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ACORN ENERGY, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[November 07, 2012]

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.

FINANCIAL RESULTS BY COMPANY The following table shows, for the periods indicated, the financial results (dollar amounts in thousands) 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 nine month periods ended September 30, 2011.

Nine months ended September 30, 2012 DSIT OmniMetrix GridSense USSI Acorn Total Revenues $ 10,034 $ 952 $ 2,884 $ 1,317 $ - $ 15,187 Cost of Sales 6,401 592 1,643 2,089 - 10,725 Gross profit 3,633 360 1,241 (772 ) - 4,462 Gross profit margin 36 % 38 % 43 % (59 )% 29 % R& D expenses, net of credits 789 208 1,114 2,660 - 4,771 Selling, general and administrative expenses 2,224 1,533 3,509 2,598 4,027 13,891 Operating income (loss) $ 620 $ (1,381 ) $ (3,382 ) $ (6,030 ) $ (4,027 ) $ (14,200 ) Nine months ended September 30, 2011 DSIT OmniMetrix GridSense USSI Acorn Total Revenues $ 6,686 $ - $ 4,684 $ 883 $ - $ 12,253 Cost of Sales 4,486 - 2,451 989 - 7,926 Gross profit 2,200 - 2,233 (106 ) - 4,327 Gross profit margin 33 % 48 % (12 )% 35 % R& D expenses, net of credits 428 - 525 634 - 1,587 Selling, general and administrative expenses 2,375 - 2,565 1,158 2,511 8,609 Operating loss $ (603 ) $ - $ (857 ) $ (1,898 ) $ (2,511 ) $ (5,869 ) Three months ended September 30, 2012 DSIT OmniMetrix GridSense USSI Acorn Total Revenues $ 3,271 $ 570 $ 977 $ 234 $ - $ 5,052 Cost of Sales 2,141 284 553 401 - 3,379 Gross profit 1,130 286 424 (167 ) - 1,673 Gross profit margin 35 % 50 % 43 % (71 )% 33 % R& D expenses, net of credits 333 137 427 857 - 1,754 Selling, general and administrative expenses 750 699 1,320 1,205 1,298 5,272 Operating income (loss) $ 47 $ (550 ) $ (1,323 ) $ (2,229 ) $ (1,298 ) $ (5,353 ) Three months ended September 30, 2011 DSIT OmniMetrix GridSense USSI Acorn Total Revenues $ 1,872 $ - $ 2,544 $ 635 $ - $ 5,051 Cost of Sales 1,492 - 1,307 445 - 3,244 Gross profit 380 - 1,237 190 - 1,807 Gross profit margin 20 % 49 % 30 % 36 % R& D expenses, net of credits 158 - 250 305 - 713 Selling, general and administrative expenses 791 - 872 530 949 3,142 Operating income (loss) $ (569 ) $ - $ 115 $ (645 ) $ (949 ) $ (2,048 ) 7-------------------------------------------------------------------------------- Table of Contents BACKLOG As of September 30, 2012, our backlog of work to be completed was as follows (amounts in millions of U.S. dollars): DSIT Solutions $ 9.2 GridSense 0.9 OmniMetrix 0.4 USSI 1.2 Total $ 11.7 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, Acorn would receive a further payment for such shares ratably with all other USSI Common Stock holders as though Acorn's shares of USSI Preferred Stock were the same number of shares of USSI Common Stock.

On November 1, 2012, Acorn made an additional investment of $2.5 million in exchange for additional shares of USSI Preferred Stock under the Summer USSI Purchase Agreement. Following the November 1, 2012 payment to USSI, Acorn would own approximately 94.4% of USSI upon conversion of the USSI Preferred Stock (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 October 23, 2012, the Company's Board of Directors approved a fourth quarter 2012 dividend of $0.035 per share to be paid on December 3, 2012 to common stockholders of record on November 15, 2012.

8-------------------------------------------------------------------------------- Table of Contents 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 nine month periods ended September 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 nine months of 2012 as compared to the first nine months of 2011 as well as increased gross profit, gross margin and net income. DSIT's revenues of $10.0 million for the first nine months of 2012 represents an increase of approximately $3.3 million or 50% as compared to the first nine months of 2011. Third quarter 2012 revenues of $3.3 million also reflected an increase of $1.4 million or 75% compared to third quarter 2011 revenues of $1.9 million. The increased revenues for both the first nine months of 2012 and the third quarter of 2012 was due to increased revenues in our Energy & Sonar Security Solutions segment which reported first nine month 2012 revenues of $9.2 million compared to $5.7 million in the first nine months of 2011 and $3.0 million in the third quarter of 2012 versus $1.6 million in the third quarter 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. DSIT expects work on this project to continue into mid 2013.

