Acorn Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Dollar amounts are in millions unless otherwise stated. Acorn operated through CoaLogix, DSIT, GridSense and USSI; its comparative periods are affected by the timing of the GridSense and USSI acquisitions. Coreworx is reported as discontinued operations in the 2010 comparison.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $10.7 | $8.2 | $17.6 | $15.3 |
| Gross profit | $3.0 | $3.5 | $5.2 | $6.6 |
| Gross margin | 27.8% | 42.3% | 29.8% | 43.1% |
| Operating loss | $(2.3) | $(1.4) | $(5.2) | $(2.5) |
| Net loss attributable to Acorn shareholders | $(2.1) | $(3.2) | $(4.3) | $(6.3) |
| Loss per share attributable to Acorn shareholders | $(0.12) | $(0.21) | $(0.25) | $(0.45) |
Second-quarter revenue rose 30% year over year, but gross profit fell as cost of sales grew faster than revenue. First-half revenue increased 15%, while gross profit declined 21%. First-half results included a $0.5 million gain on the HangXing sale; 2010 included a $1.3 million GridSense investment gain and a $5.2 million loss from discontinued operations.
- Revenue mix and trends: First-half CoaLogix revenue was $10.4 million, up 11%; GridSense was $2.1 million versus $0.5 million in the partial 2010 comparison; DSIT was $4.8 million, down 11%; and USSI was $0.25 million. CoaLogix and GridSense drove growth, while DSIT revenue declined.
- Profitability drivers: CoaLogix first-half gross margin declined to 26% from 41%, reflecting costs at the Steele Creek plant before planned operating efficiencies. DSIT margin fell to 38% from 45%, partly due to project difficulties and higher labor costs. USSI continued to report negative gross profit while completing proof-of-concept work.
- Cash flow: Continuing operations used $3.3 million of operating cash in the first half. Investing activities provided $0.2 million, primarily reflecting HangXing sale proceeds and net release of restricted deposits; financing activities provided $0.4 million. Cash and cash equivalents decreased $2.6 million to $4.8 million.
- Liquidity and debt: Working capital was $10.7 million, including approximately $1.6 million of restricted deposits. At June 30, total bank credit and debt was approximately $2.2 million, including $1.9 million current and $0.35 million long-term. Current liabilities were $15.4 million. CoaLogix and DSIT reported covenant compliance at quarter-end.
- Balance sheet: Total assets were $58.3 million and total equity was $37.9 million at June 30, compared with $59.8 million and $41.9 million, respectively, at year-end 2010. Inventory increased to $6.6 million from $4.3 million; unbilled revenue and work-in-process increased to $7.1 million from $3.9 million.
Material developments, outlook and risks
- On July 28, 2011, Acorn agreed to sell CoaLogix for $101 million in cash before adjustments, including assumed debt. Acorn, which held approximately 65% on a fully diluted basis, expected net proceeds of approximately $61.8 million before taxes. Closing was expected in Q3 2011 and remained subject to customary conditions, including antitrust clearance. Until closing, CoaLogix results remained consolidated.
- Management expected the CoaLogix sale proceeds to provide sufficient liquidity for Acorn and its subsidiaries. If closing failed or was materially delayed, Acorn said it might need to raise capital; it gave no assurance that financing would be available on acceptable terms. Acorn’s corporate cash was approximately $2.1 million at July 31, after loans to subsidiaries and corporate spending.
- CoaLogix reported a $10.0 million backlog at June 30 and received $9.5 million of orders during Q2. Management expected revenue growth and improved margins as Steele Creek efficiencies and capacity improved. Expansion plans could require additional capital; Ohio incentives under consideration included a $2.5 million grant and $6.3 million loan.
- DSIT backlog fell to $5.4 million from $6.4 million at year-end 2010. Its 2011 growth and profitability depended on receipt of an anticipated major sonar-systems order; delay could require cost reductions or additional financing, with no assurance that outside support would be available.
- GridSense backlog was $3.4 million. It reported a major utility order to monitor more than 2,000 transformers, with much of the order expected to be supplied during the rest of 2011. Acorn had lent GridSense $1.3 million in the first half and another $0.1 million in July; management anticipated continued near-term working-capital support and noted uncertainty about longer-term funding needs.
- USSI backlog was $1.1 million at June 30 and rose to more than $1.8 million after two July orders. Management described these as trial projects that could lead to substantial follow-on orders, but they were not assured. USSI had approximately $0.24 million cash at July 31 and relied on sales or additional investment for funding.
- CoaLogix’s July amended bank facility retained a $4 million formula-based line, added a $3 million term loan and set maximum facility availability at $5 million. Investor equity or subordinated debt of at least one-third of term-loan advances was required. Acorn and EnerTech made subordinated loans to CoaLogix in July.
- Other items include a $0.75 million CoaLogix technology cooperation agreement and right of first refusal with Ebinger, payable in two installments; a $74,000 write-off of a terminated license; and the ongoing SCR-Tech lawsuit against Evonik, whose summary-judgment motion was mostly denied in July 2011. Evonik has asserted a counterclaim for unspecified damages.
- Management cited foreign-exchange and interest-rate exposure, subsidiary funding requirements, project execution and order timing, and the uncertainty of the CoaLogix sale. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the CoaLogix sale closed, final proceeds and adjustments, tax effects, and the treatment of CoaLogix debt and results.
- Whether CoaLogix achieves expected throughput, margin improvement and expansion funding, and how the buyer’s transaction affects reported backlog and future results.
- Whether DSIT receives the expected major order and whether GridSense and USSI convert projects, trials and backlog into collected revenue and sustainable cash flow.
- Subsidiaries’ ongoing dependence on Acorn or external financing, including the impact on corporate liquidity if the sale is delayed or does not close.
- Resolution and potential financial consequences of the Evonik litigation and counterclaim, and any developments in the contractual commitments and restricted deposits.