Acorn Energy, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unless otherwise stated, figures below are in U.S. dollars; financial statement amounts are in millions. Acorn is a holding company focused on technology-based energy infrastructure solutions, operating through DSIT, GridSense, USSI and, from February 15, 2012, OmniMetrix. CoaLogix, sold in 2011, is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q2 2012 | First six months 2012 | Comparable 2011 |
|---|---|---|---|
| Revenue | $5.90 million; up 44% | $10.14 million; up 41% | Q2 $4.11 million; six months $7.20 million |
| Gross profit / margin | $1.58 million / 27% | $2.79 million / 28% | Q2 $1.35 million / 33%; six months $2.52 million / 35% |
| Operating loss | $4.51 million | $8.85 million | Q2 $1.76 million; six months $3.82 million |
| Net loss attributable to Acorn shareholders | $3.11 million | $7.29 million | Q2 $2.08 million; six months $4.30 million |
| Basic and diluted loss per share | $0.17 | $0.41 | Q2 $0.12; six months $0.25 |
Revenue growth reflected work on DSIT’s $12.3 million AquaShield project, USSI proof-of-concept deliveries and the consolidation of OmniMetrix. Higher research and development and selling, general and administrative costs substantially exceeded gross-profit growth. The first-half income-tax benefit of $0.99 million included approximately $1.1 million related to an expected U.S. net operating loss carryback. Prior-year results included a $0.49 million HangXing sale gain and $1.40 million loss from discontinued operations; neither item recurred in 2012.
- Cash and liquidity: At June 30, cash and cash equivalents were $14.75 million, short-term deposits $18.02 million, escrowed funds $5.96 million and restricted deposits approximately $2.16 million. Working capital was $45.6 million. The company expected escrowed funds to be released in August 2012; they were not unrestricted cash at quarter-end.
- Cash flow: Continuing operations used $9.91 million in operating cash during the first half. Investing activities used $8.20 million, mainly for the OmniMetrix acquisition; financing activities used $1.41 million, including dividends. Cash and cash equivalents fell $19.53 million from year-end.
- Debt: Balance-sheet short-term bank credit and current debt were $0.15 million; long-term debt was $0.08 million. Contractual obligations also included leases, severance and minimum royalties, totaling $6.67 million.
- Dividends and equity: Acorn declared dividends of $0.035 per share in each of Q1 and Q2. Dividends paid during the first half totaled $2.12 million. Shares outstanding were 17.93 million at August 2, 2012.
Material changes and business developments
- Acorn acquired OmniMetrix for $8.5 million in cash in February. Since acquisition through June 30, OmniMetrix contributed $0.38 million of revenue and a $0.83 million net loss. The purchase added $5.58 million of intangible assets and $1.93 million of goodwill.
- Six-month segment revenue was DSIT $6.18 million, GridSense $1.91 million, USSI $1.08 million and OmniMetrix Power Generation Monitoring $0.30 million. DSIT’s growth was driven by the AquaShield project. GridSense revenue declined 11% from the prior-year period. USSI’s revenue increase came principally from two proof-of-concept projects, while its gross loss widened to $0.61 million because of upfront engineering costs.
- Acorn invested $5.25 million in USSI during the first half and owned approximately 92% on a fully diluted basis at June 30. On July 30, it invested a further $2.5 million; ownership then was approximately 93.6%. The company could invest another $2.5 million later in 2012.
- Backlog at June 30 was $11.2 million: DSIT $9.5 million, GridSense $0.5 million, USSI $0.9 million and OmniMetrix $0.3 million.
Outlook, commentary and risks
- Management expected DSIT revenue growth and profitability for 2012, while noting planned increases in marketing and development costs could affect profitability. Its backlog had declined from $13.6 million at year-end 2011 to $9.5 million at June 30.
- GridSense was expanding sales, support and engineering capacity, but utility sales cycles are long and future spending and pilot-program conversions are uncertain. Acorn committed on August 3 to provide up to $3.0 million of additional GridSense funding through 2012 and 2013. GridSense had approximately $0.15 million cash at July 31.
- Management anticipated USSI growth and improved margins as proof-of-concept work transitions toward production, but follow-on orders were not assured. USSI had approximately $2.3 million cash at July 31 and continued to require funding. Its Northrop Grumman patent license requires a minimum $50,000 annual royalty for ten years, plus royalties tied to product sales.
- Acorn committed to invest $2.5 million in OmniMetrix to support marketing; $0.5 million had been invested by July 31. Management anticipated near-term gross-margin pressure from the marketing program. OmniMetrix had approximately $0.6 million cash at July 31.
- DSIT and USSI received a joint BIRD Foundation grant of up to $0.9 million for underwater threat-detection development. Funding depended on signing a project agreement, and grant amounts may be repayable upon commercial success.
- Management stated that available cash, operating cash flow and available credit were expected to fund current activity for at least the next 12 months. However, subsidiaries’ cash needs and the timing or availability of outside financing remain uncertain; funding commitments compete for Acorn’s capital. Other risks include customer concentration in receivables, foreign-exchange exposure, and OmniMetrix’s dependence on key personnel, a small sales force, third-party cellular networks and a single assembly subcontractor.
Important facts for investors to verify
- Whether DSIT’s major project converts backlog into revenue and profit as expected, and whether new orders replenish the reduced backlog.
- Whether GridSense pilots lead to commercial rollouts and whether the committed $3.0 million, bank financing or other funding will be sufficient.
- Whether USSI can reduce upfront engineering and manufacturing costs, secure follow-on orders and limit additional funding needs.
- OmniMetrix’s progress integrating the acquisition, growing recurring monitoring revenue and executing its marketing plan within the committed investment.
- The timing and availability of escrow releases and restricted deposits, alongside ongoing operating cash consumption, dividends and subsidiary funding commitments.
- Completion terms and repayment conditions for the BIRD grant, and the continuing cost and obligations under USSI’s Northrop Grumman license.