XNAS:ACFN Acorn Energy Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012


Commission file number: 0-19771
  
ACORN ENERGY, INC.
(Exact name of registrant as specified in charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
 
22-2786081
(I.R.S. Employer Identification No.)
 
 
 
3903 Centerville Road, Wilmington, Delaware
(Address of principal executive offices)
 
19807
(Zip Code)

302-656-1707
(Registrant’s telephone number, including area code)

4 West Rockland Road, Montchanin, Delaware 19710
(Former address) 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨  Accelerated filer x  Non-accelerated filer ¨  Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨  No x
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
 
Outstanding at August 2, 2012
Common Stock, $0.01 par value per share
 
17,926,752 shares



ACORN ENERGY, INC.
Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 2012

TABLE OF CONTENTS

 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certain statements contained in this report are forward-looking in nature. These statements are generally identified by the inclusion of phrases such as “we expect”, “we anticipate”, “we believe”, “we estimate” and other phrases of similar meaning. Whether such statements ultimately prove to be accurate depends upon a variety of factors that may affect our business and operations. Many of these factors are described in our most recent Annual Report on Form 10-K as filed with Securities and Exchange Commission.






PART I
 


ACORN ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
 
 
As of December 31, 2011
 
As of June 30, 2012
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
34,280

 
$
14,753

Short-term deposits
 
18,000

 
18,015

Restricted deposit
 
2,223

 
1,888

Funds held in escrow
 
5,961

 
5,961

Accounts receivable
 
4,965

 
4,476

Unbilled revenue
 
3,778

 
3,997

Inventory
 
2,144

 
2,652

Other current assets
 
922

 
2,765

Total current assets
 
72,273

 
54,507

Property and equipment, net
 
635

 
842

Severance assets
 
2,620

 
2,716

Restricted deposit
 
271

 
269

Intangible assets, net
 
4,780

 
10,056

Goodwill
 
4,637

 
6,562

Deferred taxes
 
440

 
423

Other assets
 
149

 
99

Total assets
 
$
85,805

 
$
75,474

LIABILITIES AND EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Short-term bank credit and current maturities of long-term debt
 
$
677

 
$
149

Accounts payable
 
2,052

 
2,164

Accrued payroll, payroll taxes and social benefits
 
1,907

 
2,139

Deferred revenue
 
2,876

 
1,597

Other current liabilities
 
4,544

 
3,139

Total current liabilities
 
12,056

 
9,188

Long-term liabilities:
 
 

 
 

Accrued severance
 
3,837

 
3,949

Long-term debt
 
141

 
75

Other long-term liabilities
 
204

 
210

Total long-term liabilities
 
4,182

 
4,234

Commitments and contingencies
 


 


Equity:
 
 

 
 

Acorn Energy, Inc. shareholders
 
 

 
 

Common stock - $0.01 par value per share:
 
 

 
 


1


Authorized – 30,000,000 shares; Issued –18,325,529 and 18,728,672 shares at December 31, 2011 and June 30, 2012, respectively
 
183

 
187

Additional paid-in capital
 
84,614

 
84,244

Warrants
 
427

 
55

Accumulated deficit
 
(13,022
)
 
(20,312
)
Treasury stock, at cost – 801,920 shares at December 31, 2011 and June 30, 2012
 
(3,036
)
 
(3,036
)
Accumulated other comprehensive income
 
485

 
484

Total Acorn Energy, Inc. shareholders’ equity
 
69,651

 
61,622

Non-controlling interests
 
(84
)
 
430

Total equity
 
69,567

 
62,052

Total liabilities and equity
 
$
85,805

 
$
75,474

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

2



ACORN ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT NET INCOME (LOSS) PER SHARE DATA)
 
 
 
Six months ended June 30,
 
Three months ended June 30,
 
 
2011
 
2012
 
2011

2012
Revenues:
 
 
 
 
 
 
 
 
Projects
 
$
4,857

 
$
7,618

 
$
2,509

 
$
4,582

Products
 
2,102

 
2,176

 
1,482

 
1,196

Services
 
243

 
341

 
116

 
122

Total revenues
 
7,202

 
10,135

 
4,107

 
5,900

Cost of sales:
 


 


 
 

 


Projects
 
3,371

 
5,773

 
1,904

 
3,527

Products
 
1,115

 
1,322

 
758

 
668

Services
 
195

 
251

 
98

 
127

Total cost of sales
 
4,681

 
7,346

 
2,760

 
4,322

Gross profit
 
2,521

 
2,789

 
1,347

 
1,578

Operating expenses:
 


 


 
 

 


Research and development expenses, net of credits
 
874

 
3,017

 
384

 
1,699

Selling, general and administrative expenses
 
5,467

 
8,619

 
2,724

 
4,390

Total operating expenses
 
6,341

 
11,636

 
3,108

 
6,089

Operating loss
 
(3,820
)
 
(8,847
)
 
(1,761
)
 
(4,511
)
Finance income (expense), net
 
(217
)
 
107

 
(100
)
 
130

Gain on sale of HangXing
 
492

 

 

 

Loss from continuing operations before taxes
 
(3,545
)
 
(8,740
)
 
(1,861
)
 
(4,381
)
Income tax benefit (expense)
 
(39
)
 
989

 
26

 
1,064

Net loss from continuing operations
 
(3,584
)
 
(7,751
)
 
(1,835
)
 
(3,317
)
Loss from discontinued operations, net of income taxes
 
(1,404
)
 

 
(568
)
 

Non-controlling interest share of loss from discontinued operations
 
389

 

 
157

 

Net loss
 
(4,599
)
 
(7,751
)
 
(2,246
)
 
(3,317
)
Net loss attributable to non-controlling interests
 
303

 
461

 
167

 
205

Net loss attributable to Acorn Energy, Inc. shareholders
 
$
(4,296
)
 
$
(7,290
)

$
(2,079
)
 
$
(3,112
)
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share attributable to Acorn Energy, Inc. shareholders:
 
 
 
 
 
 
 
 
   From continuing operations
 
$
(0.19
)
 
$
(0.41
)
 
$
(0.10
)
 
$
(0.17
)
   From discontinued operations
 
$
(0.06
)
 
$

 
$
(0.02
)
 
$

Basic and diluted net loss per share attributable to Acorn Energy, Inc. shareholders
 
$
(0.25
)
 
$
(0.41
)
 
$
(0.12
)
 
$
(0.17
)
Weighted average number of shares outstanding attributable to Acorn Energy, Inc. shareholders – basic and diluted
 
17,410

 
17,796

 
17,489

 
17,912

Dividends declared per common share
 
$

 
$
0.070

 
$

 
$
0.035

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


3


ACORN ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)



 
 
Six months ended June 30,
 
Three months ended June 30,
 
 
2011
 
2012
 
2011
 
2012
 
 
 
 
 
 
 
 
 
Net loss attributable to Acorn Energy, Inc. shareholders
 
$
(4,296
)
 
$
(7,290
)
 
$
(2,079
)
 
$
(3,112
)
Other comprehensive income (loss), net of income taxes:
 


 


 


 


   Foreign currency translation adjustments
 
292

 
(1
)
 
185

 
(202
)
      Comprehensive loss, net of income taxes
 
(4,004
)
 
(7,291
)
 
(1,894
)
 
(3,314
)
   Comprehensive loss attributable to non-controlling interests
 
(6
)
 

 
(2
)
 
6

      Comprehensive loss attributable to Acorn Energy, Inc. shareholders
 
(4,010
)
 
(7,291
)
 
(1,896
)
 
(3,308
)


The accompanying notes are an integral part of these condensed consolidated financial statements.


