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ACORN ENERGY, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
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.
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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.
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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.
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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
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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
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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 $1.1 million with respect to an
expected net operating loss carryback of its expected consolidated tax loss in
2012.
Results of Operations
The following table sets forth certain information with respect to the
consolidated results of operations of the Company for the three and six month
periods ended June 30, 2011 and 2012, including the percentage of total revenues
during each period attributable to selected components of the operations
statement data and for the period to period percentage changes in such
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components. For segment data see Note 11 to the Unaudited Condensed Consolidated
Financial Statements included in this quarterly report.
The financial results of OmniMetrix are included in our condensed consolidated
financial statements effective February 15, 2012. Accordingly, there are no
comparative results reported for these activities for the three and six month
period ended June 30, 2011. In August 2011, we sold our interests in CoaLogix.
Those results are reflected below as discontinued operations.
Six months ended June 30, Three months ended June 30,
Change
2011 2012 2011 2012 from
Change from 2011 to
($,000) % of revenues ($,000) % of revenues 2011 to 2012 ($,000) % of revenues ($,000) % of revenues 2012
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 ) (53 )% (8,847 ) (87 )% 132 % (1,761 ) (43)% (4,511 ) (76)% 156%
Finance expense,
net (217 ) (3 )% 107 1 % (149 )% (100 ) (2)% 130 2% (230)%
Gain on sale of
HangXing 492 7 % - - % (100 )% - -% - -%
Loss before
taxes on income (3,545 ) (49 )% (8,740 ) (86 )% 147 % (1,861 ) (45)% (4,381 ) (74)% 135%
Taxes on income (39 ) (1 )% 989 10 % (2,636 )% 26 1% 1,064 18% 3,992%
Loss from
continuing
operations (3,584 ) (50 )% (7,751 ) (76 )% 116 % (1,835 ) (45)% (3,317 ) (56)% 81%
Loss from
discontinued
operations, net
of income taxes (1,404 ) (19 )% - - % (100 )% (568 ) (14)% - -% (100)%
Non-controlling
interest share
of loss from
discontinued
operations 389 5 % - - % (100 )% 157 4% - -% (100)%
Net loss (4,599 ) (64 )% (7,751 ) (76 )% 69 % (2,246 ) (55)% (3,317 ) (56)% 48%
Net loss
attributable to
non-controlling
interests 303 4 % 461 5 % 52 % 167 4% 205 3% 23%
Net loss
attributable to
Acorn EnergyInc. $ (4,296 ) (60 )% $ (7,290 ) (72 )% 70 % $ (2,079 ) (51)% $ (3,112 ) (53)% 50%
Revenues. Revenues in the first half of 2012 increased by $2.9 million or 41%
from $7.2 million in the first half of 2011 to $10.1 million in the first half
of 2012. The increased revenues was driven primarily by increased revenues at
DSIT whose revenues increased by $1.9 million (40%) to $6.8 million compared to
first half 2011 revenues of $4.8 million and USSI revenues which increased by
$0.8 million (337%) to $1.1 million compared to first half 2011 revenues of $0.2
million. In addition, we recorded approximately $0.4 million of revenues
associated with our newly acquired OmniMetrix subsidiary. GridSense revenues
decreased by $0.2 million (11%) to $1.9 million compared to first half 2011
revenues of $2.1 million.
The increase in DSIT revenues was primarily due to progress on a major
AquaShieldTM DDS order (valued at $12.3 million) which was received in the end
of 2011. The increase in USSI revenues was due to the delivery in the second
quarter of 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) a fiber-optic
based marine seismic array for oil & gas exploration to an international service
provider. The decrease in GridSense revenues was primarily due to 2011 revenues
including the beginning of the fulfillment a major order of transformer monitors
to a southeastern US electric utility which began in the second quarter of 2011
and ended in the fourth quarter of 2011.
.
Gross profit. Gross profit in the first half of 2012 reflected an increase of
$0.3 million (11%) as compared to the first half of 2011 as gross profit
increased from $2.5 million to $2.8 million. DSIT's first half 2012 gross profit
increased by $0.7 million
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(37%) over first half 2011 gross profit. The increase in DSIT's gross profit was
attributable to increased revenues. DSIT's gross margin deteriorated slightly
from 38% in 2011 to 37% in 2012. DSIT's decreased gross margin in 2012 was due
to lower margin projects being worked on in 2012 as compared to 2011.
GridSense's first half 2012 gross profit decreased by $179,000 (18%) compared to
first half 2011 gross profit. The decrease in GridSense's gross profit was
attributable to decreased revenues as well as reduced gross margins which
deteriorated to 43% in 2012 from 47% in 2011. GridSense's decreased gross
margins in 2012 was attributable to higher shipping costs and raw materials
costs due to purchases made in smaller lot sizes in 2012 as well as certain
fixed costs being spread over a larger revenue base in 2011. USSI continued to
show a negative gross profit ($605,000, an increase of $308,000 compared to the
negative gross profit in the first half of 2011) as it continues to incur 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. In addition, we
recorded approximately $75,000 of gross profit associated with our newly
acquired OmniMetrix subsidiary.
