Acorn Energy, Inc. — Q1 2014 Form 10-Q
Business and period: Acorn is a holding company focused on technology for energy infrastructure asset management. Its businesses include sonar/security solutions (DSIT), smart-grid automation (GridSense), fiber-optic oil and gas sensors (USSI), and power-generation monitoring (OmniMetrix). Results cover the three months ended March 31, 2014, compared with Q1 2013; financial statement amounts are in thousands unless stated otherwise.
Financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $4.454 million | $5.716 million |
| Gross profit / margin | $1.242 million / 28% | $2.125 million / 37% |
| Operating loss | $4.550 million | $5.132 million |
| Net loss attributable to Acorn shareholders | $4.304 million; $0.19 per share | $4.975 million; $0.28 per share |
| Operating cash flow | $(3.781) million | $(4.734) million |
| Cash and cash equivalents at quarter-end | $12.831 million | $20.163 million |
Revenue fell 22% and gross profit fell 42%; gross margin declined to 28% from 37%. Lower revenue and margins were partly offset by reduced operating expenses: R&D declined 18% to $1.650 million and SG&A declined 21% to $4.142 million. Finance expense was $80,000, compared with $14,000 of finance income; the 2014 income-tax line was a $55,000 benefit. No dividend was declared in Q1 2014, versus $0.035 per share in Q1 2013.
Cash decreased $4.448 million during the quarter. Investing activities used $889,000, principally for restricted deposits and equipment; financing activities provided $212,000 from net short-term bank credit. At March 31, current assets were $30.053 million and current liabilities $12.676 million, or working capital of approximately $17.4 million. Short-term bank credit was $2.515 million. Total liabilities were $18.286 million; the filing reports no long-term debt balance, but accrued severance and other long-term liabilities totaled $5.610 million.
Material changes and operating developments
- DSIT: Revenue declined 14% to approximately $2.9 million; gross margin fell to 29% from 39%, primarily due to project mix and weather-related installation delays. Backlog was $11.8 million.
- GridSense: Revenue fell 38% to approximately $1.0 million and gross margin dropped to 19% from 43%, reflecting supplier constraints, product mix and a one-time radio-upgrade charge. The company reported $2.7 million of backlog and $2.8 million of new orders cited for the quarter. Its $1.5 million bank line was nearly fully drawn at quarter-end and expires June 30, 2014; Acorn guarantees the facility.
- USSI: Q1 revenue was zero versus $325,000 a year earlier; gross loss was $188,000. A May deep-well field deployment encountered sensor communication failures, and the array was retrieved for examination. Acorn reported investing $3.0 million in USSI in the first four months of 2014 and anticipated investing at least another $3.0 million during the rest of 2014. USSI’s $2.5 million backlog included a $1.8 million supermajor evaluation order; the filing did not assure delivery or commercial orders on a specific schedule.
- OmniMetrix: Revenue increased 20% to $641,000 and gross margin improved to 64% from 62%. SG&A fell following restructuring. Acorn lent OmniMetrix $430,000 during Q1.
Total backlog was $18.7 million at March 31: DSIT $11.8 million, GridSense $2.7 million, USSI $2.5 million and OmniMetrix $1.7 million. Backlog is not a guarantee of revenue or timing. Acorn also reported continuing cash support for subsidiaries: GridSense had borrowed a further $620,000 from Acorn through April 30, and USSI and OmniMetrix were expected to need further funding.
Outlook, risks and unusual items
- Management expected DSIT margins to recover somewhat but remain below historical levels in 2014; it expected GridSense margins to improve as product mix and shipments normalized. These are expectations, not guarantees.
- USSI’s commercialization timeline had been slower and less predictable than anticipated. Technical, deployment and reliability issues have delayed sales; management did not anticipate significant array sales until at least year-end 2014 and said additional capital or a strategic partner may be needed.
- GridSense’s bank line was due to expire June 30, 2014, and its extension or expansion was uncertain. Acorn disclosed no assurance that subsidiary financing would be available in adequate amounts or on acceptable terms.
- In April and May 2014, Acorn lent a USSI channel partner $300,000 and then $220,000 under an 8% secured note. Principal and interest were due by the earlier of collection of specified receivables or June 30, 2014; the partner pledged receivables and business intellectual property as collateral.
- Contractual cash obligations totaled $10.555 million, including $2.379 million of operating leases, $5.211 million of potential severance obligations and $450,000 of minimum royalties. Foreign-exchange exposure, customer concentration in receivables and unbilled revenue, and variable-rate credit facilities are also disclosed risks.
- Q1 included an $80,000 inventory write-off in the cash-flow reconciliation. The filing also describes prior-year restructuring charges and unpaid restructuring balances; it reports no new restructuring provision in Q1 2014. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether USSI resolves deep-well reliability issues, completes its backlog deliveries and secures commercial orders or outside funding.
- Whether GridSense renews or expands its expiring credit line, converts its orders and backlog into shipments, and repays Acorn’s advances.
- Whether operating cash burn and planned subsidiary funding remain supportable by Acorn’s cash and available credit.
- Timing and collectability of the channel-partner loan, and the value and enforceability of its collateral.
- Whether DSIT project execution and margins, and GridSense product margins, improve as management expects; also monitor backlog conversion and customer concentration.