4


ACORN ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
(IN THOUSANDS)

 
  
 
Acorn Energy, Inc. Shareholders
 
 
 
 
 
 
Number of Shares
 
Common Stock
 
Additional Paid-In Capital
 
Warrants
 
Accumulated Deficit
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total Acorn Energy, Inc. Shareholders’ Equity
 
Non-controlling interests
 
Total Equity
As of December 31, 2011
 
18,326

 
$
183

 
$
84,614

 
$
427

 
$
(13,022
)
 
$
(3,036
)
 
$
485

 
$
69,651

 
$
(84
)
 
$
69,567

Net loss
 

 

 

 

 
(7,290
)
 

 

 
(7,290
)
 
(461
)
 
(7,751
)
Differences from translation of subsidiaries’ financial statements
 

 

 

 

 

 

 
(1
)
 
(1
)
 

 
(1
)
Comprehensive income
 

 

 

 

 

 

 

 
(7,291
)
 
(461
)
 
(7,752
)
Dividends
 

 

 
(1,248
)
 

 

 

 

 
(1,248
)
 

 
(1,248
)
Adjustment of non-controlling interests in USSI following additional investment by the Company
 

 

 
(975
)
 

 

 

 

 
(975
)
 
975

 

Stock option compensation
 

 

 
182

 

 

 

 

 
182

 

 
182

Exercise of warrants and options
 
403

 
4

 
1,671

 
(372
)
 

 

 

 
1,303

 

 
1,303

Balances as of June 30, 2012
 
18,729

 
$
187

 
$
84,244

 
$
55

 
$
(20,312
)
 
$
(3,036
)
 
$
484

 
$
61,622

 
$
430

 
$
62,052

 



 The accompanying notes are an integral part of these condensed consolidated financial statements.


5


ACORN ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)


 
 
Six months ended
 
 
June 30, 2011
 
June 30, 2012
Cash flows used in operating activities:
 
 
 
 
Net loss before non-controlling interests
 
$
(4,988
)
 
$
(7,751
)
Less net loss from discontinued operations
 
(1,404
)
 

Net loss from continuing operations
 
(3,584
)
 
(7,751
)
Adjustments to reconcile net loss to net cash used in operating activities (see Schedule A)
 
787

 
(2,157
)
Net cash used in operating activities – continuing operations
 
(2,797
)
 
(9,908
)
Cash flows provided by (used in) investing activities:
 
 
 
 

Acquisitions of property and equipment
 
(393
)
 
(370
)
Acquisition of license
 

 
(150
)
Restricted deposits
 
(547
)
 
(45
)
Release of restricted deposits
 
342

 
386

Maturity of short-term deposits
 

 
8,000

Short-term deposit
 

 
(8,015
)
Amounts funded for severance assets
 
(145
)
 
(169
)
 Proceeds from the sale of HangXing
 
492

 

Acquisition of OmniMetrix, net of cash acquired (see Schedule C)
 

 
(7,835
)
Net cash used in investing activities – continuing operations
 
(251
)
 
(8,198
)
Cash flows provided by (used in) financing activities:
 
 
 
 

Proceeds from employee stock option and warrant exercises
 
193

 
1,303

Short-term bank credit, net
 
(126
)
 
(510
)
Proceeds from borrowings of long-term debt
 
76

 
16

Repayments of long-term debt
 
(225
)
 
(95
)
Dividends paid
 

 
(2,123
)
Other
 
24

 

Net cash used in financing activities – continuing operations
 
(58
)
 
(1,409
)
 
 
 
 
 
Discontinued operations:
 
 
 
 
Operating cash flows
 
(516
)
 

Investing cash flows
 
455

 

Financing cash flows
 
489

 

Net cash provided by discontinued operations
 
428

 

Effect of exchange rate changes on cash and cash equivalents
 
77

 
(12
)
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(2,601
)
 
(19,527
)
Cash and cash equivalents at beginning of the year of discontinued operations
 
807

 

Cash and cash equivalents at beginning of year of continuing operations
 
6,549

 
34,280

Cash and cash equivalents at the end of the period
 
$
4,755

 
14,753

Cash and cash equivalents of discontinued operations at end of period
 
$
(1,363
)
 

Cash and cash equivalents held by continuing operations at end of the period
 
$
3,392

 
14,753


 The accompanying notes are an integral part of these condensed consolidated financial statements.

6


ACORN ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)








 
 
 
 
Six months ended
 
 
 
 
June 30, 2011
 
June 30, 2012
A.
 
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
$
402

 
$
661

 
 
Increase in accrued severance
 
190

 
211

 
 
Stock-based compensation
 
265

 
181

 
 
Deferred taxes
 
(136
)
 
(240
)
 
 
Gain on the sale of HangXing
 
(492
)
 

 
 
Other
 
36

 
(35
)
 
 
Change in operating assets and liabilities:
 
 
 
 
 
 
Decrease (increase) in accounts receivable, unbilled work-in process, other current and other assets
 
1,545

 
(925
)
 
 
   Increase in inventory
 
(209
)
 
(275
)
 
 
   Increase in accounts payable, accrued payroll, payroll taxes and social benefits, advances from customers, other current liabilities and other liabilities
 
(814
)
 
(1,735
)
 
 
 
 
$
787

 
$
(2,157
)
B.
 
Non-cash investing and financing activities:
 
 

 
 
 
 
Adjustment of additional paid-in-capital and non-controlling interests from additional investment option by Acorn in USSI
 
$
600

 
$
975

 
 
       Value of shares issued as compensation
 
101

 
 
 
 
 
 
 
 
 
C.
 
Assets/liabilities acquired in the acquisition of OmniMetrix
 
 
 
 
 
 
Accounts receivable
 
 
 
(328
)
 
 
Inventory
 
 
 
(234
)
 
 
Other current assets
 
 
 
(10
)
 
 
Property and equipment
 
 
 
(26
)
 
 
Intangible assets
 
 
 
(5,581
)
 
 
Goodwill
 
 
 
(1,930
)
 
 
Current liabilities

 
 
274

 
 
 

 
 
(7,835
)
 The accompanying notes are an integral part of these condensed consolidated financial statements.



7


NOTE 1— BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements of Acorn Energy, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
In August 2011 we sold our interest in CoaLogix whose results are reflected as discontinued operations. Accordingly, certain reclassifications have been made to the Company's condensed consolidated financial statements for the three and six month periods ended June 30, 2011 to conform to the current period's consolidated financial statement presentation.
All dollar amounts in the notes to the condensed consolidated financial statements are in thousands except for per share data.


8


NOTE 2—RECENT AUTHORITATIVE GUIDANCE
 

In June 2011, the Financial Accounting Standards Board ("FASB") issued ASU No. 2011-05, "Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income," ("ASU 2011-05") which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders' equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after Dec. 15, 2011 with early adoption permitted. The adoption of ASU 2011-05 by the Company did not have a material impact on the Company's consolidated results of operation and financial condition.

