ACORN ENERGY, INC. quarterly report, Q3 FY2014

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Acorn Energy, Inc. — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2014. Acorn is a holding company with businesses in sonar and security systems (DSIT), smart-grid products (GridSense), fiber-optic oilfield sensors (USSI), and remote monitoring and control (OmniMetrix). Amounts below are in U.S. dollars; financial statement amounts are in thousands unless otherwise noted.

Financial performance

  • Third quarter: Revenue was $5.639 million, up 13% year over year. Gross profit was $1.505 million, or 27% of revenue, versus $1.059 million and 21% a year earlier. Operating loss was $4.192 million versus $12.542 million; net loss attributable to Acorn shareholders was $3.849 million, or $0.17 per share, versus $12.312 million, or $0.68 per share.
  • First nine months: Revenue was $14.816 million, down 7%. Gross profit was $3.781 million, or 26% of revenue, versus $4.456 million and 28%. Operating loss was $14.384 million versus $25.198 million; net loss attributable to Acorn shareholders was $13.680 million, or $0.62 per share, versus $24.461 million, or $1.35 per share.
  • Cash flow: Operating activities used $13.797 million in the first nine months, compared with $16.484 million in the prior-year period. Investing activities used $2.096 million; financing activities provided $2.638 million. Cash declined $13.279 million to $4.000 million.
  • Balance sheet and liquidity: At September 30, cash was $4.000 million, restricted deposits were $1.065 million, working capital was $8.4 million, and total assets were $39.027 million. Current liabilities were $15.936 million. Short-term bank credit and current maturities of long-term debt totaled $4.808 million; long-term debt was $0.113 million.
  • Backlog: Total backlog was $17.4 million at September 30: DSIT $12.0 million, GridSense $1.8 million, OmniMetrix $1.7 million, and USSI $1.9 million.

Material changes versus the prior comparable period

  • Nine-month revenue declined mainly at DSIT, GridSense, and USSI; OmniMetrix revenue grew 24% to $2.0 million. Third-quarter revenue rose 13% year over year.
  • Gross profit fell 15% for the first nine months, reflecting lower DSIT and GridSense margins and continued negative USSI gross profit. USSI’s nine-month gross loss was $0.858 million, driven in part by provisions for expected production costs on fixed-price evaluation projects.
  • Research and development expense decreased 19% to $5.141 million, and selling, general and administrative expense decreased 21% to $11.993 million, following cost reductions and restructuring. The prior-year period included a $6.731 million impairment charge; no impairment was recorded in 2014.
  • Acorn recorded a $0.649 million provision for a channel-partner loan, including accrued interest, after the borrower defaulted. The company took a full provision for the $0.640 million principal and $0.009 million accrued interest.
  • Inventory increased to $6.480 million from $4.540 million at year-end 2013; the inventory reserve rose to $2.055 million from $1.139 million.

Outlook, commentary, and risks

  • Liquidity and financing: Management stated that available cash, operating cash flow, and credit lines might not be sufficient to fund Acorn and its subsidiaries for the foreseeable future or the next 12 months, particularly if USSI continues to require funding at prior levels. Acorn was exploring a strategic partner or other funding for USSI and the possible sale of an operating company; neither outcome was assured.
  • On November 5, 2014, after quarter-end, Acorn raised $4.5 million gross, approximately $4.0 million net, through a private placement of 4,285,714 shares at $1.05 each and warrants for up to 2,142,857 shares at $1.30. These securities dilute existing shareholders if warrants are exercised. Management reported approximately $6.9 million of Acorn cash after the financing, before considering subsequent cash needs.
  • USSI: Management did not expect significant sensor-array sales until at least 2015. USSI reduced headcount by 15 employees, or 28%, at quarter-end, with an anticipated quarterly burn-rate reduction of approximately $0.3 million. The $1.8 million supermajor order was expected to be delivered in the fourth quarter, but revenue timing depended on customer acceptance. USSI had invested $8.5 million through October and expected to invest at least another $1.5 million during the remainder of 2014.
  • Other subsidiaries: DSIT’s margin recovery was expected to be partial, with full-year 2014 margins still below historical levels. GridSense closed its Australian offices and relied on bank borrowing and Acorn loans for working capital; by October 31, it had used its full $1.5 million revolving line and additional receivables financing. OmniMetrix also depended on Acorn loans and was seeking bank financing.
  • Operational and financial risks: Customer project timing and acceptance, long utility sales cycles, subsidiary cash requirements, foreign-exchange exposure, and customer concentration in receivables and unbilled revenue could affect results and liquidity. Certain credit lines were fully utilized and subject to covenants. The channel-partner loan remained in default, and Acorn was evaluating its rights and remedies.
  • Management said disclosure controls were effective at a reasonable-assurance level. It also noted that staffing reductions and personnel turnover had left fewer resources for administering, remediating, and testing internal controls over financial reporting.

Important facts for investors to verify

  • Whether the post-quarter private placement and any additional financing or asset-sale plans provide adequate runway, including the cash required by USSI and other subsidiaries.
  • Whether USSI delivers the supermajor order, obtains customer acceptance, achieves commercial-scale sales, and reduces cash needs as projected.
  • Whether GridSense and OmniMetrix can improve operating performance and fund working capital without continued or expanded Acorn support.
  • Whether DSIT converts backlog into revenue on schedule and improves margins, and whether the reported $17.4 million total backlog remains executable.
  • Recovery prospects for the defaulted channel-partner loan and the extent of any further loss or collection.
  • Potential dilution from the placement shares and warrants, and the status of subsidiary credit-line renewals, utilization, and covenant compliance.