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.