In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (the revised standard). The revised standard is intended to reduce the cost and complexity of testing indefinite-lived intangible assets other than goodwill for impairment. It allows companies to perform a "qualitative" assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The Company is currently evaluating the effect that this guidance will have on its consolidated financial position, results of operations and cash flows.

Other recent authoritative guidance issued by the FASB (including technical corrections to the Codification), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not, or are not expected to have a material effect on the Company's consolidated financial statements.


9


NOTE 3—ACQUISITION OF OMNIMETRIX
 
On February 15, 2012, the Company entered into a definitive agreement pursuant to which it acquired, through its XYZ Holdings, Inc. wholly-owned Georgia subsidiary ("Holdings" which has been renamed OMX Holdings, Inc.), all of the issued and outstanding limited liability company membership interests (the "Interests") in OmniMetrix, LLC, a Georgia limited liability company ("OmniMetrix"). OmniMetrix is in the business of designing, manufacturing, marketing and selling (i) wireless remote systems that monitor standby power generation, backup power generators, remote powered equipment, cellular towers, emergency towered communications and remote tower sites (the "Power Generator Monitoring" segment - see Note 11), and (iii) cathodic protection products to monitor pipeline integrity (the "Cathodic Protection" segment - included in the Company's "Other" segment - see Note 11). Holdings purchased the Interests in OmniMetrix from its three individual holders (the "Sellers") in consideration for an aggregate cash payment of $8,500. The Company incurred approximately $300 of transaction costs in connection with the acquisition of OmniMetrix which are included in Selling, general and administrative expense in the Condensed Consolidated Statement of Operations. The acquisition of OmniMetrix adds to the Company's growing product lines of remote monitoring systems for aging energy infrastructure.
The transaction was accounted for as a purchase business combination. OmniMetrix's results from operations for the period from acquisition (February 15, 2012) to June 30, 2012 have been included in the Company’s consolidated statement of comprehensive income. In the period since our acquisition, the Company recorded $382 of revenues and a net loss of $830 associated with OmniMetrix's activities. Pro forma information with respect to the acquisition of OmniMetrix are not included in these condensed financial statements as the information is not material.

In accordance with generally accepted accounting principles, the fair value of OmniMetrix is allocated to OmniMetrix's identifiable tangible and intangible assets and liabilities assumed based on their fair values as of the date of the transaction. Based upon a third-party valuation of intangible assets as of that date, the Company allocated the $8,500 consideration of the fair value to assets and liabilities as follows:

Cash
$
665

Accounts receivable
328

Inventory
234

Other current assets
10

Property and equipment
26

Intangible assets
5,581

Goodwill (see Note 7 for allocation to segments)
1,930

Total assets acquired
8,774

 
 

Current liabilities
(274
)
Fair value of assets and liabilities acquired
$
8,500

 
Intangible assets with estimated useful lives are amortized over that period. The intangible assets acquired and their weighted average estimated useful life in years is noted in the table below:
Intangible Asset Acquired
Estimated value
 
Weighted average estimated useful life in years
OmniMetrix technologies
$
2,319

 
10
Customer relationships
3,236

 
14
Non-compete agreements
26

 
6
 
$
5,581

 
 

The goodwill is not amortized for financial statement purposes in accordance with generally accepted accounting principles. The goodwill is expected to be deductible for tax purposes.


10


NOTE 4—US SEISMIC SYSTEMS, INC.

On February 6, 2012, the Company entered into a new Stock Purchase Agreement (the “USSI Purchase Agreement”) with USSI pursuant to which the Company converted advanced funds into additional shares of USSI common stock (“USSI Common Stock”) and shares of USSI's new Series A-1 Preferred Stock (“USSI Preferred Stock”). The Company also made a further payment to USSI of $2,250 on February 6, 2012 to purchase additional shares of USSI Preferred Stock. The USSI Preferred Stock provides that upon any future liquidation of USSI, to the extent funds are available for distribution to USSI's stockholders after the satisfaction of any USSI liabilities at that time, USSI would first repay the Company for the purchase price of our USSI Preferred Stock. Thereafter, the Company would receive a further payment for such shares ratably with all other USSI Common Stock holders as though the Company's shares of USSI Preferred Stock were the same number of shares of USSI Common Stock.
In April 2012, the Company conducted a second closing for the purchase of additional USSI Preferred Stock in accordance with the USSI Purchase Agreement and invested an additional $2,500 in USSI. Following this investment, the Company owns approximately 92% of USSI on a fully diluted basis. See Note 12 - Subsequent Events.
In connection with the USSI Purchase Agreement, the Company established a new 2012 Stock Plan (the “USSI 2012 Plan”) under which key employees, directors and consultants of USSI may receive options to purchase up to an aggregate of 1,180,000 shares of USSI Common Stock on such terms as the USSI 2012 Plan provides and as determined by USSI's board of directors or by such committee designated by USSI's board to administer the USSI 2012 Plan, if any. If options to purchase all shares of USSI Common Stock available under the USSI 2012 Plan are granted and exercised, the Company would own approximately 81% of USSI on a fully diluted basis. To date, no options have been issued under the USSI 2012 Plan.
    





11


NOTE 5—NON-CONTROLLING INTERESTS
 
The composition of the net income (loss) attributable to non-controlling interests (“NCI”) is as follows:
 
 
 
Six months ended June 30,
 
Three months ended June 30,
 
 
2011
 
2012
 
2011
 
2012
Net income (loss) attributable to NCI in DSIT
 
$
(23
)
 
$
65

 
$
(24
)
 
$
57

Net loss attributable to NCI in USSI
 
(280
)
 
(526
)
 
(143
)
 
(262
)
Net loss attributable to NCI
 
$
(303
)
 
$
(461
)
 
$
(167
)
 
$
(205
)
 

12


NOTE 6—INVENTORY


The composition of inventory is as follows:

 
 
As of December 31, 2011
 
As of June 30, 2012
Raw materials
 
$
1,663

 
$
1,696

Work-in-process
 
481

 
540

Finished goods
 

 
416

 
 
$
2,144

 
$
2,652



 



13


NOTE 7—GOODWILL AND INTANGIBLE ASSETS
 
(a) Goodwill
 
The changes in the carrying amounts of goodwill by segment from December 31, 2011 to June 30, 2012 were as follows:
 
 
 
Energy & Security Sonar Solutions segment
 
GridSense segment
 
USSI segment
 
Power Generation Monitoring segment
 
Cathodic Protection segment*
 
Total
Balance as of December 31, 2011
 
$
527

 
$
2,708

 
$
1,402

 
$

 
$

 
$
4,637

Goodwill recorded in the acquisition of OmniMetrix (see Note 3)
 

 

 

 
1,517

 
413

 
1,930

Translation adjustment
 
(14
)
 
9

 

 

 

 
(5
)
Balance as of June 30, 2012
 
$
513

 
$
2,717

 
$
1,402

 
$
1,517

 
$
413

 
$
6,562


* Results for the Cathodic Protection segment are included in "Other" in Segment Reporting (see Note 11).