DSIT's gross profit in the first nine months of 2012 increased by approximately $1.4 million or 65% compared to first nine months 2011 gross profit. The increase in gross profit was attributable to the abovementioned increase in revenues combined with an increase in the gross margin over the period. Gross margins increased in the first nine months of 2012 to 36% as compared to 33% in the first nine months of 2011. Third quarter 2012 gross margin of 35% was also significantly above third quarter 2011 gross margin of 20%. The increase in the gross margin was attributable to higher margin projects being worked on in 2012 as compared to 2011 as well as the 2011 gross margin being negatively impacted by increased costs associated with technical difficulties encountered in a number of projects.

In June 2012, DSIT together with USSI were awarded a joint $900,000 grant from the Israel-United States Binational Industrial Research and Development ("BIRD") Foundation for the joint development of the next generation integrated passive/active threat detection system for underwater site protection. In October 2012, a Cooperation and Project Funding Agreement was signed between the companies and the BIRD Foundation which allows for the commencement of the funding which is expected to take place over a 24 month period. DSIT anticipates receipt of a majority (approximately 60%) of the grant based on the expected allocation of project costs between DSIT and USSI. The first advance payment from the BIRD Foundation of approximately $110,000 is expected to be received during the fourth quarter of 2012.

9-------------------------------------------------------------------------------- Table of Contents During the first nine months of 2012, DSIT recorded approximately $0.8 million of Research and Development (R&D) expense, an increase of approximately $0.4 million compared to the first nine months of 2011. R&D expense was $0.3 million and $0.2 million during the third quarters of 2012 and 2011, respectively. The increase is primarily attributable in part to work on joint development (with USSI) of the next generation integrated passive/active threat detection system for underwater site protection and efforts to expand DSIT's portfolio of products. DSIT anticipates that its R&D costs will increase above its current levels for the foreseeable future.

During the first nine months of 2012, DSIT recorded approximately $2.2 million of selling, general and administrative (SG&A) expense; approximately $0.2 million or 6% below the $2.4 million recorded in the first nine months of 2011.

Third quarter 2012 SG&A of $0.7 million was slightly below third quarter 2011 SG&A of $0.8 million. The decreases are due to decreased marketing costs in 2012 as 2011 (particularly the first half of 2011) had a relatively high number of product demonstrations as well as a weaker New Israeli Shekel (NIS) during the periods which decreased our NIS expenses when reported in U.S. dollars. DSIT anticipates that its marketing costs will increase above its current levels for the foreseeable future.

At December 31, 2011, DSIT had a backlog of approximately $13.6 million. During the first nine months of 2012, we received new orders totaling approximately $4.7 million and at the end of September 2012 had a backlog of approximately $9.2 million.

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

GridSense In the first nine months of 2012, GridSense reported revenues of $2.9 million, a decrease of $1.8 million (38%) compared to first nine month 2011 revenues of $4.7 million. Third quarter 2012 revenues of $1.0 million represents a decrease of $1.6 million (62%) compared to third quarter 2011 revenues. During the first nine months of 2012 compared to the first nine months of 2011, GridSense reported reduced revenues in both the United States and in Australia with revenues decreasing from $2.1 million to $1.5 million in the United States and from $2.6 million to $1.4 million in Australia. The decreased revenues in the United States during 2012 compared to 2011 was attributable to approximately $1.5 million of revenue 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. Revenue from this customer decreased to approximately $0.2 million in 2012. The decreased revenues in Australia during 2011 compared to 2012 was primarily attributable to approximately $0.7 million of revenue recorded from a single customer in 2011 which provided negligible revenue in 2012. In addition, there were limited sales from three major utility customers in New South Wales due to a restructuring by the State government to bring these three entities under a single new state owned corporation. Management expects spending from these three utilities to return to normal levels in 2013.

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 forty around the globe.

We expect that many of these paid pilot projects could result is substantial commercial rollouts, in the fourth quarter of 2012 and into 2013. GridSense's recently announced initial order of 500 TransformerIQTM advanced monitoring units (valued at approximately $1.0 million) to a major California utility is an example of a paid pilot project developing into a commercial rollout. This order represents an early phase of the utility's rollout plan and we expect it to be processed and shipped in the fourth quarter of 2012.

