Acorn Energy, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited consolidated results include DSIT, which was sold in part after quarter-end, and GridSense, reported as a discontinued operation. Amounts below are in U.S. dollars; financial statement figures are in thousands unless otherwise stated.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $4,761 | $3,710 |
| Gross profit / margin | $1,631 / 34% | $1,242 / 33% |
| Operating loss | $(1,359) | $(1,490) |
| Net loss from continuing operations | $(1,640) | $(1,457) |
| Net loss attributable to Acorn shareholders | $(2,975) | $(2,769) |
| Basic and diluted loss per share | $(0.11) | $(0.11) |
| Net cash used in operating activities | $(1,123) | $(2,538) |
Revenue rose 28% year over year, mainly from DSIT’s naval projects and increased OmniMetrix monitoring activity. Gross margin improved slightly, while operating loss narrowed. Shareholder net loss increased, including $273 of net finance expense in 2016 and $1,386 of discontinued-operations loss. The filing attributes about $460 of corporate expense to former CEO John Moore’s severance and related costs; accelerated option vesting added about $174 of non-cash compensation.
Balance sheet, cash flow and liquidity
- At March 31, cash and cash equivalents were $63 for continuing operations; management stated non-escrow corporate cash was below $50. Restricted deposits totaled $4,392, much of which secured DSIT guarantees and was not freely available.
- Working capital was negative $3.3 million overall, including negative $1.6 million for continuing operations. Total assets were $22,865 and total equity was a deficit of $1,154; Acorn shareholders’ equity was a deficit of $2,371.
- Current liabilities included $1,902 of short-term bank credit and current debt maturities, $1,940 due under the Leap Tide loan, and $375 in director loans. The company used $722 of operating cash in continuing operations and $401 in discontinued operations.
- On April 21, Acorn received $4,913 gross proceeds from the DSIT transaction, subject to $579 escrow, $266 Israeli withholding tax and fees. On April 29, it repaid Leap Tide’s $2,000 principal and accrued interest, and repaid $275 of director loans plus interest; another director converted a $100 loan and $15 interest into 465,587 shares.
- Management said available cash and expected cash flow were insufficient for the next 12 months and that additional funding was necessary. The filing states that these conditions raise substantial doubt about Acorn’s ability to continue as a going concern.
Material developments and segment performance
- DSIT: Q1 revenue was $3,920, up 29% year over year; gross profit was $1,206 and operating income was $61, compared with an operating loss of $174 a year earlier. Backlog was $20.6 million at quarter-end.
- OmniMetrix: Revenue increased 25% to $841, but gross profit fell to $425 from $438 and gross margin contracted to 51% from 65%. The subsidiary reported an operating loss of approximately $248.
- DSIT transaction: Acorn sold a 50% interest to Rafael Advanced Defense Systems, leaving Acorn with approximately 41.2% ownership. Starting Q2 2016, Acorn expected to account for DSIT using the equity method rather than consolidate it. Acorn may receive its pro-rata share of a $1 million earn-out over three years.
- GridSense: Acorn announced it would cease operations and liquidate the subsidiary. It wrote down GridSense assets to estimated realizable values and accrued $140 of estimated severance and $100 of lease commitments. Most asset-sale proceeds are expected to go to creditors; proceeds to Acorn are uncertain.
- Management: CEO John Moore resigned effective January 28. Acorn appointed Jan Loeb under a consulting agreement through January 2017, at a monthly fee of $17, and issued 35,000 warrants.
Outlook, risks and controls
- No specific consolidated earnings or revenue guidance was provided. Management expected corporate quarterly expenses after Q1 to be below the quarter’s level excluding the one-time former-CEO costs; OmniMetrix SG&A was expected to remain relatively stable, with some R&D increase anticipated.
- Acorn said it would pursue related- or third-party loans, asset or business sales, strategic partners, or equity financing. It cautioned that funding may not be available on acceptable terms or in sufficient amounts.
- OmniMetrix’s receivables-based facility had a stated $500 credit line but a lender-imposed $300 sublimit, with a current effective borrowing cost of about 19.5%. Outstanding borrowings were approximately $110 as of May 9.
- Other risks include customer concentration (55% of receivables due from two customers and 77% of unbilled revenue due from three), foreign-currency exposure, and potential BIRD Foundation grant repayment obligations. DSIT did not expect the Foundation to seek recovery of approximately $379 previously funded, but the filing says the obligation’s effect is unclear.
- Management concluded disclosure controls and procedures were ineffective due to 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.
Important facts for investors to verify
- Cash remaining after the DSIT sale, escrow, taxes, fees and debt repayments—and whether it is sufficient to address the stated going-concern uncertainty.
- Progress and terms of additional funding, and the timing and availability of OmniMetrix’s borrowing capacity.
- DSIT’s post-sale performance, Acorn’s equity-method share of results, and the conditions and timing of any earn-out.
- GridSense liquidation proceeds, creditor claims and whether any additional support from Acorn will be required.
- Potential share dilution from Leap Tide’s 850,000 initial shares and 1,531,396 accrued vested share rights, as well as the director-loan share conversion.
- Remediation of the disclosed material weaknesses and any change in the company’s liquidity or going-concern assessment.