 
(b) Intangibles
 
The changes in the carrying amounts of and accumulated amortization of intangible assets from December 31, 2011 to June 30, 2012 were as follows:

 
 
Energy &
Security Sonar
Solutions
segment
 
GridSense segment
 
USSI segment
 
Power Generation Monitoring segment
 
Cathodic Protection segment**
 
 
 
 
Cost
 
A.A.*
 
Cost
 
A.A.*
 
Cost
 
A.A.*
 
Cost
 
A.A.*
 
Cost
 
A.A.*
 
Total
Balance as of December 31, 2011
 
$
519

 
$
(274
)
 
$
2,748

 
$
(543
)
 
$
2,565

 
$
(235
)
 
$

 
$

 
$

 
$

 
$
4,780

Acquisition of license
 

 

 

 

 
150

 

 

 

 

 

 
150

Intangibles recorded in the acquisition of OmniMetrix (see Note 3)
 

 

 

 

 

 

 
4,385

 

 
1,196

 

 
5,581

Amortization
 

 
(41
)
 

 
(162
)
 

 
(70
)
 

 
(132
)
 

 
(51
)
 
(456
)
Cumulative translation adjustment
 
(13
)
 
9

 
6

 
(1
)
 

 

 

 

 

 

 
1

Balance as of June 30, 2012
 
$
506

 
$
(306
)
 
$
2,754

 
$
(706
)
 
$
2,715

 
$
(305
)
 
$
4,385

 
$
(132
)
 
$
1,196

 
$
(51
)
 
$
10,056

Weighted average estimated useful lives in years
 
6
 
10
 
20
 
13
 
9
 
 
 
*    Accumulated amortization
** Results for the Cathodic Protection segment are included in "Other" in Segment Reporting (see Note 11).

The composition of intangibles in each of the Company's segments are as follows:

Segment
 
Type of Intangible
Energy & Security Sonar Solutions
 
Naval technologies
GridSense
 
Software and customer relationships
USSI
 
Sensor technologies and license
Power Generation Monitoring
 
Technologies, customer relationships and non-compete agreements
Cathodic Protection*
 
Technologies and customer relationships

14


* The Cathodic Protection segment is included in "Other" in Segment Reporting (see Note 11).
     
In April 2012, USSI and Northrop Grumman Guidance and Electronics Company, Inc. signed a license agreement involving several of Northrop Grumman’s fiber-optic technology patents. The license agreement calls for an initial payment of $150 and for a royalty payment of 10% of the net selling price of each unit of licensed products used or sold during the term of the agreement, subject to an annual minimum royalty of $50 for the first ten years of the license term.

Amortization expense for each of the six months ended June 30, 2011 and 2012 amounted to $267 and $456, respectively. Amortization expense with respect to intangible assets is estimated to be $1,023, $975, $925, $852 and $852 for each of the years ending June 30, 2013 through 2017.
 

15


NOTE 8—EQUITY
 
(a)
Dividends

On February 7, 2012, the Company announced that its Board of Directors approved a first quarter 2012 dividend of $0.035 per share which was paid on March 1, 2012 to common stockholders of record on February 20, 2012. On April 19, 2012, the Company's Board of Directors approved a second quarter 2012 dividend of $0.035 per share which was paid on June 1, 2012 to common stockholders of record on May 15, 2012. The dividends are a continuation of the Company's policy to pay a regular quarterly dividend. The March 1, 2012 dividend payment was $620 while the June 1, 2012 dividend payment was $628. See Note 12 - Subsequent Events.
(b)
Acorn Stock Options

A summary of stock option activity for the six months ended June 30, 2012 is as follows:

 
 
Number 
of Options
(in shares)
 
Weighted
Average
Exercise
Price Per Share
 
Weighed Average Remaining Contractual Life
 
Aggregate Intrinsic Value
Outstanding at December 31, 2011
 
1,388,333

 
$
4.17

 
 
 
 
Granted
 
115,000

 
$
7.60

 
 
 
 
Exercised
 
(133,333
)
 
$
1.89

 
 
 
 
Forfeited or expired
 
(25,000
)
 
$
2.96

 
 
 
 
Outstanding at June 30, 2012
 
1,345,000

 
$
4.71

 
3.4 years
 
$
4,756

Exercisable at June 30, 2012
 
1,154,375

 
$
4.39

 
4.4 years
 
$
4,361


 The weighted average grant date fair value of the 115,000 stock options granted during the first six months of 2012 was $3.19 per share. The fair value of the options granted was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:
        
Risk-free interest rate
 
1.4
%
Expected term of options, in years
 
6.5

Expected annual volatility
 
58
%
Expected dividend yield
 
2.0
%
 


(c)
Stock-based Compensation Expense

Stock-based compensation expense included in the Company’s Condensed Statements of Operations was $265 and $181 for the six months ended June 30, 2011 and 2012, respectively ($133 and $39 for the three months ended June 30, 2011 and 2012, respectively) and was included in Selling, general and administrative expense.
 
(d)
Warrants

The Company previously issued warrants at exercise prices equal to or greater than market value of the Company’s common stock at the date of issuance.  A summary of warrant activity follows:

16


 
 
Number 
of Warrants
(in shares)
 
Weighted
Average
Exercise
Price Per Share
 
Weighed Average Remaining Contractual Life
Outstanding at December 31, 2011
 
313,806

 
$
4.29

 
 
Granted
 

 
 
 
 
Exercised
 
(269,808
)
 
$
4.39

 
 
Forfeited or expired
 
(15,248
)
 
$
3.68

 
 
Outstanding at June 30, 2012
 
28,750

 
$
3.68

 
3.5

During the six months ended June 30, 2012, 36,502 warrants were exercised and 15,248 warrants were forfeited in connection with the “net exercise” of 51,750 warrants. In a net exercise of a warrant, the Company does not require a payment of the exercise price of the warrant from the warrant holder, but reduces the number of shares of common stock issued upon the exercise of the warrant by the smallest number of whole shares that has an aggregate fair market value equal to or in excess of the aggregate exercise price for the warrants covered by the warrants exercised. The 51,750 options which were exercised under this method had a weighted average exercise price of $3.68 per share.


17


NOTE 9—WARRANTY PROVISION
 
The changes in the warranty provision from December 31, 2011 to June 30, 2012 was as follows:

 
 
Gross Carrying Amount
 
Balance at December 31, 2011*
 
$
188

 
     Warranties issued
 

 
     Adjustment of warranty provision
 
39

 
     Warranty claims
 

 
Balance at June 30, 2012*
 
$
227

 
 
* The balance at December 31, 2011 is included in other current liabilities ($37) and other long-term liabilities ($151). At June 30, 2012, the balance is included in other current liabilities ($32) and other long-term liabilities ($195).
 


18


NOTE 10—FAIR VALUE MEASUREMENTS
 
Financial items measured at fair value are classified in the table below in accordance with the hierarchy established in applicable accounting principles.
 
 
 
As at June 30, 2012
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Short-term deposits
 
$
18,015

 
$

 
$

 
$
18,015

Restricted deposits – current and non-current
 
2,157

 

 

 
2,157

Funds held in escrow
 
5,961

 

 

 
5,961

Derivative liabilities
 
(57
)
 

 

 
(57
)
Total
 
$
26,076

 
$

 
$

 
$
26,076

 
 
 
 
 
 
 
 
 
 
 
As at December 31, 2011
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Short-term deposits
 
$
18,000

 
$

 
$

 
$
18,000

Restricted deposits – current and non-current
 
2,494

 

 

 
2,494

Funds held in escrow
 
5,961

 

 

 
5,961

Derivative liabilities
 
(18
)
 

 

 
(18
)
Total
 
$
26,437

 
$

 
$

 
$
26,437

 
Derivative assets and liabilities are forward contracts for the purchase of New Israeli Shekels for which market prices are readily available. Unrealized gains or losses from forward contracts are recorded in Finance expense, net.
 