GridSense's gross profit in the first nine months of 2012 decreased by approximately $1.0 million or 44% compared to first nine months 2011 gross profit. GridSense's gross profit in the third quarter of 2012 decreased by approximately $0.8 million or 66% compared to third quarter 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 nine months of 2012 to 43% as compared to 48% in the first nine months of 2011. In the third quarter of 2012, GridSense's gross margin decreased from 49% in 2011 to 43% in 2012. The decrease in gross margin during the first nine months and third quarter of 2012 was attributable to product delays of the latest version of the company's line monitoring platform which resulted in the fulfillment of orders based on the higher costing predecessor product. Also, additional costs were incurred in freight as the company began shifting production from its Sydney facility to its Sacramento facility. The transfer of production of all products will be complete before the end of the year and will result in greater production efficiencies and cost savings in the long term.

10-------------------------------------------------------------------------------- Table of Contents In the first nine months of 2012, GridSense recorded $1.1 million of R&D expense as compared to $0.5 million in the first nine months of 2011. Third quarter 2012 R& D expense was $0.4 million compared to $0.3 million in the third quarter of 2011. During 2012, GridSense added to its engineering team in order to accelerate the development of some key projects that GridSense believes will lead to the generation of new revenues. We expect that R&D expenses going forward will approximate those of the third quarter of 2012.

During the first nine months of 2012, GridSense recorded approximately $3.5 million of SG&A expense representing an increase of approximately $0.9 million (37%) compared to first nine months 2011 SG&A expense of $2.6 million. Third quarter SG&A expense increased from $0.9 million in 2011 to $1.3 million in 2012 (51%). The increased SG&A costs for both the first nine months and the third quarter are primarily due to increased salary costs associated with additional sales, marketing, administrative and accounting staff as well as increased advertising and marketing related expenses, increased facility expenses and increased professional fees. We do not expect SG&A costs to change significantly in coming periods.

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 August 3, 2012, we committed to fund an additional $3.0 million to GridSense (the "Commitment"), payable in increments as we deem necessary during the balance of 2012 and during 2013. During the period from August 3, 2012 to October 31, 2012, we transferred $2.1 million of this Commitment. On August 20, 2012, GridSense signed a Loan and Security Agreement with a bank to provide it with up to a $1.0 million revolving line of credit (subject to a calculated borrowing base). GridSense cannot draw on the line of credit until the bank completes its review and approves GridSense's 2013 business plan. The line-of-credit is also subject to certain financial covenants.

On October 31, 2012, GridSense had cash on hand of approximately $270,000. We have no assurance that GridSense will increase its sales or reduce its need for additional financing to support its working capital needs following the remaining funding by us under the Commitment. Additional working capital support may be in the form of an additional or expanded bank line, new investment by others, additional investment or loans by Acorn, or a combination of the above.

There is no assurance that GridSense will be able to obtain an additional or expanded 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 GridSense may be limited by the working capital needs of our corporate activities and other operating companies.

USSI In the first nine months of 2012, USSI reported revenues of $1.3 million, an increase of $0.4 million (49%) compared to first nine months of 2011 revenues of $0.9 million. The increased 2012 revenues compared to 2011 revenues was attributable to the revenue recognized in 2012 on six different projects (four of which were energy related proof-of-concept projects) whereas in the first nine months of 2011, USSI recognized revenue on just three different projects (only one of which was energy related). The revenue recognized in 2012 included two large proof of concept projects: 1) a 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 contributed over $0.8 million to USSI's 2012 revenue.

Third quarter 2012 revenues of $234,000 reflects a $401,000 (63%) decrease compared to third quarter 2011 revenues of $635,000. The decrease in revenues is primarily attributable to the revenue associated with the completion of a major U.S. Government project in the third quarter of 2011. The decrease in third quarter 2012 revenue as compared to third quarter 2011 was solely due to the number and size of projects that USSI was able to complete and deliver during the respective quarters.

In the first nine months of 2012, gross profit continued to be negative ($772,000) as it was in the first nine months of 2011 ($106,000). The negative gross profit is primarily due to large amounts of up front non-recurring engineering design costs ("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 2012.

USSI's recorded negative gross profit in the third quarter of 2012 of $167,000 compared to a gross profit of $189,000 in the third quarter of 2011. The increase in USSI's negative gross profit was primarily attributable to the amount of Q3 2012 NRE on a prototype defense project.

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 and product designs that will ultimately result in less man-hours required for each product sold. We cannot at this time determine when the impact of these improved production processes and product designs will ultimately produce improved gross margins as each of our proof- 11-------------------------------------------------------------------------------- Table of Contents of-concept projects has its own unique NRE design costs associated with it. We believe that upon receipt of a follow-up order on one of our proof-of-concept projects, we will realize significantly greater efficiencies in production.

During the first nine months of 2012, USSI recorded approximately $2.7 million of research and development ("R&D") expense as compared to $0.6 million in the first nine months of 2011. During the third quarter of 2012, USSI recorded approximately $0.9 million of R&D expense as compared to $0.3 million in the third quarter 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 third quarter of 2012 as USSI continues to internally develop more efficient production versions of its current products and adds additional engineering headcount to continue its development of multiple product offerings.

