ACORN ENERGY, INC. quarterly report, Q1 FY2015

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Acorn Energy, Inc. — Q1 2015 Form 10-Q

Business context and period. This unaudited report covers the three months ended March 31, 2015, compared with Q1 2014. Acorn is a holding company whose continuing businesses are DSIT (energy and security sonar solutions), GridSense (utility monitoring and automation), and OmniMetrix (remote monitoring and control). USSI is reported as discontinued operations after Acorn stopped funding it and USSI suspended operations.

Key financial results

Amounts below are in thousands of dollars except per-share data. Continuing-operations revenue increased 4% to $4,618. Gross profit rose 6% to $1,519, and gross margin improved to 33% from 32%. Operating expenses fell 17% to $3,346, narrowing operating loss to $1,827 from $2,615. Continuing-operations net loss was $1,782, compared with $2,619; total net loss was $2,934, compared with $4,575. Net loss attributable to Acorn shareholders was $2,769, or $0.11 per diluted share, versus $4,304, or $0.19.

  • Business performance: DSIT revenue increased 7% to $3,037, while gross margin decreased to 26% from 29% because of project mix. GridSense revenue declined 6% to $908, but gross margin improved to 31% from 19%, partly reflecting prior-year one-time costs. OmniMetrix revenue rose 5% to $673, with gross margin of 65% versus 64%.
  • Cash flow: Net cash used in operations was $2,538, including $1,108 from continuing operations and $1,430 from discontinued operations. Investing used $170; financing provided $80. Cash decreased $2,687 during the quarter.
  • Liquidity and debt: March 31 cash and cash equivalents were $2,099, and restricted deposits totaled $1,113. Total current assets were $18,924 and current liabilities $17,748; management reported working capital of $1.2 million overall and $5.4 million for continuing operations. Current bank credit and current maturities of long-term debt were $4,528; contractual bank and other debt was $4,570. USSI separately had $1,460 of matured bank debt due on demand, secured by substantially all its assets; Acorn had not guaranteed it.
  • Balance sheet: Total assets were $26,899, total liabilities $23,294, and total equity $3,605. Acorn shareholders’ equity was $7,049; non-controlling interests were negative $3,444.

Material changes and developments

  • Revenue growth and lower operating expenses reduced the continuing-operations loss year over year. USSI’s discontinued-operations loss narrowed to $1,152 from $1,956.
  • Backlog at March 31 was $29.0 million: DSIT $26.5 million, GridSense $0.6 million, and OmniMetrix $1.9 million. DSIT reported more than $19 million of new orders in late 2014 and Q1 2015, including a multi-year naval sonar and trainer project.
  • GridSense’s bank had declared a covenant default and accelerated its obligations. Under an April 30 amendment, the bank waived the defaults after GridSense paid $500,000; Acorn agreed to restricted-account deposits totaling $750,000 and to maintain a minimum unrestricted cash balance tied to remaining unsecured obligations. Acorn reported that it was in compliance, but the deposits and cash requirement constrain liquidity.
  • During the first four months of 2015, Acorn lent GridSense $440,000 and OmniMetrix $480,000. Acorn reported approximately $740,000 of corporate cash as of May 13, excluding subsidiary cash.

Outlook, risks, and unusual items

  • Management believed liquidity would be sufficient for at least 12 months, relying on current cash and expected support from DSIT. It expected up to $5.0 million from DSIT to support Acorn and subsidiaries in 2015. Management cautioned that insufficient DSIT support could impair Acorn’s ability to fund corporate activities and GridSense and OmniMetrix, potentially affecting subsidiary carrying values and operations.
  • Management expected DSIT gross margins to recover toward its historical 35%–40% range as the project mix shifted to higher-margin naval work. It also expected GridSense and OmniMetrix to require financing in 2015 and planned for both to be net cash-flow neutral in 2016. These expectations are subject to sales, collections, and financing availability.
  • USSI’s assets are intended to be sold for creditors and other stakeholders; Acorn said it was uncertain whether any proceeds would reach Acorn or other shareholders. USSI liabilities included the matured $1.46 million bank debt, and its assets were pledged to the bank.
  • Other risks include long and uncertain utility sales cycles and GridSense’s need for working capital; DSIT’s dependence on new orders and timely collection of receivables and unbilled revenue; customer concentration in receivables and unbilled revenue; foreign-currency exposure; and possible goodwill impairment. Approximately 57% of trade receivables and 64% of unbilled revenue were due from three customers each.
  • Corporate SG&A included approximately $200,000 of professional and consulting fees related to potential strategic events and other one-time expenses. Stock-based compensation was $208,000, down from $310,000. The filing also reports material weaknesses in internal controls; management concluded disclosure controls and procedures were not effective.

Important facts for investors to verify

  • Whether DSIT can collect its significant receivables and unbilled revenue and provide the expected cash support to Acorn and its subsidiaries.
  • GridSense’s compliance with amended bank terms, completion of required restricted-account deposits, and ability to refinance or repay borrowings.
  • Whether backlog converts to revenue and cash on schedule, particularly DSIT’s multi-year naval projects and GridSense’s expected decline in Australian revenue as backlog is fulfilled.
  • Potential recoveries, creditor claims, and final outcomes from the USSI asset sale and matured secured debt.
  • Remediation of the disclosed material weaknesses and the effect, if any, on future financial reporting.