19


NOTE 11—SEGMENT REPORTING
 

The Company currently operates in four operating segments:
 
(1)
Energy & Security Sonar Solutions whose activities are focused on the following areas – sonar and acoustic related solutions for energy, defense and commercial markets and includes other real-time and embedded hardware & software development and production. Energy & Security Sonar Solutions activities are provided through the Company’s DSIT Solutions Ltd. subsidiary.

(2)
The Company’s GridSense segment provides Smart Grid Distribution Automation products and services through its GridSense subsidiaries.  

(3)
The Company’s USSI segment's focus is to develop and produce fiber optic sensing systems for the energy and security markets.  These activities are performed through the Company's USSI subsidiary.

(4)
The Company's Power Generation Monitoring segment provides products and services which deliver critical, real-time machine information to customers, while its Smart Service™ software provides remote diagnostics that give users real control over their equipment. These activities are performed through the Company's OmniMetrix subsidiary. As these activities were acquired in February 2012 (see Note 3), there are no comparative results reported for these activities for the three and six month periods ended June 30, 2011.

Other operations include various operations in DSIT and OmniMetrix that do not meet the quantitative thresholds under applicable accounting principles.

    

20


 
 
Energy &
Security
Sonar
Solutions
 
GridSense
 
USSI
 
Power Generation Monitoring
 
Other
 
Total
Six months ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
 
$
6,182

 
$
1,907

 
$
1,083

 
$
301

 
$
662

 
$
10,135

Intersegment revenues
 

 

 

 

 

 

Segment gross profit (loss)
 
2,297

 
817

 
(605
)
 
49

 
231

 
2,789

Depreciation and amortization
 
116

 
189

 
153

 
132

 
66

 
656

Segment net income (loss) before income taxes
 
581

 
(2,057
)
 
(3,802
)
 
(228
)
 
(65
)
 
(5,571
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
 
$
4,032

 
$
2,140

 
$
248

 
$

 
$
782

 
$
7,202

Intersegment revenues
 

 

 

 

 

 

Segment gross profit (loss)
 
1,386

 
996

 
(297
)
 

 
436

 
2,521

Depreciation and amortization
 
98

 
180

 
109

 

 
13

 
400

Segment net income (loss) before income taxes
 
(270
)
 
(1,058
)
 
(1,254
)
 

 
235

 
(2,347
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
 
$
3,419

 
$
989

 
$
962

 
$
172

 
$
358

 
$
5,900

Intersegment revenues
 

 

 

 

 

 

Segment gross profit (loss)
 
1,337

 
473

 
(394
)
 
3

 
159

 
1,578

Depreciation and amortization
 
58

 
93

 
83

 
89

 
41

 
364

Segment net income (loss) before income taxes
 
421

 
(858
)
 
(2,087
)
 
(219
)
 
(3
)
 
(2,746
)
 
 
 
 
 
 
 
 
 
 
 
 

Three months ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
 
$
2,006

 
$
1,499

 
$
205

 
$

 
$
397

 
$
4,107

Intersegment revenues
 

 

 

 

 

 

Segment gross profit (loss)
 
673

 
726

 
(288
)
 

 
236

 
1,347

Depreciation and amortization
 
48

 
91

 
52

 

 
6

 
197

Segment net income (loss) before income taxes
 
(239
)
 
(236
)
 
(738
)
 

 
117

 
(1,096
)
 

21



Reconciliation of Segment Income (Loss) to Consolidated Net Loss
 
Six months ended June 30,
 
Three months ended June 30,
 
2011
 
2012
 
2011
 
2012
Total net loss before income taxes for reportable segments
$
(2,582
)
 
$
(5,506
)
 
$
(1,213
)
 
$
(2,743
)
Other operational segment net income (loss) before income taxes
235

 
(65
)
 
117

 
(3
)
Total segment net loss before income taxes
(2,347
)
 
(5,571
)
 
(1,096
)
 
(2,746
)
Unallocated cost of corporate, DSIT and OmniMetrix headquarters*
(1,690
)
 
(3,169
)
 
(765
)
 
(1,635
)
Income tax benefit (expense) **
(39
)
 
989

 
26

 
1,064

Non-controlling interests (see Note 5)
303

 
461

 
167

 
205

Gain on sale of HangXing
492

 

 

 

Loss from discontinued operations, net of income taxes
(1,404
)
 

 
(568
)
 

Non-controlling interest share of loss from discontinued operations
389

 

 
157

 

Consolidated net loss attributable to Acorn Energy, Inc. shareholders
$
(4,296
)
 
$
(7,290
)
 
$
(2,079
)
 
$
(3,112
)
 

* Includes stock compensation expense of $265 and $181 for the six month periods ending June 30, 2011 and 2012, respectively. Includes stock compensation expense of $133 and $39 for the three month periods ending June 30, 2011 and 2012, respectively.

** In 2012, includes an income tax benefit of $1,100 recorded with respect to net operating loss carryback of the Company's expected consolidated tax loss in the United States.

22


NOTE 12—SUBSEQUENT EVENTS
 

Additional Investment in USSI

On July 30, 2012, the Company entered into another Stock Purchase Agreement (the “Summer USSI Purchase Agreement”) with USSI pursuant to which the Company made a payment to USSI of $2,500 to purchase additional shares of USSI Preferred Stock. The USSI Preferred Stock is the same class of shares that the Company acquired earlier this year (see Note 4) and provides that upon any future liquidation of USSI, to the extent funds are available for distribution to USSI's stockholders after the satisfaction of any USSI liabilities at that time, USSI would first repay the Company for the purchase price of its USSI Preferred Stock. Thereafter, the Company would receive a further payment for such shares ratably with all other USSI Common Stock holders as though the Company's shares of USSI Preferred Stock were the same number of shares of USSI Common Stock.  In connection with this investment, the Company also entered into a Second Amended and Restated Stockholders Agreement with USSI and its other stockholders providing for certain rights and obligations to purchase or sell our USSI securities and with regard to the management of USSI.

                Following the July 30, 2012 payment to USSI, the Company owned approximately 93.6% of USSI on a fully diluted basis.  The  Summer USSI Purchase Agreement contemplates that the Company may make an additional investment of $2,500 later this year in exchange for more shares of USSI Preferred Stock.  If the Company fully funds that investment, it will own approximately 94.4% of USSI on a fully diluted basis (which amount would be diluted to approximately 85.1% if all options which could be awarded under USSI's 2012 Stock Purchase Plan were awarded and exercised).

Dividends

On July 10, 2012, the Company's Board of Directors approved a third quarter 2012 dividend of $0.035 per share to be paid on September 4, 2012 to common stockholders of record on August 17, 2012.


23


ACORN ENERGY, INC.