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. In October 2012, a Cooperation and Project Funding Agreement was signed between the companies and the BIRD Foundation which allows for the commencement of the funding which is expected to take place over a 24 month period. USSI anticipates receipt of a approximately 40% of the grant based on the expected allocation of project costs between DSIT and USSI. The first advance payment from the BIRD Foundation of approximately $70,000 was received in October 2012.

During the first nine months of 2012, USSI recorded approximately $2.6 million of SG&A expense representing an increase of approximately $1.4 million (124%) compared to the first nine months of 2011. Third quarter 2012 SG&A expense ($1.2 million) also reflects an increase of $0.7 million over third quarter 2011 SG&A expense of $0.5 million.The increased SG&A costs are due to increased sales and marketing activities combined with the costs of additional administrative personnel. In addition, both the three and nine month SG&A costs of 2012 include approximately $0.2 million of non-cash stock compensation expense associated with USSI's stock option plan. Excluding non-cash stock compensation costs, we expect near term SG&A costs to approximate those for the third quarter of 2012.

As at September 30, 2012, USSI's backlog of projects was approximately $1.2 million which is comprised of three energy related proof-of-concept projects.

USSI anticipates recognizing the revenue associated with these projects over the next two quarters. Actual revenue recognition for these projects may be over a longer period of time depending upon USSI's ability to obtain delivery of raw materials with long lead times on a timely basis from its suppliers and control NRE costs. We continue to anticipate significant growth in orders, 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 a leveling off of our growing personnel costs as the pace of our personnel growth is expected to slow down. In 2012, we have grown our employee base from 28 full-time employees (inclusive of consultants) at the end of 2011 to 50 full-time employees (inclusive of consultants) as of October 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 continues to work on refining its manufacturing capabilities. USSI currently has no other sources of financing other 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.

On November 1, 2012, Acorn made an additional investment of $2.5 million in exchange for additional shares of USSI Preferred Stock under the Summer USSI Purchase Agreement. On November 1, 2012, following this additional investment, USSI had cash on hand of approximately $2.8 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 or nine month periods ended September 30, 2011.

During the period following our acquisition, we reported revenues of approximately $952,000 ($570,000 in the third quarter) and an operating loss of $1,381,000 ($550,000 in the third quarter) with respect to OmniMetrix activities. OmniMetrix' 12-------------------------------------------------------------------------------- Table of Contents third quarter revenue of $570,000 reflects an increase of $343,000 as compared to the second quarter's reported revenue of $227,000. Both OmniMetrix' Power Generation ("PG") and Cathodic Protection ("CP") activities recorded increased revenues. The PG activities revenue increase ($156,000) was driven primarily by increased monitoring revenue whereas the CP activities revenue increase ($187,000) was driven primarily by increased sales of CP monitoring units.

Since our acquisition, OmniMetrix has engaged in developing a major marketing and promotion program to increase the penetration rate of its PG 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.

OmniMetrix has hired additional personnel growing since our acquisition from 11 employees (one of which was in sales) to 27 employees (inclusive of consultants) at October 31, 2012, seven of which are sales and marketing personnel. We expect that the level of personnel growth at OmniMetrix will level off 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 $1.5 million has been invested through October 31, 2012 with the balance expected to be funded over the balance of 2012.

As of October 31, 2012, OmniMetrix had cash on hand of approximately $1.2 million. We have no assurance that OmniMetrix will not need additional financing for working capital after we complete our $2.5 million additional investment. A significant portion of the remaining $1.0 investment in OmniMetrix is expected to be used to grow its inventory of PG monitoring units in anticipation of increased deliveries of PG units to customers as a result of its marketing and promotion program. 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. OmniMetrix 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 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 nine months of 2012 reflected a $1.5 million increase to $4.0 million as compared to $2.5 million of expense in the first nine months 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. Third quarter 2012 corporate general and administrative expense was $1.3 million reflecting an increase of approximately $0.3 million compared to the third quarter of 2011.

The increase in third quarter 2012 corporate general and administrative expense compared to third quarter 2011's balance was due to increased personnel costs and investor relation activities which offset a decrease in professional fees which were higher in the third quarter of 2011 due to our CoaLogix transaction.

Third quarter 2012 corporate general and administrative expense was unchanged compared to the second quarter 2012 corporate general and administrative expense. We expect our corporate general and administrative costs to stay near or increase slightly from its current level as fourth and first quarter costs tend to be higher than second and third quarter costs due to year end closing costs.

