| • 10-Q • AT WILL EMPLOYMENT AGREEMENT • 31.1 CERTIFICATION OF CEO • 31.2 CERTFICATION OF CFO • 32.1 CERTIFICATION OF CEO • 32.2 CERTFICATION OF CFO • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q
Commission file number: 0-19771 ACORN ENERGY, INC. (Exact name of registrant as specified in charter)
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.
ACORN ENERGY, INC. Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 2012 TABLE OF CONTENTS
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)
1
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)
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)
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)
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)
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)
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:
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:
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:
12 NOTE 6—INVENTORY The composition of inventory is as follows:
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:
* 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:
* 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:
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
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.
A summary of stock option activity for the six months ended June 30, 2012 is as follows:
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:
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.
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
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:
* 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.
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:
Other operations include various operations in DSIT and OmniMetrix that do not meet the quantitative thresholds under applicable accounting principles. 20
21 Reconciliation of Segment Income (Loss) to Consolidated Net Loss
* 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.
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.
BACKLOG As of June 30, 2012, our backlog of work to be completed was as follows (amounts in millions of U.S. dollars):
RECENT DEVELOPMENTS
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).
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.
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.
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