ACORN ENERGY, INC. quarterly report, Q3 FY2012

Acorn Energy, Inc. — Q3 2012 Form 10-Q

Reporting period: Three and nine months ended September 30, 2012; compared with the corresponding 2011 periods. Amounts are in U.S. dollars, generally thousands unless noted. Acorn is a holding company focused on technology-based energy-infrastructure monitoring and related solutions, operating through DSIT, GridSense, USSI and OmniMetrix. OmniMetrix results are included from its February 15, 2012 acquisition.

Key financial results

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Revenue	$5.052 million	$5.051 million	$15.187 million	$12.253 million
Gross profit / margin	$1.673 million / 33%	$1.807 million / 36%	$4.462 million / 29%	$4.327 million / 35%
Operating loss	$(5.353) million	$(2.048) million	$(14.200) million	$(5.869) million
Net loss attributable to Acorn shareholders	$(3.750) million	Net income $40.796 million	$(11.040) million	Net income $36.500 million
Basic loss per share attributable to shareholders	$(0.21)	Net income $2.33 per share	$(0.62)	Net income $2.09 per share

For the nine months, project revenue rose to $11.017 million from $7.250 million, while product revenue declined to $3.549 million from $4.617 million. In Q3, project revenue increased but product revenue fell, leaving total revenue essentially unchanged year over year. Consolidated operating expenses increased substantially: nine-month R&D rose to $4.771 million from $1.587 million, and SG&A to $13.891 million from $8.609 million.

Cash flow and liquidity: Operating cash used by continuing operations was $16.714 million in the first nine months of 2012, versus $6.614 million in 2011. Investing activities provided $5.605 million, including deposit maturities and release of CoaLogix-sale escrow, partly offset by the OmniMetrix acquisition. Financing activities used $1.602 million, including $2.682 million of dividends paid. Cash and cash equivalents were $21.717 million at September 30, down $12.563 million from year-end 2011; short-term deposits were $10.000 million and restricted deposits were approximately $2.154 million. Working capital was $41.5 million. Total bank and other debt, utilized credit lines and capital leases were $563,000; the balance sheet reports $524,000 current and $39,000 long term.

Material changes and notable items

• Nine-month revenue increased 24%, led by DSIT and the inclusion of OmniMetrix; GridSense revenue fell 38%. Q3 revenue was virtually flat.
• DSIT revenue increased 50% for the first nine months, supported by work on a $12.3 million AquaShield diver-detection sonar project awarded in late 2011. Management expected work to continue into mid-2013.
• GridSense revenue and gross profit declined amid reduced customer orders, product delays and production-transfer costs. Its gross margin fell to 43% from 48% for the nine-month period.
• USSI revenue increased 49% for the first nine months, but it recorded a $772,000 gross loss, principally reflecting upfront engineering costs on proof-of-concept projects. Its nine-month operating loss was approximately $6.0 million.
• OmniMetrix contributed $952,000 of revenue and recorded a $1.381 million operating loss from acquisition through September 30. Acorn paid $8.5 million for the business and recorded $5.581 million of acquired intangible assets and $1.930 million of goodwill.
• The 2011 comparison includes a $30.683 million after-tax gain on the CoaLogix sale and $12.072 million of income tax benefit, making prior-period net income a poor indicator of recurring performance. The 2012 nine-month tax benefit was $2.476 million and included a $2.6 million benefit related to a net operating loss carryback.
• Acorn reported backlog of $11.7 million at September 30: DSIT $9.2 million, USSI $1.2 million, GridSense $0.9 million and OmniMetrix $0.4 million.

Outlook, risks and commitments

• Management expected DSIT R&D spending to rise and marketing costs to increase. DSIT and USSI were awarded a joint $900,000 BIRD Foundation development grant; funding was expected over 24 months.
• GridSense management cited potential utility spending recovery and expected paid pilots to lead to commercial rollouts, including a California utility order for 500 units valued at approximately $1.0 million. The timing of utility purchases remains uncertain. Acorn committed $3.0 million of additional GridSense funding; $2.1 million had been transferred by October 31. GridSense had approximately $270,000 cash then, and its proposed $1.0 million bank line remained subject to approval and covenants.
• Management expected continuing Acorn funding for USSI as it transitions from development to production. Acorn invested a further $2.5 million in USSI on November 1; management reported approximately $2.8 million of USSI cash after that investment. USSI’s backlog consisted of three energy proof-of-concept projects, and revenue timing depends in part on long-lead materials and control of engineering costs.
• Acorn committed $2.5 million to OmniMetrix, with $1.5 million invested through October 31 and the balance expected by year-end. OmniMetrix was expanding marketing and inventory; management cautioned additional funding might be needed.
• At September 30, Acorn reported $4.119 million of accrued severance obligations, $2.394 million of purchase commitments and $1.760 million of operating-lease obligations. OmniMetrix also had a standing supplier purchase order of approximately $2.4 million. A new seven-year OmniMetrix lease signed in October was not included in the contractual-obligations table.
• Key risks include continued cash consumption and dependence of subsidiaries on Acorn funding; uncertain access to outside financing; GridSense’s slow utility sales cycle; USSI’s development costs and negative gross margins; OmniMetrix’s reliance on a single assembly subcontractor, third-party cellular networks and key personnel; and foreign-currency exposure. The filing also identifies prospective conflict-minerals compliance costs.
• Acorn stated that its available cash and expected operating cash and credit availability should fund operations for the next 12 months. It was considering a securities offering, potentially in 2013, but provided no amount or terms. The board approved a $0.035-per-share fourth-quarter 2012 dividend, payable December 3.

Important facts for investors to verify

• Whether DSIT can complete the AquaShield project on schedule and convert its backlog into revenue and cash.
• Whether GridSense’s customer pilots become sustained commercial orders and whether its financing and working-capital needs can be met.
• Whether USSI can reduce non-recurring engineering costs, improve gross margins and secure follow-on orders without further substantial Acorn investment.
• OmniMetrix’s ability to grow recurring monitoring revenue, manage supplier concentration and achieve a path toward profitability.
• The pace of consolidated cash use, the amount and timing of subsidiary funding, and the feasibility and potential dilution of any future securities offering.
• The sustainability of dividends given operating losses and cash consumption, and the collection of concentrated receivables: one customer represented approximately 47% of trade receivables at September 30, subsequently collected in October.