In the third quarter 2012, Acorn recorded an income tax benefit of approximately $1.5 million ($2.6 million with respect to the nine months ended September 30, 2012) with respect to a 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 nine month periods ended September 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 components. For segment data see Note 11 to the Unaudited Condensed Consolidated Financial Statements included in this quarterly report.

13-------------------------------------------------------------------------------- Table of Contents 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 nine month periods ended September 30, 2011. In August 2011, we sold our interests in CoaLogix. Those results are reflected below as discontinued operations.

Nine months ended September 30, Three months ended September 30, Change 2011 2012 Change 2011 2012 from from 2011 2011 to ($,000) % of revenues ($,000) % of revenues to 2012 ($,000) % of revenues ($,000) % of revenues 2012 Revenues $ 12,253 100 % $ 15,187 100 % 24 % $ 5,051 100% $ 5,052 100% -% Cost of sales 7,926 65 % 10,725 71 % 35 % 3,244 64% 3,379 67% 4% Gross profit 4,327 35 % 4,462 29 % 3 % 1,807 36% 1,673 33% (7)% R&D expenses 1,587 13 % 4,771 31 % 201 % 713 14% 1,754 35% 146% SG&A expenses 8,609 70 % 13,891 91 % 61 % 3,142 62% 5,272 104% 68% Operating loss (5,869 ) (48 )% (14,200 ) (94 )% 142 % (2,048 ) (41)% (5,353 ) (106)% 161% Finance income (expense), net 46 - % (53 ) - % (215 )% 262 5% (160 ) (3)% (161)% Gain on sale of HangXing 492 4 % - - % (100 )% - -% - -% Loss before taxes on income (5,331 ) (44 )% (14,253 ) (94 )% 167 % (1,786 ) (35)% (5,513 ) (109)% 209% Income tax benefit 12,072 99 % 2,476 16 % (79 )% 12,111 240% 1,487 29% (88)% Income (loss) from continuing operations 6,741 55 % (11,777 ) (78 )% (275 )% 10,325 204% (4,026 ) (80)% (139)% Loss from discontinued operations, net of income taxes (1,948 ) (16 )% - - % (100 )% (544 ) (11)% - -% (100)% Gain on the sale of discontinued operations, net of income taxes 30,683 250 % - - % (100 )% 30,683 607 % - -% (100)% Non-controlling interest share of loss from discontinued operations 540 4 % - - % (100 )% 151 3% - -% (100)% Net income (loss) 36,016 294 % (11,777 ) (78 )% (133 )% 40,615 804% (4,026 ) (80)% (110)% Net loss attributable to non-controlling interests 484 4 % 737 5 % 52 % 181 4% 276 5% 52% Net income (loss) attributable to Acorn Energy Inc. $ 36,500 298 % $ (11,040 ) (73 )% (130 )% $ 40,796 808% $ (3,750 ) (74)% (109)% Revenues. Revenues in the first nine months of 2012 increased by $2.9 million or 24% from $12.3 million in the first nine months of 2011 to $15.2 million in the first nine months of 2012. The increase in revenues was driven primarily by increased revenues at DSIT whose revenues increased by $3.3 million (50%) to $10.0 million compared to first nine month 2011 revenues of $6.7 million and USSI revenues which increased by $0.4 million (49%) to $1.3 million compared to first nine month 2011 revenues of $0.9 million. In addition, we recorded approximately $1.0 million of revenues associated with our newly acquired OmniMetrix subsidiary. GridSense revenues decreased by $1.8 million (38%) to $2.9 million compared to first nine month 2011 revenues of $4.7 million.

Third quarter 2012 revenue of $5.1 million was unchanged from third quarter 2011 revenue. DSIT's third quarter 2012 revenue increased 75% to $3.3 million compared to third quarter 2011 revenue. Both GridSense and USSI recorded revenue decreases in when comparing the third quarter of 2012 to 2011. GridSense revenues decreased by $1.6 million (62%) to $1.0 million in the third quarter of 2012 while USSI revenue decreased by $0.4 million (63%) to $0.2 million in the third quarter of 2012. In addition, we recorded approximately $0.6 million of revenues associated with our newly acquired OmniMetrix subsidiary in the third quarter of 2012.

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 for the nine months ended September 30, 2012 14-------------------------------------------------------------------------------- Table of Contents was due to the increase in the number of proof-of-concept projects being worked on in 2012 as compared to 2011. The decrease in USSI's quarter on quarter revenue was due to USSI executing on smaller proof-of-concept projects in its backlog after delivering two very large systems in the second quarter of 2012.

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 combined with decreased revenues in Australia due to a restructuring by the New South Wales government of three major utilities into a a single new state owned corporation.

