ACORN ENERGY, INC. annual report, FY2013

Acorn Energy, Inc. — FY2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013. This is an annual report; fourth-quarter figures are included where relevant. Acorn is a holding company focused on energy-infrastructure monitoring and security, with businesses in fiber-optic oil-and-gas sensing (USSI), sonar and acoustic solutions (DSIT), smart-grid monitoring (GridSense), and generator monitoring (OmniMetrix).

Financial performance

Metric	FY2013	FY2012
Revenue	$21.756 million	$19.419 million
Gross profit / margin	$5.156 million / 24%	$5.203 million / 27%
Operating loss	$30.955 million	$20.748 million
Net loss attributable to Acorn shareholders	$29.714 million; $1.57 per share	$16.711 million; $0.93 per share
Cash used in operating activities	$17.803 million	$22.243 million
Cash and cash equivalents, year-end	$17.279 million	$26.147 million
Working capital, year-end	$22.080 million	$35.958 million
Short-term bank credit and current debt, year-end	$2.303 million	$0.153 million

FY2013 financing activities provided $12.002 million, principally including $10.375 million of net proceeds from an October stock offering and $2.303 million of net short-term bank credit. Investing activities used $2.945 million, mainly for property and equipment. Cash declined by $8.868 million during the year. Acorn reported $13.0 million of cash at its corporate operations on February 28, 2014, excluding subsidiary cash, and said it expected available cash, operations and borrowing capacity to fund current operations for at least 12 months, subject to strategy and subsidiary needs.

Year-end backlog was $18.5 million, of which $11.9 million was expected to be completed in 2014: DSIT $13.4 million, GridSense $0.8 million, OmniMetrix $1.8 million, and USSI $2.5 million.

Material changes and segment performance

• Revenue rose 12%, but gross profit was essentially flat and gross margin fell from 27% to 24%. R&D expense increased to $8.175 million from $6.590 million.
• DSIT: Revenue decreased 4% to $13.1 million. Gross margin fell to 34% from 37%, including installation complications on an AquaShield project. A $14.5 million underwater acoustic monitoring contract was signed in the fourth quarter; year-end backlog was $13.4 million, with approximately $7.0 million expected to be recognized in 2014.
• GridSense: Revenue increased 37% to $5.0 million, and gross margin improved to 36% from 26%. The company restructured operations, moving most production and development to the U.S. and reducing Australian operations. It remained loss-making.
• USSI: Revenue was approximately unchanged at $1.5 million. Gross loss widened to $2.3 million from $1.0 million, reflecting engineering work, technical challenges, cost overruns and inventory adjustments. About 83% of revenue came from one oil-company evaluation customer.
• OmniMetrix: Revenue rose to $2.2 million from $0.7 million, but the slower-than-expected uptake of its generator-monitoring model led to restructuring and major impairments. Acorn recorded $6.731 million of goodwill and intangible impairment charges, primarily related to OmniMetrix, and $1.389 million of restructuring charges across the businesses.

Fourth quarter: Revenue was $5.825 million versus $4.796 million a year earlier; gross profit was $0.700 million versus $1.029 million. Operating loss was $5.757 million, compared with $6.260 million. Net loss attributable to Acorn shareholders was $5.253 million, or $0.24 per share, versus $5.383 million, or $0.30 per share.

Outlook, risks and unusual items

• Management anticipated modest DSIT revenue growth in 2014. USSI’s full-scale high-temperature field evaluation was expected during 2014, but the filing said significant array sales were not anticipated in at least the first half of that year. Commercial adoption, performance in actual well conditions and follow-on orders remained uncertain.
• Management set a goal for GridSense and OmniMetrix, together, to move toward cash-flow neutrality, but provided no assurance of achieving it. GridSense had received additional utility orders after year-end; the filing describes these orders with differing amounts in different sections, so the total is not clear from the filing text.
• Acorn expected to invest at least $3.4 million more in USSI during 2014; other sections cite an anticipated $4.7 million. The differing figures and final funding commitment should be verified. Acorn also approved working-capital loans of $550,000 for GridSense and $500,000 for OmniMetrix.
• OmniMetrix’s customer disconnects, low cash balance and lack of an established bank facility, together with USSI’s ongoing cash needs, could require further parent funding or outside financing. Subsidiary credit facilities were subject to borrowing-base limits, covenants and, in some cases, near-term expiration.
• Acorn raised $10.4 million net in October 2013 by issuing shares and underwriter warrants, diluting existing shareholders. It suspended its dividend after the March 2013 payment and said it did not expect to pay dividends in the foreseeable future.
• Other material exposures include customer concentration, long project and utility sales cycles, fixed-price contract cost estimates, reliance on key suppliers, foreign-exchange movements, and political and operating risks in Israel. DSIT had approximately $1.2 million of performance and bank guarantees outstanding, supported in part by restricted cash. The IRS was examining federal returns for 2011–2012, including a prior tax-loss carryback refund; management expected no significant adverse impact.
• Management reported effective disclosure controls and internal control over financial reporting at year-end; the auditor also opined that internal control was effective. No legal proceedings were reported, although the company disclosed that law firms had solicited claims related to OmniMetrix impairment and restructuring announcements; no lawsuits had been filed as of the report.

Important facts for investors to verify

• Whether USSI’s 2014 field evaluation succeeds, resolves deployment and durability issues, and results in commercial orders—and how much further parent financing is needed.
• The actual 2014 cash needs and funding available to USSI, GridSense and OmniMetrix, including the differing USSI investment estimates in the filing.
• The amount, shipment schedule and revenue contribution of GridSense’s post-year-end orders; the filing reports inconsistent order totals in separate sections.
• DSIT’s progress, margins, milestone collections and delivery obligations under the $14.5 million contract, and whether its customer concentration declines.
• Cash burn, liquidity and covenant compliance relative to the $17.279 million year-end cash balance, $22.080 million working capital and $2.303 million year-end debt/credit.
• Whether additional impairments, customer losses, contract cost revisions or equity financing could materially affect reported results or shareholder dilution.