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion includes statements that are forward-looking in nature. Whether such statements ultimately prove to be accurate depends upon a variety of factors that may affect our business and operations. Certain of these factors are discussed in this report and in our Annual Report on Form 10-K for the year ended December 31, 2011.


REVENUES BY COMPANY
The following table shows, for the periods indicated, the dollar amount (in thousands) of the consolidated revenues attributable to each of our consolidated companies. The financial results of OmniMetrix are included in our consolidated financial statements effective February 15, 2012. Accordingly, there are no comparative results reported for these activities for the three and six month periods ended June 30, 2011.

 
 Six months ended June 30,
 
Three months ended June 30,
 
2011
 
2012
 
2011
 
2012
DSIT Solutions
$
4,814

 
$
6,763

 
$
2,403

 
$
3,722

GridSense
2,140

 
1,907

 
1,499

 
989

OmniMetrix

 
382

 

 
227

USSI
248

 
1,083

 
205

 
962

Total
$
7,202

 
$
10,135

 
$
4,107

 
$
5,900


BACKLOG
As of June 30, 2012, our backlog of work to be completed was as follows (amounts in millions of U.S. dollars):
DSIT Solutions
$
9.5

 
GridSense
0.5

 
OmniMetrix
0.3

 
USSI
0.9

 
Total
$
11.2

 



RECENT DEVELOPMENTS



(1)
Additional Investment in USSI
On July 30, 2012, Acorn entered into another Stock Purchase Agreement (the “Summer USSI Purchase Agreement”) with USSI pursuant to which we made a payment to USSI of $2.5 million to purchase additional shares of USSI Preferred Stock. The USSI Preferred Stock is the same class of shares that we acquired earlier this year and provides that upon any future liquidation of USSI, to the extent funds are available for distribution to USSI's stockholders after the satisfaction of any USSI liabilities at that time, USSI would first repay Acorn for the purchase price of its USSI Preferred Stock. Thereafter, the Company would receive a further payment for such shares ratably with all other USSI Common Stock holders as though the Company's shares of USSI Preferred Stock were the same number of shares of USSI Common Stock.  In connection with this investment, the Company also entered into a Second Amended and Restated Stockholders Agreement with USSI and its other stockholders providing for certain rights and obligations to purchase or sell our USSI securities and with regard to the management of USSI.

24



                Following the July 30, 2012 payment to USSI, the Company owned approximately 93.6% of USSI on a fully diluted basis.  The  Summer USSI Purchase Agreement contemplates that we may make an additional investment of $2.5 million later this year in exchange for more shares of USSI Preferred Stock.  If we fully fund that investment, we will own approximately 94.4% of USSI on a fully diluted basis (which amount would be diluted to approximately 85.1% if all options which could be awarded under USSI's 2012 Stock Purchase Plan were awarded and exercised).
(2)
Dividends
On July 10, 2012, the Company's Board of Directors approved a third quarter 2012 dividend of $0.035 per share to be paid on September 4, 2012 to common stockholders of record on August 17, 2012.

(3)
BIRD Development Grant
In June 2012, two of the Acorn Energy's companies, DSIT Solutions Ltd. and US Seismic Systems, Inc., were awarded a joint grant of up to $900,000 from the U.S. Binational Industrial Research and Development ("BIRD") Foundation. The grant was awarded for the joint development of the next generation integrated passive/active threat detection system for underwater site protection. The BIRD Foundation provides funding money for projects involving joint innovation and development between American and Israeli companies. The grant calls for the signing of a Cooperation and Project Funding Agreement between the companies and the BIRD Foundation within three months to enable commencement of the funding. Grants received from the BIRD Foundation are subject to repayment upon the commercial success of the integrated passive/active threat detection system.


 









25


OVERVIEW AND TREND INFORMATION
 
Acorn Energy, Inc. ("Acorn" or "the Company”) is a holding company focused on technology driven solutions for energy infrastructure asset management.  
 
Through our majority or wholly-owned operating subsidiaries we provide the following services and products:

·      Energy & Security Sonar Solutions .  We provide sonar and acoustic related solutions for energy, defense and commercial markets with a focus on underwater site security for strategic energy installations and other advanced acoustic systems and real-time embedded hardware and software development and production through our DSIT Solutions Ltd. ("DSIT") subsidiary.
 
·      Smart Grid Distribution Automation.  These products and services are provided by our GridSense subsidiaries (GridSense Inc. in the United States and GridSense Pty Ltd. and CHK GridSense Pty Ltd. in Australia - collectively "GridSense") which develop, market and sell remote monitoring and control systems to electric utilities and industrial facilities worldwide.
 
·      Energy and Security Sensor Systems.  These products and services are provided by our US Seismic Systems, Inc. subsidiary ("USSI") which develops and produces “state of the art” fiber optic sensing systems for the energy, commercial security and defense markets worldwide.

·      Power Generation (PG) Monitoring.  These products and services are provided by our newly acquired OmniMetrix subsidiary. OmniMetrix's PG products and services deliver critical, real-time machine information to customers and provide remote diagnostics that give users real control over their equipment.

During 2012, each of the four abovementioned activities represented a reportable segment. In addition, our “Other” segment represents IT and consulting activities at our DSIT subsidiary as well as Cathodic Protection activities in our newly acquired OmniMetrix subsidiary. As OmniMetrix's activities were acquired in February 2012, there are no comparative results reported for these activities for the three and six month periods ended June 30, 2011.
The following analysis should be read together with the segment information provided in Note 11 to the interim unaudited condensed consolidated financial statements included in this quarterly report.


DSIT Solutions
DSIT reported increased revenues in the first half of 2012 as compared to the first half of 2011 as well as increased gross profit and net income. DSIT's revenues of $6.8 million for the first half of 2012 quarter represents an increase of approximately $1.9 million or 40% as compared to the first half of 2011. Second quarter 2012 revenues of $3.7 million also reflected an increase ($0.7 million or 22%) compared to first quarter 2012 revenues of $3.0 million. The increase in revenues from the first half of 2011 was due to increased revenues in our Energy & Sonar Security Solutions segment which reported first half 2012 revenues of $6.2 million compared to $4.0 million in the first half of 2011. The increase in revenues was due to the receipt of a major AquaShieldTM Diver Detection Sonar ("DDS") project (valued at $12.3 million) in the end of 2011 and the subsequent work on that project. The increase in revenues as compared to the first quarter of 2012 was due to increased progress on the large project received in late 2011.

DSIT's gross profit in the first half of 2012 increased by approximately $0.7 million or 37% compared to first half 2011 gross profit. The increase in gross profit was attributable to the abovementioned increase in revenues which was partially offset by slightly reduced gross margins. Gross margins decreased in the first half of 2012 to 37% as compared to 38% in the first half of 2011. The decrease in gross margin was attributable to lower margin projects being worked on in 2012 as compared to 2011.

During the first half of 2012, DSIT recorded approximately $0.5 million of Research and Development expense, an increase of approximately $0.2 million compared to the first half of 2011. The increase is attributable in part to preliminary work on joint development (with USSI) of the next generation integrated passive/active threat detection system for underwater site protection.

During the first half of 2012, DSIT recorded approximately $1.5 million of selling, general and administrative (SG&A) expense; slightly below the $1.6 million recorded in the first half of 2011. The decrease is due to decreased marketing costs in 2012 as the first half of 2011 had a relatively high number of product demonstrations as well as a weaker New Israeli Shekel (NIS) during the period which decreased our NIS expenses when reported in U.S. dollars.