Gross profit. Gross profit during the first nine months of 2012 of $4.5 million reflected a slight increase of $135,000 (3%) as compared to the first nine months of 2011. DSIT's first nine months of 2012 gross profit increased by $1.4 million (65%) over first nine months 2011 gross profit. The increase in DSIT's gross profit was attributable to increased revenues as well as an increased gross margin. DSIT's gross margin improved from 33% in 2011 to 36% in 2012.

DSIT's improved gross margin in 2012 was due to higher margin projects being worked on in 2012 as compared to 2011. GridSense's first nine months 2012 gross profit decreased by $1.0 million (44%) compared to first nine months 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 48% in 2011. USSI continued to show a negative gross profit ($772,000, an increase of $666,000 compared to the negative gross profit in the first nine months of 2011) as it continues to incur large amounts of up front engineering design costs (non-recurring engineering costs) for its proof-of-concept projects. In addition, we recorded approximately $360,000 of gross profit associated with our newly acquired OmniMetrix subsidiary during the period since our acquisition in February through September 30, 2012.

Gross profit during the third quarter of 2012 of $1.7 million reflects a decrease of $0.1 million (7%) as compared to the third quarter of 2011. DSIT's third quarter gross profit increased by $0.8 million (197%) over third quarter 2011 gross profit. The increase in quarter-on-quarter DSIT gross profit was attributable to increased revenues as well as an increased gross margin. DSIT's gross margin improved from 20% in 2011 to 35% in 2012. DSIT's improved gross margin in 2012 was due to higher margin projects being worked on in 2012 as compared to 2011 as well as the 2011 gross margin being negatively impacted by increased costs associated with technical difficulties encountered in a number of projects. GridSense's third quarter gross profit decreased by $0.8 million (66%) compared third quarter 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 49% in 2011. GridSense's decreased gross margins in 2012 was attributable to delays in product launch and additional logistical expenses incurred in the transfer of production from one facility to another. USSI had a negative gross profit in the third quarter of 2012 of $167,000 compared to a positive gross profit of $190,000 in the third quarter of 2011. The decrease in USSI's gross profit was attributable to the amount of non-recurring engineering costs incurred on a prototype defense project. OmniMetrix reported gross profit of $286,000 during the third quarter of 2012.

Research and development ("R&D") expenses. R& D expenses increased $3.2 million from $1.6 million in the first nine months of 2011 to $4.8 million in the first nine months of 2012. R&D expenses increased at all companies with most of the increase ($2.0 million) being attributable 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 ($0.6 million) and at DSIT ($0.4 million) were due to GridSense adding to its engineering team in order to accelerate development of projects and DSIT's work on joint development (with USSI) of the next generation integrated passive/active threat detection system for underwater site protection and efforts to expand DSIT's portfolio of products.

Selling, general and administrative expenses ("SG&A"). SG&A costs in the first nine months of 2012 increased by $5.3 million (61%) as compared to the first nine months of 2011. The inclusion of OmniMetrix' SG&A costs contributed approximately $1.5 million of this increase. DSIT's SG&A decreased slightly ($2.4 million in the first nine months of 2011 compared to $2.2 million in the first nine months 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 $0.9 million (37%) while USSI recorded an increase of $1.4 million (124%). GridSense's increased SG&A expense was primarily attributable to increased personnel costs as increased advertising and marketing related expenses. USSI's increased SG&A expense was attributable to increased sales and marketing activities combined with the costs of additional personnel. USSI's increased SG&A expense also includes approximately $0.2 million of non-cash stock compensation expense associated with USSI's stock option plan. Corporate general and administrative costs increased by $1.5 million from $2.5 in the first nine months of 2011 to $4.0 million in the first nine months 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.

SG&A costs in the third quarter of 2012 increased by $2.1 million (68%) as compared to third quarter of 2011. The inclusion of OmniMetrix' SG&A costs contributed approximately $0.7 million of this increase. DSIT's SG&A decreased slightly ($0.8 million in the third quarter of 2011 compared to $0.7 million in the third quarter of 2012), due to a weaker NIS in 2012. Both GridSense and USSI recorded increases in SG&A expenses. GridSense recorded an increase of $0.4 million while USSI recorded an increase of $0.7 million. GridSense's increased SG&A expense was attributable to additional headcount, increased facility expenses, increased marketing activity and miscellaneous professional fees.

USSI's increased SG&A expense was 15-------------------------------------------------------------------------------- Table of Contents attributable to to an increase in headcount and associated salaries and costs as well as approximately $0.2 million of non-cash stock compensation expense associated with USSI's stock option plan. Corporate general and administrative costs increased from $0.9 million in the third quarter of 2011 to $1.3 million in the third quarter of 2012 primarily due increased personnel and investor relation costs which offset a decrease in professional fees which were higher in the third quarter of 2011 due to our CoaLogix transaction.

