Acorn Energy, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated results cover Acorn and its subsidiaries; OmniMetrix is included from its February 2012 acquisition, so its six-month comparison is not for equivalent periods.
Financial results
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $5.233 million | $5.727 million | $10.949 million | $9.910 million |
| Gross profit (margin) | $1.272 million (24%) | $1.486 million (26%) | $3.397 million (31%) | $2.686 million (27%) |
| Operating loss | $7.524 million | $4.603 million | $12.656 million | $8.950 million |
| Net loss attributable to Acorn shareholders | $7.174 million | $3.204 million | $12.149 million | $7.393 million |
| Loss per share, basic and diluted | $0.40 | $0.18 | $0.67 | $0.42 |
| Net cash used in operating activities | Not presented separately | Not presented separately | $10.987 million | $9.908 million |
First-half revenue increased 10%, but Q2 revenue fell 9% year over year. First-half gross margin improved, while Q2 margin declined. The larger losses reflected higher research and development and selling, general and administrative costs, plus a $1.116 million intangible-asset impairment and $594,000 in restructuring and related charges. First-half finance income was $89,000; income tax expense was $85,000.
At June 30, cash and cash equivalents were $13.349 million, restricted deposits were $598,000, working capital was $23.8 million, total assets were $53.996 million, and total equity was $38.983 million. Current liabilities were $9.563 million; short-term bank credit and current maturities of long-term debt were $251,000. Cash declined $12.798 million in the first half. Investing activities used $1.302 million, principally for property and equipment; financing activities used $423,000, including $517,000 of cash dividends. The Board halted the dividend in May 2013.
Business and material changes
Acorn is a technology-focused holding company with four reportable segments: Energy and Security Sonar Solutions (DSIT), smart-grid distribution automation (GridSense), fiber-optic sensing (USSI), and power-generation monitoring (OmniMetrix).
- DSIT: First-half revenue was approximately $6.8 million and broadly unchanged year over year. First-half operating income was $226,000. Q2 sonar-segment revenue fell 8% year over year, and gross margin declined to 37% from 40%, partly due to increased projected installation costs on a project. Backlog was $6.2 million.
- GridSense: First-half revenue rose 30% to $2.5 million, largely from U.S. utility orders; Q2 revenue was 6% lower year over year. It recorded a $594,000 restructuring charge, including severance, facility costs, and inventory/fixed-asset charges. Australian production was discontinued and activity consolidated toward the U.S. Its bank line was $171,000 drawn at June 30; it was out of compliance with financial covenants but had obtained a waiver. Backlog was $1.2 million.
- OmniMetrix: First-half revenue was $1.061 million, with $601,000 gross profit and a 57% gross margin. A major customer began disconnecting monitoring units; Acorn recorded a $1.116 million impairment of the related customer-relationship intangible. Backlog was $1.8 million.
- USSI: First-half revenue was $635,000, down 41%, and gross loss was $850,000, including an inventory write-off. A manufacturing defect in high-pressure seals delayed delivery on a project; management expected delivery in Q3 after qualifying replacement suppliers. A major oil company selected USSI to advance to the next phase of a competitive technology evaluation. Backlog was $1.0 million. First-half USSI operating loss was approximately $4.2 million.
Consolidated backlog at June 30 was $10.2 million. Segment results were uneven: DSIT reported a small first-half operating profit, while GridSense, USSI, and OmniMetrix reported substantial operating losses.
Outlook, liquidity, and risks
- Management said available cash, expected operating cash flows, and available borrowing were expected to fund Acorn and subsidiaries for at least the next 12 months. Acorn also expected a federal tax refund of approximately $1.7 million in Q4 2013 and was considering a securities offering before year-end; terms and amount were undetermined.
- Acorn committed additional 2013 support for subsidiaries: $5.0 million for USSI, funded by the filing date; $3.0 million for OmniMetrix, of which $2.0 million had been funded by July 31; and $1.5 million for GridSense working capital plus $480,000 for restructuring, funded in 2013. Acorn said further USSI funding was anticipated and OmniMetrix could need financing beyond its commitment.
- GridSense aimed to become cash-flow neutral by year-end, but management cautioned that sales, utility spending cycles, and access to additional financing were uncertain. GridSense and OmniMetrix each had approximately $100,000 cash on hand at July 31; USSI had approximately $250,000.
- DSIT’s 2013 growth and profitability depended partly on pending sonar orders, including a major multi-million-dollar bid for which there was no assurance of success or timely revenue recognition. Management also described potential follow-on demand for USSI’s proof-of-concept projects, but timing and conversion to commercial orders remained uncertain.
- After quarter-end, Acorn converted $2.8 million of DSIT advances and loans into preferred stock, purchased another $800,000, and committed up to a further $1.4 million on specified dates or milestones. The filing gives differing DSIT ownership percentages in its notes and later MD&A; investors should reconcile them.
- GridSense and OmniMetrix were placed under unified management in July to pursue operating synergies. Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Other exposures include customer concentration in receivables and unbilled revenue, foreign-currency movements, reliance on continued Acorn funding for loss-making subsidiaries, and execution risks in moving USSI from development to production. Contractual cash obligations totaled $9.467 million, including operating leases, potential severance, minimum royalties, and purchase commitments; the filing says severance obligations were substantially covered by deposits and insurance.
Important facts for investors to verify
- Whether subsidiary cash needs and Acorn’s stated 12-month liquidity expectation remain consistent with operating cash burn and planned investments.
- GridSense’s performance against its cash-flow-neutral target, covenant status, and ability to obtain financing; and OmniMetrix’s customer losses, unit growth, and financing needs.
- Whether DSIT wins the pending major project and whether USSI completes delayed deliveries, resolves seal qualification, and converts evaluations into commercial orders.
- The timing and funding of Acorn’s post-quarter DSIT commitments, the stated DSIT ownership percentages, and any proposed securities offering.
- The continuing effects of the $1.116 million impairment, $594,000 restructuring charge, and USSI inventory write-off on operating performance and cash requirements.