26


At December 31, 2011, DSIT had a backlog of approximately $13.6 million. During the first half of 2012, we received new orders totaling approximately $1.9 million and at the end of June 2012 had a backlog of approximately $9.5 million. DSIT expects to continue to show revenue growth in 2012 compared to 2011 and expects 2012 to be profitable as well. The level of profitability, however, is expected to be dependent upon anticipated increased levels of marketing and development costs planned for the balance of 2012.
    
As noted in Recent Developments, in June 2012, DSIT together with USSI were awarded a joint $900,000 grant from the BIRD Foundation for the joint development of the next generation integrated passive/active threat detection system for underwater site protection. The grant calls for the signing of a Cooperation and Project Funding Agreement between the companies and the BIRD Foundation within three months to enable commencement of the funding. DSIT anticipates receipt of a majority (approximately 60%) of the grant based on the expected allocation of project costs between DSIT and USSI.

DSIT has also recently received Israeli government approval for a program which provides funds to facilitate marketing in Asia. DSIT expects to receive approximately $300,000 of government participation in certain marketing expenses over the next three years.

The lease for DSIT's current operating facilities in the Tel Aviv, Israel metropolitan area expires in August 2012. DSIT is currently negotiating an extension of the lease and does not anticipate a material change in its annual rent.


GridSense

In the first half of 2012, GridSense reported revenues of $1.9 million, a decrease of $0.2 million (11%) compared to first half 2011 revenues and a slight increase ($0.1 million or 8%) compared to first quarter 2012 revenues. The decreased first half 2012 revenues compared to first half 2011 revenues was primarily attributable to revenues recorded in 2011 with respect to the beginning of the fulfillment of an order of over 2,000 transformers monitors to a southeastern US electric utility which began in the second quarter of 2011. While Gridsense sees a general improvement in the overall business environment in the utility industry and expects utility spending to continue to increase in future quarters, the timing of such spending on products such as those that GridSense provides cannot be predicted with certainty due to the sales cycle of electric utilities which is typically long and requires much technical and application support. To address these long sales cycles, GridSense has expanded its customer pilot programs from just a handful to over twenty around the globe. We expect that many of these paid pilot projects will result is substantial commercial rollouts, possibly as early as late in 2012.

GridSense's gross profit in the first half of 2012 decreased by approximately $0.2 million or 18% compared to first half 2011 gross profit. The decrease in gross profit was attributable to the abovementioned decrease in revenues combined with a decrease in gross margins. Gross margins decreased in the first half of 2012 to 43% as compared to 47% in the first half of 2011. The decrease in gross margin was attributable to higher shipping costs and raw materials costs due to purchases in smaller lot sizes in 2012 as well certain fixed costs being spread over a larger revenue base in 2011. Gross margin, however, increased in the second quarter of 2012 to 48% from 37% in the first quarter of 2012. The increase is attributable to design stabilization, buying in better economic order quantities and placing blanket purchase orders with multiple release dates to obtain better pricing.

During the first half of 2012, GridSense recorded approximately $2.2 million of SG&A expense representing an increase of approximately $0.5 million (29%) compared to the first half of 2011. The increased SG&A costs are primarily due to additional staff in sales, marketing, administrative and accounting. During 2012, GridSense's employee count has increased by eight full-time positions. In response to improving industry conditions, GridSense expects to continue to expand its sales and support capabilities. We expect further increases in SG&A costs as additional employee positions (primarily in sales) are expected to be filled during the remainder of 2012.

GridSense is also adding to its engineering team in order to accelerate the development of some key projects that GridSense believe will lead to the generation of new revenues and anticipates increased research and developments expenses going forward (approximately $0.7 million in the first half of 2012).

We expect that GridSense will continue to require working capital support while it focuses on increasing its sales. Acorn continues to provide funds for GridSense's working capital needs and expects to do so in the future. In the period from January 1 to June 30, 2012, Acorn provided GridSense $2.0 million for its working capital needs. On July 31, 2012, GridSense had cash on hand of approximately $150,000. On August 3, 2012, we committed to fund an additional $3.0 million to GridSense, payable in increments as we deem necessary during the balance of 2012 and during 2013. We have no assurance that GridSense will increase its sales or reduce its need for additional financing to support its working capital needs following this additional funding by us. Additional working capital support may be in the form of a bank line, new investment by others, additional investment or loans

27


by Acorn, or a combination of the above. GridSense is currently in discussions with a bank to provide working capital financing; however, there is no assurance that such financing from the bank or any other party will be available in sufficient amounts, in a timely manner or on acceptable terms. The availability and amount of any additional investment from us in GridSense may be limited by the working capital needs of our corporate activities and other operating companies.

USSI

In the first half of 2012, USSI reported revenues of $1.1 million, an increase of $0.8 million (337%) compared to first half 2011 revenues of $248,000 and an increase of $841,000 (695%) compared to first quarter 2012 revenues of $121,000. The increased first half 2012 revenues compared to first half 2011 revenues as well and the increase in the second quarter of 2012 compared to the first quarter of 2012 was attributable to the delivery in the second quarter of the following two large proof of concept projects: 1) The world's largest commercial high temperature down-hole fiber-optic seismic array (40 - level array) which is designed for monitoring wells that use the latest unconventional oil and gas extraction technique known as hydrofracking, and 2) an Ultra-High Sensitivity fiber-optic based marine seismic array for oil and gas exploration to an international service provider for use as a marine array to aid in the collection and interpretation of data in the hostile environment of deep sea oil and gas operations. These two contracts generated 2012 revenue of over $800,000. USSI is moving forward with similar "proof of concept" demonstrations with a number of its other customers, and we expect that USSI's products will be validated via customer field testing, resulting in anticipated follow-on orders.

In the first half of 2012, gross profit continued to be negative ($605,000) as it was in the first half of 2011 ($297,000). The negative gross profit is primarily due to large amounts of up front engineering design costs (non-recurring engineering costs or "NRE") that accompanied the production of the first commercial high temperature down‐hole fiber‐optic seismic array (40 - level array). Similar NRE accompanied USSI's other proof of concept projects in the second quarter. USSI is continuing to work to develop cost cutting measures for the manufacturing of its commercial products, including investment in equipment that will make manufacturing more efficient and improving the production process that will ultimately result in less man-hours required for each product sold. USSI expects that its gross margin will improve over the balance of 2012 as it benefits from: 1) Less NRE required on future projects, 2) lower cost production personnel used as opposed to higher cost engineers, and 3) allocating its fixed costs over a larger revenue base.

During the first half of 2012, USSI recorded approximately $1.8 million of research and development ("R&D") expense as compared to $0.3 million in the first half of 2011. The increased R&D expense is due to an increase in engineering headcount as well as an increase in R&D materials used in product development. We expect R&D expense to continue at levels seen in the first half of 2012 as USSI continues to internally develop more efficient production versions of its current products and adds additional engineering headcount to continue it development of multiple product offerings.

