Acorn Energy, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial statement amounts are generally in thousands unless noted. Acorn’s continuing businesses were DSIT (sonar and security solutions), GridSense (smart-grid products and services), and USSI (fiber-optic sensing systems). CoaLogix was sold during the quarter and is reported as discontinued operations.
Financial results and liquidity
| Metric | Q3 2011 | First nine months 2011 | Comparable 2010 |
|---|---|---|---|
| Revenue | $5.051 million | $12.253 million | $4.017 million Q3; $9.995 million nine months |
| Gross profit / margin | $1.807 million / 35.8% | $4.327 million / 35.3% | $1.797 million / 44.7% Q3; $4.602 million / 46.0% nine months |
| Operating loss | $2.048 million | $5.869 million | $1.314 million Q3; $3.568 million nine months |
| Net income attributable to Acorn | $40.796 million | $36.500 million | Net losses of $4.567 million Q3 and $10.842 million nine months |
- Reported profits were driven by the CoaLogix sale and tax accounting, not operating performance. Acorn recorded a $30.683 million after-tax sale gain and a $12.0 million deferred-tax benefit related primarily to previously unrecognized tax assets. Continuing operations nevertheless had operating losses; Q3 income from continuing operations was $10.325 million, substantially reflecting a $12.111 million income-tax benefit.
- Revenue rose 23% year over year for the nine-month period, mainly from GridSense and USSI, partly offset by lower DSIT sales. Gross profit declined 6% and gross margin fell from 46% to 35%, reflecting DSIT’s lower sales and project margins and USSI’s development-stage costs.
- Continuing-operations operating cash use was $6.614 million in the first nine months; cash used by discontinued operations was another $0.524 million. Investing activities provided $55.402 million, principally from the CoaLogix sale. Total cash increased $47.826 million.
- At September 30, cash and cash equivalents were $55.182 million, with $6.308 million in sale-related escrow. Working capital was reported as $62.6 million. Total bank debt and utilized lines of credit were approximately $1.139 million, including $914,000 due within a year. Current and long-term liabilities also included accrued severance and other obligations.
Material changes and business developments
- On August 31, Acorn completed the sale of CoaLogix for $101 million in cash at the buyer transaction level. Acorn owned approximately 65% and received about $61.9 million; approximately $6.3 million was placed in escrow. Management expected about $0.3 million of working-capital escrow to be released in Q4 2011 and the remaining approximately $6.0 million by August 2012, subject to claims and adjustments.
- DSIT revenue fell 22% for the first nine months to $6.7 million. Its gross margin declined to 33% from 45%, amid delayed or absent replacement orders, slower AquaShield project work, and technological difficulties that increased labor costs. DSIT backlog was $4.4 million.
- GridSense revenue was $4.7 million for the first nine months, including $2.5 million in Q3; its nine-month gross margin was 48%. A U.S. utility order to monitor more than 2,000 transformers supported Q3 growth. GridSense backlog was $1.5 million.
- USSI revenue was $883,000 for the first nine months, including $635,000 in Q3; it recorded $190,000 of Q3 gross profit after prior negative gross profit. USSI backlog was $1.7 million. Its workforce expanded to 20 employees.
- Total backlog at September 30 was $7.6 million. Acorn also sold its 25% HangXing interest in March for $492,000 and recorded a gain of the same amount.
Outlook, risks, and other items
- No consolidated numerical earnings or revenue guidance was provided. Management expected GridSense sales activity to be lower in the first half of 2012 and higher in the second half, citing utility purchasing seasonality and lengthy, uncertain award cycles. USSI expected revenue growth through the remainder of 2011 and into 2012, but follow-on orders from proof-of-concept contracts were not assured.
- DSIT’s profitability depends partly on receiving major sonar orders. One anticipated order was delayed until no earlier than Q2 2012; another was expected shortly but might not generate enough 2011 revenue for DSIT to be profitable. Further delays could require cost reductions or additional capital, with no assurance of profitability or financing.
- GridSense may need additional working capital; its cash was about $150,000 at October 31, and contemplated bank financing was not assured. USSI had less than $100,000 cash at October 31 and depended on Acorn or other financing. Acorn had advanced USSI $1.5 million through October in anticipation of a new investment agreement.
- Management said CoaLogix-sale proceeds should provide sufficient liquidity for Acorn and subsidiaries for the foreseeable future and the next 12 months. However, operating cash use, subsidiary financing needs, delayed orders, and the timing of customer collections remain relevant risks.
- On October 17, the board approved a $0.035-per-share quarterly dividend and a $0.05-per-share special year-end dividend, payable in November 2011 and January 2012, respectively. Management expected Q4 corporate costs to increase; it expected continuing quarterly corporate costs in 2012 to be not materially different from 2011.
- Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. The filing notes exposure to interest-rate and foreign-exchange movements, and DSIT’s credit lines are subject to financial covenants.
Important facts for investors to verify
- Whether and when the CoaLogix escrow is released, and whether indemnification claims or working-capital adjustments reduce proceeds.
- Order timing, backlog conversion, and project margins at DSIT, especially the delayed sonar orders and AquaShield work.
- GridSense’s ability to collect on the large utility project, secure working capital, and convert its sales pipeline into awarded contracts.
- USSI’s funding requirements, cash runway, and conversion of proof-of-concept contracts into repeat commercial orders.
- The quality and repeatability of reported earnings: the $30.7 million sale gain and $12.0 million tax benefit materially contributed to net income, while continuing operations remained loss-making.
- Subsidiary cash needs, operating cash burn, debt and covenant status, and the terms and funding of the declared dividends.