losses versus 2014 reflected improved gross profit, reduced operating expenses, and a smaller USSI discontinued-operations loss. Q2 2015 included $850,000 of GridSense impairment charges: $513,000 of goodwill and $337,000 of intangibles. The first-half 2014 comparison included a $649,000 provision for a channel-partner loss and $198,000 of restructuring charges.
- At June 30, cash and cash equivalents were $896,000, versus $4.821 million at year-end 2014. Current and non-current restricted deposits totaled $7.948 million. Total assets were $29.955 million; total liabilities were $29.271 million; and total equity was $684,000.
- Current bank credit and current maturities of long-term debt were $3.642 million at June 30. Acorn reported negative working capital of $3.2 million, including negative $4.4 million for discontinued USSI; continuing operations had working capital of $1.2 million. Deferred revenue was $6.895 million.
- First-half operating cash flow was positive $4.040 million overall, including $5.615 million from continuing operations and $1.575 million used by discontinued operations. Investing activities used $7.113 million, mainly reflecting a $6.824 million net increase in restricted deposits. Financing activities used $845,000. Cash declined $3.973 million over the period.
Material changes, outlook, and risks
- DSIT orders and cash generation: DSIT reported $26.6 million of backlog at June 30, against $12.0 million at year-end 2014, following approximately $21.1 million of first-half orders. A $15.42 million naval order included a $6.168 million down payment. Management expected DSIT’s 2015 gross margin to remain around current levels, consistent with its historical 35%–40% range, and anticipated up to $5 million of DSIT support for Acorn and subsidiaries in 2015. That support depends on project milestones and collecting receivables and unbilled revenue; it is not assured.
- GridSense weakness: Lower sales, particularly in Australia after fulfillment of a major order, contributed to impairments and a first-half gross-margin decline. Management described utility customer sales cycles as long and uncertain and said GridSense may need further financing; there is no assurance it can secure adequate funding on acceptable terms.
- OmniMetrix funding: Revenue and first-half gross margin improved, but the business relied on Acorn for financing. Management expected further funding needs into 2016, dependent in part on market penetration, and said future funding availability was uncertain.
- Liquidity and debt events: In April 2015, Square 1 Bank declared a default under GridSense’s loan arrangements after covenant noncompliance; the bank waived the defaults under an amendment. After Acorn’s subsequent financing, Acorn paid $480,000 and applied $500,000 of restricted deposits to settle the amounts due under that loan. Separately, DSIT was out of compliance with a financial covenant at June 30 after receiving the large order down payment; the bank was working with DSIT to reformulate the covenant.
- Subsequent financing and dilution: On August 13, 2015, Acorn borrowed $2 million from Leap Tide at 10% annual interest, due August 13, 2016. The loan is secured by Acorn assets, with domestic subsidiary guarantees and certain IP pledged. Leap Tide received 850,000 common shares and rights to 179,167 additional shares per full month the full principal remains outstanding. Acorn lacked sufficient authorized shares for all potential rights and must amend its charter by March 31, 2016; failure is an event of default and may trigger acceleration and a lender put right. Management reported approximately $1.5 million of Acorn corporate unrestricted cash on August 13 after financing and GridSense loan settlement.
- USSI and contingencies: USSI’s $1.460 million bank debt had matured, was due on demand, and bore default interest of 11.5%; Acorn had not guaranteed it. USSI assets were pledged to its bank, and management said it was uncertain whether asset-sale proceeds would reach Acorn or other shareholders. DSIT also could face recovery claims for $379,000 previously funded by the BIRD Foundation; the filing says the outcome is uncertain.
- Listing and controls: Acorn’s shares were delisted from Nasdaq effective July 24, 2015 for failure to regain compliance with the minimum bid-price requirement and began trading on OTCQB. Management concluded disclosure controls were not effective because of previously identified material weaknesses, including inadequate resources, employee turnover, and limited IT capabilities at subsidiaries.
- Other exposure: The filing identifies foreign-currency exposure at DSIT, customer concentration in receivables and unbilled revenue, and substantial contractual and severance obligations. Acorn stated it believed liquidity would be sufficient for at least 12 months, but warned that insufficient DSIT support could impair subsidiaries’ carrying values and Acorn’s ability to continue operations.
Most important facts for investors to verify
- Whether DSIT meets project milestones, collects unbilled revenue, and provides the anticipated cash support; and whether it resolves its bank covenant issue.
- Whether GridSense can restore sales and margins and fund operations after the impairment and settlement of its bank loan.
- The total cost, share dilution, collateral implications, and compliance with the March 31, 2016 authorized-share condition of the Leap Tide loan.
- Acorn’s actual available liquidity after accounting for restricted deposits, subsidiary funding needs, and the USSI wind-down; also verify the status and potential proceeds of USSI asset sales.
- Progress in remediating the material weaknesses in disclosure controls and the implications of the Nasdaq delisting.