Acorn Energy, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filing dated March 30, 2016. Acorn is a holding company with businesses in sonar and security systems (DSIT), smart-grid monitoring (GridSense), and machine-to-machine asset monitoring (OmniMetrix). USSI is reported as discontinued operations after suspending operations and filing Chapter 7 bankruptcy in September 2015.
Financial results and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $19.055 million | $19.560 million |
| Gross profit / margin | $6.187 million / 32% | $6.638 million / 34% |
| Operating loss | $9.088 million | $10.166 million |
| Continuing-operations net loss | $9.629 million | $10.459 million |
| Net loss attributable to Acorn shareholders | $10.599 million; $0.40 per share | $27.145 million; $1.19 per share |
| Cash from continuing operating activities | $0.811 million provided | $7.124 million used |
| Cash from operating activities, including discontinued operations | $0.981 million used | $18.217 million used |
Fourth-quarter 2015 revenue was $4.854 million, versus $5.215 million in fourth-quarter 2014. Fourth-quarter 2015 net loss attributable to Acorn shareholders was $1.925 million, compared with $13.465 million in fourth-quarter 2014; the prior-year quarter included substantial USSI losses.
At year-end, total assets were $24.330 million, cash and cash equivalents were $172,000, and working capital was negative $1.0 million. Current liabilities were $16.820 million against current assets of $15.852 million. Bank debt and receivables-backed borrowings totaled $2.054 million; the Leap Tide loan had $1.9 million net carrying value. Restricted deposits totaled approximately $5.1 million, largely securing DSIT guarantees and unavailable for general operations. Total equity was $1.658 million, including Acorn shareholder equity of $366,000.
Changes versus 2014
- Revenue declined 3% overall. DSIT revenue rose 10% to $13.5 million; OmniMetrix revenue rose 11% to $3.0 million; GridSense revenue fell 44% to $2.5 million.
- GridSense gross margin dropped to 1% from 29%, reflecting unexpected deployment costs, warranty costs and inventory impairments. Management said margin would have been 35% excluding these items.
- DSIT gross margin improved to 32% from 30%, while OmniMetrix gross margin increased to 59% from 58%. Consolidated gross margin declined to 32% from 34%.
- R&D expense fell 19% to $2.205 million and SG&A fell 4% to $11.508 million. GridSense recorded $1.562 million of goodwill and intangible impairment charges; no goodwill or intangible assets remained for GridSense at year-end.
- USSI discontinued-operations loss fell to $1.173 million from $19.140 million in 2014. Acorn’s common shares outstanding increased during 2015, and the company later obtained shareholder approval to increase authorized shares from 30 million to 42 million.
Outlook, significant events and risks
- Liquidity and going concern: Management stated it did not have sufficient cash flow for the next 12 months; the auditor’s report and management disclosures cite substantial doubt about Acorn’s ability to continue as a going concern. Corporate unrestricted cash was approximately $22,000 as of March 21, 2016. Management was relying on financing and asset-sale proceeds, with no assurance additional funding would be available on acceptable terms.
- DSIT transaction: In January 2016 Acorn agreed to sell a portion of its DSIT interest to Rafael for expected gross proceeds of approximately $4.9 million, before $0.6 million escrow, fees and taxes, plus eligibility for a pro-rata share of a $1.0 million earn-out. Required Israeli approvals had been received; closing was expected in early April 2016. After closing, Acorn expected to hold approximately 41.2%, use equity-method accounting and cease consolidating DSIT. The sale had not closed when the filing was made. Proceeds were intended partly to repay $2.0 million of Leap Tide debt and $375,000 borrowed from directors, with the remainder supporting Acorn and subsidiaries.
- Business outlook: DSIT expected 2016 revenue growth based on backlog and new orders, while noting long sales cycles and uncertainty. Its year-end backlog was $20.6 million, with $9.6 million expected to be completed in 2016. GridSense cited more than 20 major pilots, each with potential rollout revenue exceeding $500,000, but cautioned that pilots may not convert to large orders; management focused on selected products and U.S. opportunities. OmniMetrix expected to expand its customer base and planned LTE-enabled products, but anticipated continued financing needs. Total backlog was $23.0 million, with $11.5 million expected to be completed in 2016.
- Funding and debt: Acorn borrowed $2.0 million from Leap Tide at 10% annual interest in 2015, secured by a lien and supported by subsidiary guarantees; the loan was due August 2016. Director loans made in 2016 totaled $375,000 and were repayable at 115% of principal following receipt of DSIT sale proceeds. OmniMetrix’s 2016 receivables facility had a $500,000 stated limit but a lender-imposed $300,000 sublimit and an effective rate reported at 19.5% on advances.
- Other material risks and contingencies: Acorn reported ineffective disclosure controls and material weaknesses in internal controls at GridSense and OmniMetrix, though it said these did not cause material misstatements in the reported periods. DSIT’s four largest customers represented about 78% of its 2015 revenue; approximately $9.6 million of DSIT guarantees were outstanding and secured in part by restricted deposits. Risks also include fixed-price project cost estimates, delayed orders and collections, dependence on external financing, low oil prices and defense spending, competition, foreign exchange, and the status of BIRD grant obligations after USSI’s closure.
- Management change: CEO John Moore resigned in January 2016. Acorn disclosed $425,000 of severance, up to $17,000 of medical-insurance reimbursement, and accelerated option vesting. Jan Loeb became CEO under a consulting arrangement costing $17,000 per month through January 2017.
Key facts investors should verify
- Whether the DSIT sale closed, net proceeds after escrow, taxes and fees, the earn-out terms, and the resulting ownership, governance and equity-method accounting.
- Acorn’s post-transaction unrestricted cash, debt repayment and remaining liquidity runway, including whether financing is available for GridSense and OmniMetrix.
- Whether DSIT converts backlog and expected orders into revenue and cash collections, and whether customer concentration or restricted guarantee deposits constrain cash availability.
- Whether GridSense pilots convert to commercial-scale sales and whether margins recover after the deployment, warranty and inventory issues.
- OmniMetrix’s financing availability and cost, customer-monitoring retention, and the effect of its preferred shares’ 10% dividend and anti-dilution provisions.
- Progress remediating the disclosed internal-control material weaknesses, and any developments concerning USSI-related obligations or BIRD grant recovery.