Acorn Energy, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited consolidated results; amounts below are in U.S. dollars unless noted. Acorn is a holding company focused on energy-infrastructure technology, with operations in sonar and security, smart-grid distribution, fiber-optic sensing, and—following its February acquisition—remote equipment monitoring. The 2011 comparison excludes CoaLogix, sold in 2011 and reported as discontinued operations.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2012 |
|---|---|---|
| Revenue | $3.095 million | $4.235 million |
| Gross profit / margin | $1.174 million / 38% | $1.211 million / 29% |
| Operating loss | $2.059 million | $4.336 million |
| Net loss attributable to Acorn shareholders | $2.217 million | $4.178 million |
| Basic and diluted loss per share | $0.13 | $0.24 |
| Net cash used in continuing operating activities | $0.335 million | $4.714 million |
Revenue increased 37%, but cost of sales rose faster, reducing gross margin. Operating expenses grew 72% to $5.547 million, including R&D of $1.318 million (up from $0.490 million) and SG&A of $4.229 million (up from $2.743 million). The company attributed higher costs to USSI product development and staffing, GridSense and USSI expansion, corporate spending, and approximately $0.3 million of OmniMetrix acquisition costs.
At March 31, cash and cash equivalents were $21.401 million, short-term deposits $18.0 million, escrowed funds $5.961 million, and restricted deposits $2.175 million. Management reported working capital of $49.2 million. Some liquidity is restricted or held in escrow; the escrow funds were expected to be released in August 2012. Cash fell $12.879 million during the quarter. Investing activities used $7.823 million, primarily for the OmniMetrix acquisition; financing activities used $0.447 million, with option and warrant proceeds partly offset by debt repayments and dividends. Total reported debt and utilized credit was modest: current debt and credit of $0.464 million and long-term debt of $0.117 million at quarter-end.
Material changes and business developments
- OmniMetrix acquisition: Acorn acquired all membership interests on February 15 for $8.5 million in cash and began consolidating its results from that date. The purchase-price allocation included $5.403 million of intangible assets and $2.109 million of goodwill. OmniMetrix contributed approximately $155,000 of revenue and reported a loss of approximately $166,000 to $170,000 in the post-acquisition period; the filing gives both loss figures.
- Segment performance: DSIT revenue rose 26% year over year to approximately $3.0 million, supported by work on a $12.3 million sonar project; DSIT reported approximately $60,000 of profit. GridSense revenue rose 43% to $0.9 million, but its segment pre-tax loss was $1.199 million. USSI revenue rose to $121,000 but had a $211,000 gross loss and a $1.715 million segment pre-tax loss, reflecting development and production costs. OmniMetrix’s reported segment pre-tax loss was $9,000; the separate post-acquisition narrative reports a larger net loss.
- Backlog: Total backlog at March 31 was $13.5 million: DSIT $11.1 million, GridSense $0.6 million, OmniMetrix $0.4 million, and USSI $1.4 million. DSIT backlog was approximately $13.6 million at December 31, 2011.
- USSI ownership and funding: Acorn owned approximately 87% at March 31 and reported ownership of approximately 92% after a further $2.5 million preferred-stock investment in April. Acorn had also invested $2.25 million in USSI in February.
Outlook, risks, and contingencies
Management stated it expected DSIT revenue growth and profitability in 2012, while noting that results would depend on marketing and development costs. GridSense expected utility spending to improve but anticipated further sales and engineering hiring and continued Acorn working-capital support. USSI expected revenue growth and improved margins as it moved from development to production, but anticipated higher R&D and continued funding needs. OmniMetrix planned expanded marketing and sales and was expected to need working-capital support. The company gave no consolidated earnings or revenue guidance.
Management believed available cash, operating cash flow, and available credit would be sufficient for current operating levels over the next 12 months. That outlook depends in part on continued subsidiary funding and access to financing. GridSense, USSI, and OmniMetrix relied on Acorn for support; availability of bank or third-party financing was uncertain. Acorn also disclosed possible additional financing needs for DSIT’s planned marketing and development expansion.
Other disclosed exposures include foreign-currency and interest-rate movements, customer concentration in receivables and unbilled revenue, and project timing. OmniMetrix risks include dependence on key staff, a small sales force, third-party cellular networks, data systems, and a single product-assembly subcontractor, as well as competitive and technology-upgrade risks. Contractual cash obligations totaled $6.460 million, including $1.826 million of operating leases and $4.053 million of potential severance obligations; the filing states that severance obligations were substantially funded. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- How much reported liquidity is readily deployable, given the escrow and restricted deposits, and whether the expected escrow release occurred.
- Whether Acorn’s subsidiaries can improve operating performance and reduce reliance on parent funding; confirm subsequent investment needs and financing terms.
- Whether DSIT’s project milestones, backlog conversion, and third-party installation dependencies support management’s 2012 expectations.
- OmniMetrix’s post-acquisition results, integration progress, purchase-price allocation, and ability to grow recurring monitoring revenue.
- The filing reports a $0.035-per-share quarterly dividend, a $620,000 declared dividend in the equity note, and $1.496 million of dividends paid in the cash-flow statement; reconcile the difference.
- Reconcile the differing OmniMetrix loss descriptions in the acquisition note and management discussion, and monitor the company’s stated funding and operating risks.