Research and development ("R&D") expenses. R& D expenses increased $2.1 million
from $0.9 million in the first half of 2011 to $3.0 million in the first half of
2012. R&D expenses increased at all companies with most of the increase ($1.5
million) being attributed to USSI from an increase in its engineering headcount
as well as an increase in R&D materials used in product development. Increased
R&D expense at GridSense ($0.4 million) and at DSIT ($0.2 million) were due to
GridSense adding to its engineering team in order to accelerate development of
projects and DSIT's preliminary work on joint development (with USSI) of the
next generation integrated passive/active threat detection system for underwater
site protection.
Selling, general and administrative expenses ("SG&A"). SG&A costs in the first
half of 2012 increased by $3.2 million as compared to the first half of 2011.
DSIT's SG&A decreased slightly ($1.6 million in the first half of 2011 compared
to $1.5 million in the first half of 2012), the decrease being attributable to
decreased marketing costs and a weakening of the NIS. Both GridSense and USSI
recorded increases in SG&A expenses. GridSense recorded an increase of $0.5
million (29%) while USSI recorded an increase of $0.8 million (121%).
GridSense's increased SG&A expense was attributable to increased personnel costs
as it increased its employee count by eight full-time employees. USSI's
increased SG&A expense was attributable to increased sales and marketing
activities combined with the costs of additional personnel. Corporate general
and administrative costs increased by $1.2 million from $1.5 in the first half
of 2011 to $2.7 million in the first half of 2012 primarily due to professional
fees and costs incurred in the acquisition of OmniMetrix (approximately
$300,000) as well as increased investor relations and personnel costs.
Additionally, $0.8 million of the increase in SG&A costs is due to the inclusion
of OmniMetrix SG&A costs in the first half of 2012.
Gain on sales of HangXing. In March 2011, we sold our 25% interest in HangXing
International Automation Engineering Co. Ltd. ("HangXing") back to the majority
owner, China Aero-Polytechnology Establishment for $492,000.
Taxes on income. 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.
Loss from discontinued operations. In August 2011, we sold our entire investment
in CoaLogix. Accordingly, all of CoaLogix' activity for the first six months of
2011 (a loss of $1.4 million prior to attribution of $0.4 million to
non-controlling interests) is presented as a loss from discontinued operations.
Net loss. We had a net loss of $7.3 million in the first half of 2012 compared
with net loss of $4.3 million in the first half of 2011. Our loss in 2012 was
primarily due to GridSense, USSI and OmniMetrix (in the period since our
acquisition) losses of $2.1 million, $3.8 million and $0.8 million, respectively
with corporate expenses contributing an additional $2.7 million. These losses
were offset by DSIT's profit of approximately $0.4 million for the first half of
2012, Acorn's income tax benefit of $1.1 million with respect to its expected
net operating loss carryback and the non-controlling interest's share of our
operations of approximately $0.5 million.
Liquidity and Capital Resources
As of June 30, 2012, we had working capital of $45.6 million. Our working
capital includes $14.8 million of cash and cash equivalents, $18.0 million of
short-term deposits, $6.0 million of funds held in escrow which are expected to
be released in August 2012 and restricted deposits of approximately $1.9
million. Net cash decreased during the six months ended June 30, 2012 by $19.5
million, of which approximately $9.9 million was used in operating activities.
The primary use of cash in operating activities during the first six months of
2012 was the cash used in operations by our subsidiaries ($4.1 million, $2.0
million, $0.6 million and $0.3 million used by USSI, GridSense, DSIT and
OmniMetrix, respectively) in their operations combined with the $2.9 million of
cash used in our corporate operating activities.
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Cash used in investment activities of $8.2 million was primarily due to the net
cash used in the acquisition of OmniMetrix ($7.8 million), the acquisition of
property and equipment and a license ($0.5 million) and amounts used to fund
severance liabilities ($0.2 million). These uses of cash were partially offset
by the release, net of approximately $0.3 million of restricted deposits during
the first six months.
Net cash of $1.4 million was used in financing activities, primarily from the
payment of dividends during the first six months of 2012 ($2.1 million) and the
repayment of short and long-term debt, net of new borrowings ($0.5 million)
which was partially offset by the proceeds from the exercise of options ($1.3
million).
At June 30, 2012, DSIT had approximately $0.1 million of unrestricted cash in
banks and NIS 4 million (approximately$1.0 million) in Israeli credit lines
available to it from two Israeli banks (approximately $510,000 from each bank),
none of which was then being used. The lines-of-credit are subject to
maintaining certain financial covenants. At June 30, 2012, DSIT was in
compliance with its financial covenants.
As at June 30, 2012, DSIT also had an outstanding term loan from an Israeli bank
in the amount of approximately $202,000. The loan is denominated in NIS and
bears interest at the rate of the Israeli prime rate per annum plus 0.9%. The
loan is to be repaid in equal payments of approximately $12,000 per month
(principal and interest) through December 2013.
