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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.
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 )
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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.
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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 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.
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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.
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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-
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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'
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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 ($2.6 million with respect to the nine months ended September 30,
2012) with respect to a net operating loss carryback of its expected
consolidated tax loss in 2012.
Results of Operations
The following table sets forth certain information with respect to the
consolidated results of operations of the Company for the three and nine month
periods ended September 30, 2011 and 2012, including the percentage of total
revenues during each period attributable to selected components of the
operations statement data and for the period to period percentage changes in
such components. For segment data see Note 11 to the Unaudited Condensed
Consolidated Financial Statements included in this quarterly report.
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The financial results of OmniMetrix are included in our condensed consolidated
financial statements effective February 15, 2012. Accordingly, there are no
comparative results reported for these activities for the three and nine month
periods ended September 30, 2011. In August 2011, we sold our interests in
CoaLogix. Those results are reflected below as discontinued operations.
Nine months ended September 30, Three months ended September 30,
Change
2011 2012 Change 2011 2012 from
from 2011 2011 to
($,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--------------------------------------------------------------------------------
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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--------------------------------------------------------------------------------
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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--------------------------------------------------------------------------------
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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--------------------------------------------------------------------------------
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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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