During the first half of 2012, USSI recorded approximately $1.4 million of SG&A expense representing an increase of approximately $0.8 million (122%) compared to the first half of 2011. Second quarter 2012 SG&A expense ($0.8 million) also reflects an increase of $0.2 million over first quarter 2012 SG&A expense of $0.6 million. The increased SG&A costs are due to increased sales and marketing activities combined with the costs of additional administrative personnel. For the balance of the year, we expect SG&A costs to level off and remain consistent with levels seen for the second quarter of 2012.

In April 2012, USSI signed a license agreement with Northrop Grumman for several fiber-optic patents from Northrop's Navigation Systems Division. The licensed patents represent extensive research and development by Northrop Grumman. The licensed patents will be used by USSI to refine the next generation of high sensitivity oilfield fiber-optic geophone systems

As noted in Recent Developments, in June 2012, USSI together with DSIT were awarded a joint $900,000 grant from the BIRD Foundation for the joint development of the next generation integrated passive/active threat detection system for underwater site protection. The grant calls for the signing of a Cooperation and Project Funding Agreement between the companies and the BIRD Foundation within three months to enable commencement of the funding. USSI anticipates receipt of approximately 40% of the grant based on the expected allocation of project costs between DSIT and USSI.

We continue to anticipate significant growth in orders in 2012, particularly from new customers related to our 4D reservoir and shale gas monitoring systems following the numerous demonstrations performed during the year as well as follow-on projects from our existing "proof-of-concept" projects, each of which has the potential for annual multi-million dollar follow-up orders. We also anticipate significantly increased costs as we have grown our employee base from 28 full-time employees (inclusive of consultants) at the end of 2011 to 51 full-time employees (inclusive of consultants) as of July 31, 2012.

We expect that USSI will continue to require working capital support while it works on transitioning from development to production and as it works on refining its manufacturing capabilities. USSI currently has no other sources of financing other

28


than its internally generated sales and investments by Acorn. As noted in Recent Developments, On July 30, 2012, Acorn entered into the Summer USSI Purchase Agreement with USSI pursuant to which we made a payment to USSI of $2.5 million to purchase additional shares of USSI Preferred Stock. The  Summer USSI Purchase Agreement contemplates that we may make an additional investment of $2.5 million later this year in exchange for more shares of USSI Preferred Stock.  On July 31, 2012, USSI had cash on hand of approximately $2.3 million. We have no assurance that USSI will not need additional financing from time-to-time to finance its working capital needs beyond our current investment. Additional financing for USSI may be in the form of a bank line, new investment by others, a loan or investment by Acorn, or a combination of the above. USSI is currently engaged in discussions with a bank in order to obtain a line-of-credit. There is no assurance that USSI will be able to obtain the line-of-credit or other support in sufficient amounts, in a timely manner or on acceptable terms. The availability and amount of any additional investment from us in USSI may be limited by the working capital needs of our corporate activities and other operating companies.

OmniMetrix

In accordance with applicable accounting standards, we began consolidating the results of OmniMetrix beginning February 15, 2012, the date we acquired OmniMetrix. Accordingly, there are no comparative results reported for OmniMetrix for the three month period ended June 30, 2011.

During the period following our acquisition, we reported revenues of approximately $382,000 ($227,000 in the second quarter) and a net loss of $830,000 ($660,000 in the second quarter) with respect to OmniMetrix activities. Since our acquisition, OmniMetrix has engaged in developing a major marketing and promotion program to increase the penetration rate of its Power Generator monitoring products into the market. We anticipate that this promotion program, which began in the second quarter, will negatively impact OmniMetrix's gross profit and gross margin in the near term, but expect the gross profit and gross margin to increase as the penetration rate of its Power Generator monitoring products into the market increases.

Since our acquisition, OmniMetrix has hired additional personnel growing from 11 employees (one of which was in sales) to 25 employees (inclusive of consultants) at July 31, 2012, seven of which are sales and marketing personnel. We expect that OmniMetrix will continue to expand its sales and marketing team in the coming months.

OmniMetrix currently has no other sources of financing other than its internally generated sales and investments by Acorn. To support OmniMetrix's marketing and promotion program, Acorn has committed to invest $2.5 million into OmniMetrix of which $0.5 million has been invested through July 31, 2012 with the balance expected to be funded over the balance of 2012. As of July 31, 2012, OmniMetrix had cash on hand of approximately $0.6 million. We have no assurance that OmniMetrix will not need additional financing for working capital after we complete our $2.5 million additional investment. Additional financing for OmniMetrix may be in the form of a bank line, new investment by others, a loan or investment by Acorn, or a combination of the above. There is no assurance that such support will be available from such sources in sufficient amounts, in a timely manner or on acceptable terms. The availability and amount of any additional investment from us in OmniMetrix may be limited by the working capital needs of our corporate activities and other operating companies.

Corporate

Corporate general and administrative expense in the first half of 2012 reflected a $1.2 million increase to $2.7 million as compared to $1.5 million of expense in the first half of 2011. The increase is due primarily to professional fees and costs incurred associated with our acquisition of OmniMetrix (approximately $300,000) in February 2012 as well as increased investor relation activities and personnel costs and bonuses . Second quarter 2012 corporate general and administrative expense ($1.5 million) was approximately $0.2 million less than first quarter 2012's expense of $1.3 million primarily due to lower professional fees associated with our acquisition of OmniMetrix. We expect our corporate general and administrative costs to stay near its current level as we are maintaining a higher level of investor relation activities than we have historically.

In 2012, Acorn recorded an income tax benefit of $1.1 million with respect to an expected net operating loss carryback of its expected consolidated tax loss in 2012.




Results of Operations
The following table sets forth certain information with respect to the consolidated results of operations of the Company for the three and six month periods ended June 30, 2011 and 2012, including the percentage of total revenues during each period attributable to selected components of the operations statement data and for the period to period percentage changes in such

29


components. For segment data see Note 11 to the Unaudited Condensed Consolidated Financial Statements included in this quarterly report.
The financial results of OmniMetrix are included in our condensed consolidated financial statements effective February 15, 2012. Accordingly, there are no comparative results reported for these activities for the three and six month period ended June 30, 2011. In August 2011, we sold our interests in CoaLogix. Those results are reflected below as discontinued operations.
 
Six months ended June 30,
 
 
 
Three months ended June 30,
 
 
 
2011
 
2012
 
Change from 2011 to 2012
 
2011
 
2012
 
Change from 2011 to 2012
 
($,000)
 
% of revenues
 
($,000)
 
% of revenues
 
 
($,000)
 
% of revenues
 
($,000)
 
% of revenues
 
Revenues
$
7,202

 
100
 %
 
$
10,135

 
100
 %
 
41
 %
 
$
4,107

 
100%
 
$
5,900

 
100%
 
44%
Cost of sales
4,681

 
65
 %
 
7,346

 
72
 %
 
57
 %
 
2,760

 
67%
 
4,322

 
73%
 
57%
   Gross profit
2,521

 
35
 %
 
2,789

 
28
 %
 
11
 %
 
1,347

 
33%
 
1,578

 
27%
 
17%
R&D expenses
874

 
12
 %
 
3,017

 
30
 %
 
245
 %
 
384

 
9%
 
1,699

 
29%
 
342%
SG&A expenses
5,467

 
76
 %
 
8,619

 
85
 %
 
58
 %
 
2,724

 
66%
 
4,390

 
74%
 
61%
   Operating loss
(3,820
)
&