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.

Income tax benefit. In 2012, Acorn's income tax benefit of $2.5 million includes an income tax benefit of $2.6 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 2011 (a loss of $1.9 million prior to attribution of $0.5 million to non-controlling interests) is presented as a loss from discontinued operations.

Gain on the sale of discontinued operations. In August 2011, we recorded a gain, net of income taxes of $30.7 million, following the sale of our investment in CoaLogix.

Net loss attributable to Acorn Energy. We had a net loss attributable to Acorn Energy of $11.0 million in the first nine months of 2012 compared with net income of $36.5 million in the first nine months of 2011. Our loss in 2012 was primarily due to GridSense, USSI and OmniMetrix (in the period since our acquisition) losses of $3.5 million, $6.0 million and $1.4 million, respectively with corporate expenses contributing an additional $4.0 million. These losses were offset by DSIT's profit of approximately $0.4 million for the first nine months of 2012, Acorn's income tax benefit of $2.6 million with respect to an expected net operating loss carryback and the non-controlling interest's share of our operations of approximately $0.7 million.

Our net loss attributable to Acorn Energy of $3.8 million during the third quarter of 2012 was primarily attributable to GridSense, USSI and OmniMetrix losses of $1.4 million, $2.2 million and $0.6 million, respectively with corporate expenses contributing an additional $1.3 million. These losses were partially offset by Acorn's income tax benefit of $1.5 million and the non-controlling interest's share of our operations of approximately $0.3 million. DSIT was slightly above breakeven during the third quarter of 2012.

Liquidity and Capital Resources As of September 30, 2012, we had working capital of $41.5 million. Our working capital includes $21.7 million of cash and cash equivalents, $10.0 million of short-term deposits and restricted deposits of approximately $1.9 million. Net cash decreased during the nine months ended September 30, 2012 by $12.6 million, of which approximately $16.7 million was used in operating activities. The primary use of cash in operating activities during the first nine months of 2012 was the cash used in operations by our subsidiaries ($6.6 million, $3.5 million, $1.4 million and $1.0 million used by USSI, GridSense, DSIT and OmniMetrix, respectively) in their operations combined with the $4.2 million of cash used in our corporate operating activities.

Cash provided by investment activities of $5.6 million was due to the net cash provided from our short-term deposits ($8.0 million), the cash received following the release of the escrow deposit related to our sale of CoaLogix in 2011 ($6.0 million) and by the release, net of approximately $0.4 million of restricted deposits during the first nine months of 2012. These cash receipts were partially offset by the cash used in the acquisition of OmniMetrix ($7.8 million), the acquisition of property and equipment and a license ($0.6 million) and amounts used to fund severance liabilities ($0.2 million).

Net cash of $1.6 million was used in financing activities, primarily from the payment of dividends during the first nine months of 2012 ($2.7 million) and the repayment of short and long-term debt ($0.3 million) which was partially offset by the proceeds from the exercise of options ($1.3 million).

At September 30, 2012, DSIT had approximately $350,000 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), $380,000 of which was then being used. The lines-of-credit are subject to maintaining certain financial covenants. At September 30, 2012, DSIT was in compliance with its financial covenants.

As at September 30, 2012, DSIT also had an outstanding term loan from an Israeli bank in the amount of approximately $170,000. 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 $77,000 as a non-current restricted 16-------------------------------------------------------------------------------- Table of Contents 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. In October 2012, following the completion of a major milestone for a large DDS project, approximately $1.6 million of the restricted cash was released and is available for working capital. However, DSIT expects to redeposit a portion of these funds again as collateral for new guarantees for new projects and for renewing its credit facilities.

During the period from May 1, 2012 to October 31, 2012, Acorn advanced $2.0 million to DSIT in contemplation of an investment agreement for a planned expansion of its marketing and development programs. On October 31, 2012, DSIT had approximately $2.9 million of cash of which approximately $0.5 million was restricted ($0.2 million current and $0.3 million non-current) and was not utilizing any of its lines-of-credit. We believe that DSIT will have sufficient liquidity to finance its activities from cash flows from its own operations over the next 12 months based on its current cash balance, continued utilization of its lines-of-credit, the remaining investment from Acorn and its operating results.

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 August 3, 2012, we committed to fund an additional $3.0 million to GridSense (the "Commitment"), payable in increments as we deem necessary during the balance of 2012 and during 2013. During the period from August 3, 2012 to October 31, 2012, we transferred $2.1 million of this Commitment. On August 20, 2012, GridSense signed a Loan and Security Agreement with a bank to provide it with up to a $1.0 million revolving line of credit (subject to a calculated borrowing base).

