Business context and reporting period
Acorn Energy, Inc. is a holding company focused on energy infrastructure technology, with businesses in sonar and security systems (DSIT), smart-grid products (GridSense), fiber-optic oil-and-gas sensing (USSI), and power-generation monitoring (OmniMetrix). This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014; financial amounts below are in U.S. dollars unless noted.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $4.723 million | $5.233 million | $9.177 million | $10.949 million |
| Gross profit / margin | $1.034 million / 22% | $1.272 million / 24% | $2.276 million / 25% | $3.397 million / 31% |
| Operating loss | $5.642 million | $7.524 million | $10.192 million | $12.656 million |
| Net loss attributable to Acorn shareholders | $5.527 million | $7.174 million | $9.831 million | $12.149 million |
| Basic and diluted loss per share | $0.25 | $0.40 | $0.44 | $0.67 |
At June 30, cash and cash equivalents were $8.268 million, restricted deposits totaled approximately $0.862 million, working capital was $12.2 million, and short-term bank credit was $3.441 million. Cash declined $9.011 million in the first half; operating activities used $8.499 million, investing activities used $1.676 million, and financing activities provided $1.138 million. No long-term bank debt is shown on the balance sheet. Contractual cash obligations totaled $11.318 million, including $3.441 million of bank and other debt, utilized credit lines and capital leases.
Material changes and operating performance
- First-half revenue declined 16% year over year, while gross profit fell 33% and gross margin decreased from 31% to 25%. The quarterly revenue decline was 10% and gross margin fell from 24% to 22%.
- DSIT first-half revenue declined to $5.6 million from $6.8 million, with gross margin falling to 25% from 38%, primarily due to project delays, weather-related installation constraints and project mix.
- GridSense revenue decreased 11% to $2.2 million and gross margin fell to 25% from 42%, reflecting production ramp-up and materials delays, product mix and a one-time radio-upgrade charge. Management reported nearly $1.0 million of product shipped in July and expected a stronger second half.
- USSI reported no first-half revenue, compared with $0.635 million a year earlier, and recorded a $0.430 million gross loss. It did not deliver orders from its year-end backlog during the first half.
- OmniMetrix revenue rose 25% to $1.323 million and gross margin remained 57% for the half. Lower SG&A after restructuring helped reduce its operating costs.
- Research and development expense declined 18% to $3.385 million and SG&A declined 19% to $8.236 million. A $0.649 million provision for a defaulted channel-partner loan was recorded; the $1.116 million intangible impairment in the prior-year period did not recur. 2014 restructuring charges were $0.198 million.
Outlook, commentary and risks
- Backlog at June 30 was $18.5 million: DSIT $12.0 million, GridSense $2.4 million, OmniMetrix $1.6 million and USSI $2.5 million. Backlog is not a guarantee of revenue timing or realization.
- USSI’s supermajor order was delayed by design changes and component delays. Delivery was anticipated in Q4 2014, with customer deployment not expected until 2015; management said significant array sales were not expected until at least 2015. Acorn invested $5.8 million in USSI in the first seven months of 2014 and anticipated investing at least another $3.2 million during the balance of 2014. USSI’s technical execution, customer adoption and financing needs remain material uncertainties.
- Acorn stated that July 31 corporate cash was approximately $6.2 million and that it was uncertain whether available cash, operating cash flows and credit lines would fund Acorn and subsidiaries for the next 12 months. Management said continued USSI funding at recent levels would exceed available resources absent additional liquidity; options identified were capital-market funding, asset divestitures or a strategic partner.
- The $0.640 million secured loan to a USSI channel partner, plus $0.009 million accrued interest, was in default and fully provided for. Acorn was evaluating its remedies and could consider further funding; recovery and any additional support were uncertain.
- GridSense planned to close its Australian offices in Q3 2014 while continuing sales through distributors. It had substantial reliance on bank credit and Acorn loans; Acorn guaranteed its bank line. OmniMetrix also relied on Acorn funding and was exploring bank financing.
- Management expected DSIT gross margins to remain below historical levels in 2014, although some recovery was anticipated. GridSense expected margins to improve as product mix and deliveries normalized. These are expectations, not formal consolidated earnings guidance.
- Other risks include long utility and defense sales cycles, customer/project timing, foreign-currency exposure, customer concentration in receivables and unbilled revenue, and possible future impairment of goodwill or intangibles. A new Israeli grant to DSIT was approved after quarter-end; it is expected to total approximately $0.550 million over two years and may require royalties if a commercial product results.
Important facts for investors to verify
- Whether Acorn can fund the parent and subsidiaries through the next 12 months, including the stated planned USSI support and subsidiary credit-line availability.
- Whether USSI completes the delayed Q4 delivery and subsequent trials, converts backlog into commercial sales, and resolves remaining deployment and product-design issues.
- Whether the defaulted channel-partner loan can be recovered under its security arrangements and whether Acorn provides further financing.
- Whether DSIT and GridSense convert backlog and reported post-quarter orders into timely, profitable shipments, and whether GridSense’s Australian closure and production changes deliver expected savings.
- How backlog, working-capital needs, subsidiary borrowing, guarantees and contractual obligations evolve after June 30.