As collateral for the term-loan, DSIT has deposited with an Israeli bank
approximately $81,000 as a non-current restricted deposit. In addition to this
restricted deposit, DSIT has also deposited with two Israeli banks approximately
$2.1 million as collateral for various performance and bank guarantees for
various projects as well as for its credit facilities at the banks. DSIT expects
that most of these deposits will be released during the next twelve months, but
expects to redeposit a majority of these funds again as collateral for new
guarantees for new projects and for renewing its credit facilities.
On July 31, 2012, DSIT had approximately $2.3 million of cash of which $2.2
million was restricted ($1.9 million current and $0.3 million non-current) and
was utilizing approximately $0.1 million of its lines-of-credit. We believe that
DSIT will have sufficient liquidity to finance its current level of activities
from cash flows from its own operations over the next 12 months. This is based
on continued utilization of its line-of-credit and its operating results.
However, from time to time, DSIT may encounter cash flow difficulties arising
from the timing of its milestones which triggers a billing. In addition, DSIT
may require additional financing for a planned expansion of its marketing and
development programs for the balance of 2012 and into 2013. This financing may
be in the form of an expansion of a bank line, new investment by others,
additional investment or loan by Acorn, or a combination of the above. The
availability and amount of any additional investment from us in DSIT may be
limited by the working capital needs of our corporate activities and the
financing requirements of our other operating companies. On July 30, 2012, Acorn
transferred $0.5 million to DSIT for working capital support and to help finance
the expansion of its marketing and development programs. This follows a $1.0
million transfer to DSIT in May 2012.
As at July 31, 2012, GridSense had approximately $150,000 of cash on hand. We
expect that GridSense will continue to require working capital support while it
works on increasing its sales. Acorn continues to provide funds for GridSense's
working capital needs and expects to do so in the future. During the period from
January 1 to July 31, 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. This support may
be in the form of a bank line, new investment by others, additional investment
or loan 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 the
financing requirements of our other operating companies.
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 than its internally generated sales and investments by Acorn. In
July 2012, we purchased additional USSI Preferred Stock in accordance with the
Summer USSI Purchase Agreement and invested an additional $2.5 million in USSI
(see Recent Developments). This followed an earlier investments in USSI during
2012 of $5.25 million. As of 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.
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
has begun 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 USSI may be
limited by the working capital needs of our corporate activities and the
financing requirements of our other operating companies.
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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.
As at July 31, 2012, the Company's corporate operations (not including cash at
any of our subsidiaries) had a total of approximately $13.1 million in cash and
cash equivalents, virtually unchanged from our balance as of June 30, 2012.
During the month of July, we received $4.0 million proceeds from a maturing
CDAR. During the month, we also made an additional investment in USSI of $2.5
million (see Recent Developments), $0.5 million investment in OmniMetrix,
advanced $0.5 million to DSIT and incurred approximately $0.5 million of
corporate expenses.
We believe that our current cash plus the cash generated from operations and
borrowing from available lines of credit, if necessary, will provide more than
sufficient liquidity to finance the operating activities of Acorn and the
operations of its operating subsidiaries at their current level of operations
for the foreseeable future and for the next 12 months in particular.
Contractual Obligations and Commitments
The table below provides information concerning obligations under certain
categories of our contractual obligations as of June 30, 2012.
CASH PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS
Years Ending June 30,
(in thousands)
2018 and
Total 2013 2014 - 2015 2016 - 2017 thereafterBank and other debt,
utilized lines-of-credit
and capital leases $ 224 $ 149 $ 75 $ - $ -
Operating leases 1,992 849 900 239 4
Potential severance
obligations (1) 3,949 - 951 321 2,677
Minimum royalty payments
(2) 500 50 100 100 250
Total contractual cash
obligations $ 6,665 $ 1,048 $ 2,026 $ 660 $ 2,931
We expect to finance these contractual commitments from cash currently on hand
and cash generated from operations.
(1) Under Israeli law and labor agreements, DSIT is required to make severance
payments to dismissed employees and to employees leaving employment under
certain other circumstances. The obligation for severance pay benefits, as
determined by the Israeli Severance Pay Law, is based upon length of service and
last salary. These obligations are substantially covered by regular deposits
with recognized severance pay and pension funds and by the purchase of insurance
policies. As of June 30, 2012, we accrued a total of $3.9 million for potential
severance obligations to our Israeli employees of which approximately $2.7
million was funded.
(2) In April 2012, USSI and Northrop Grumman signed a license agreement
involving several of Northrop Grumman's fiber-optic technology patents. The
license agreement is subject to an annual minimum royalty payment of 10% of the
net selling price of each unit of licensed products used or sold during the term
of the agreement. The agreement also calls for a minimum annual payment of
$50,000 for the first ten years of the agreement beginning in 2012. The table
above includes as a royalty payment only the minimum payment due.
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