GridSense cannot draw on the line of credit until the bank completes its review and approves of GridSense's 2013 business plan. Advances from the line-of-credit bears interest at a variable annual interest rate equal to the greater of 3.25% above the Prime Rate in effect (3.25% at September 30, 2012) or 6.5%. The line-of-credit is also subject to certain financial covenants.

On October 31, 2012, GridSense had cash on hand of approximately $270,000. We have no assurance that GridSense will increase its sales or reduce its need for additional financing to support its working capital needs following the remaining funding by us under the Commitment. Additional working capital support may be in the form of an additional or expanded bank line, new investment by others, additional investment or loans by Acorn, or a combination of the above.

There is no assurance that GridSense will be able to obtain an additional or expanded 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 GridSense may be limited by the working capital needs of our corporate activities and other operating companies.

We expect that USSI will continue to require working capital support as it continues to work on transitioning from development to production and as it continues to work on refining its manufacturing capabilities. USSI currently has no other sources of financing other than its internally generated sales and investments by Acorn. Acorn continues to provide funds for USSI's working capital needs and expects to do so in the future. In July 2012, we purchased additional USSI Preferred Stock in accordance with the Summer USSI Purchase Agreement with an investment of an additional $2.5 million in USSI. This followed an earlier investments in USSI during 2012 of $5.25 million. On November 1, 2012 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). Following this investment, USSI had cash on hand of approximately $2.8 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.

While USSI's cash needs cannot be determined at this time, we anticipate the need to make on-going investments in order to support USSI's operations throughout 2013. 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.

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 $1.5 million has been invested through October 31, 2012 with the balance expected to be funded over the balance of 2012. As of October 31, 2012, OmniMetrix had cash on hand of approximately $1.2 million. We have no assurance that OmniMetrix will not need additional financing for working capital after we complete our $2.5 million 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 of October 31, 2012, the Company's corporate operations (not including cash at any of our subsidiaries) had a total 17-------------------------------------------------------------------------------- Table of Contents of approximately $18.4 million in cash and cash equivalents representing a decrease of $1.1 million from our balance as of September 30, 2012. During the month of October we invested $0.5 million investment in OmniMetrix and $0.6 million in GridSense and incurred approximately $0.4 million of corporate expenses. These expenditures were partially offset by the receipt of an income tax refund of approximately $0.4 million. On November 1, we made an additional investment in USSI of $2.5 million (see Recent Developments) and $0.5 million in OmniMetrix.

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. In order to position ourselves to take advantage of potential market expansion or complimentary acquisitions for our existing businesses, we are contemplating whether and on what terms we may offer additional securities for sale in the future. We currently expect that we may conduct such an offering sometime during 2013, the amount and terms of which cannot be determined at this time.

Contractual Obligations and Commitments The table below provides information concerning obligations under certain categories of our contractual obligations as of September 30, 2012.

CASH PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS Years Ending September 30, (in thousands) 2018 and Total 2013 2014 - 2015 2016 - 2017 thereafterBank and other debt, utilized lines-of-credit and capital leases $ 563 $ 524 $ 39 $ - $ - Operating leases 1,760 786 779 195 - Potential severance obligations (1) 4,119 - 964 325 2,830 Purchase commitments (3) 2,394 1,910 484 - - Minimum royalty payments (2) 500 50 100 100 250 Total contractual cash obligations $ 9,336 $ 3,270 $ 2,366 $ 620 $ 3,080 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 September 30, 2012, we accrued a total of $4.1 million for potential severance obligations to our Israeli employees of which approximately $2.8 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.

(3) In July 2012, OmniMetrix issued a standing purchase order ("PO") to its outside equipment assembler supplier for approximately $2.4 million, with an obligation to purchase an agreed amount of product each month. We anticipate that this purchase order will be superseded by a multi-year contract on similar terms in the near future. The table above reflects OmniMetrix's obligations under the existing PO.

(4) On October 11, 2012, OmniMetrix signed an industrial lease agreement for new premises in Buford, Georgia. The new premises will provide OmniMetrix with approximately 21,000 feet of office, testing laboratory, production and warehouse space. The lease is for a seven year term commencing January 1, 2013 and provides for annual rent of approximately $24,000 in the first year (the first six months are rent-free) and annual rents ranging from approximately $97,000 to $109,000 in the second 18-------------------------------------------------------------------------------- Table of Contents through seventh years. The lease also provides for the landlord of the property leased to OmniMetrix to participate in up to $175,000 of tenant improvements to the property. OmniMetrix expects to expend approximately $350,000 for improvements to the property. The table above does not reflect OmniMetrix's obligations under the new industrial lease agreement.

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