Acorn Energy, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted. Acorn is a holding company with businesses in sonar and security systems, smart-grid products, fiber-optic sensing, and generator monitoring. OmniMetrix results are included only from February 15, 2012, limiting year-over-year comparability.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | 2013: $4.982 million; 2012: $4.713 million | 2013: $15.931 million; 2012: $14.623 million |
| Gross profit / margin | 2013: $1.059 million / 21%; 2012: $1.488 million / 32% | 2013: $4.456 million / 28%; 2012: $4.174 million / 29% |
| Operating loss | 2013: $12.542 million; 2012: $5.538 million | 2013: $25.198 million; 2012: $14.488 million |
| Net loss attributable to Acorn shareholders | 2013: $12.312 million; 2012: $3.935 million | 2013: $24.461 million; 2012: $11.328 million |
| Basic and diluted loss per share | 2013: $0.68; 2012: $0.22 | 2013: $1.35; 2012: $0.63 |
- Nine-month revenue increased 9%, led by GridSense and OmniMetrix; DSIT and USSI revenue declined. Third-quarter revenue rose 6% year over year, but gross profit fell 29% and gross margin dropped to 21%.
- Nine-month R&D expense increased 33% to $6.336 million and SG&A increased 10% to $15.221 million. The 2013 results also included $6.731 million of goodwill and intangible impairments and $1.366 million of restructuring charges.
- Operating cash use was $16.484 million for the first nine months, versus $16.714 million in 2012. Investing activities used $2.731 million; financing activities provided $0.537 million. Cash and cash equivalents fell by $18.778 million to $7.369 million.
- At September 30, working capital was $17.3 million, including $7.4 million cash and $0.8 million in restricted deposits. Current liabilities were $10.295 million; short-term bank credit and current maturities of long-term debt totaled $1.212 million. Contractual obligations totaled $9.840 million, including $2.923 million of operating leases and $5.048 million of potential severance obligations.
Material changes, outlook and risks
- Impairments and restructuring: Acorn fully impaired OmniMetrix’s Power Generation Monitoring and Cathodic Protection goodwill, totaling $1.930 million, and recorded $3.685 million of related intangible impairments in Q3. A separate $1.116 million customer-relationship impairment was recorded in Q2. GridSense restructuring charges were $0.594 million; OmniMetrix charges were $0.772 million.
- Segment developments: USSI has not yet achieved commercial product sales; technical and deployment issues delayed shipments, and its nine-month gross loss was $1.538 million. Management did not anticipate significant array sales for the balance of 2013 and early 2014. OmniMetrix’s dealer-led sales model gained customers more slowly than expected, prompting a strategy change, restructuring, and impairment. GridSense revenue grew 23% for the nine months, but management cited long utility sales cycles and targeted cash-flow neutrality. DSIT’s backlog declined from approximately $9.6 million at year-end 2012 to $4.1 million at September 30, 2013, and results depended partly on pending large orders.
- Funding and liquidity: Acorn suspended its dividend after the March 2013 payment to prioritize investment in subsidiaries. It raised $10.5 million net through an October public offering and over-allotment. As of October 31, corporate cash was approximately $15.4 million, excluding subsidiary cash; management also expected a federal tax refund of approximately $1.7 million. Management said available cash and expected sources would be sufficient for current operations for the next 12 months, but acknowledged potential financing needs beyond that period and continuing subsidiary funding needs.
- Near-term outlook: The filing states that Acorn expected 2013 and 2014 revenue and earnings to be materially below analyst consensus. Management anticipated reduced corporate overhead in 2014 and expected about a 35% reduction versus anticipated 2013 headquarters cash expenditures. The company cautioned that subsidiary cash-neutrality targets and sales expectations were uncertain; no numerical consolidated earnings or revenue guidance was provided.
- Key risks: Continued operating losses and cash consumption; dependence on Acorn funding and the availability or renewal of subsidiary credit facilities; USSI product-development, commercialization, manufacturing, and customer-adoption risks; lengthy project and utility sales cycles; customer concentration and project delays; and foreign-exchange, supplier, and regulatory risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether USSI resolves technical issues and converts trials and lease arrangements into commercial-scale orders, and how much further funding it requires.
- Whether OmniMetrix’s revised sales strategy and restructuring improve recurring revenue and reduce cash needs; confirm the basis and remaining effects of the impairment charges.
- Whether GridSense’s utility orders convert to timely collections and whether its credit facility is extended on acceptable terms.
- Whether DSIT secures the pending large project and replenishes backlog as existing projects near completion.
- How the October equity offering, subsidiary advances, and expected tax refund affect cash runway, dilution, and the stated 12-month liquidity outlook.