ACORN ENERGY, INC. - Quarter Report: 2015 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

Commission file number: 0-19771

ACORN ENERGY, INC.

(Exact name of registrant as specified in charter)

302-656-1707

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

ACORN ENERGY, INC.

Quarterly Report on Form 10-Q

for the Quarterly Period Ended June 30, 2015

TABLE OF CONTENTS

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

PART I

Item 1. Financial Statements

ACORN ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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

ACORN ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

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

ACORN ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(IN THOUSANDS)

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

ACORN ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

(IN THOUSANDS)

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

ACORN ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN THOUSANDS)

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

ACORN ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN THOUSANDS)

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

ACORN ENERGY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 1—BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Acorn Energy, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. All dollar amounts in the notes to the condensed consolidated financial statements are in thousands except for per share data.

Certain reclassifications have been made to the Company’s condensed consolidated financial statements for the three and six month periods ended June 30, 2014 to conform to the current period’s condensed consolidated financial statement presentation. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

NOTE 2—RECENT AUTHORITATIVE GUIDANCE

There have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2015, that are of material significance, or have potential material significance, to the Company.

NOTE 3—LIQUIDITY

The Company believes that it will have sufficient liquidity to finance its activities and the activities of GridSense and OmniMetrix over at least the next 12 months based upon its current cash balance, the support expected to be provided by DSIT and the funds provided by its recent financing (see Note 12 – Subsequent Events). If the support expected to be provided by DSIT (up to $5,000 in 2015) is not available in sufficient amounts, Acorn may not be able to fund its own corporate activities and Acorn may not be able to fund GridSense and OmniMetrix as it has historically which could materially impact the carrying value of these subsidiaries and the Company’s ability to continue operations. Through June 30, 2015, DSIT has lent Acorn $500 in 2015. At June 30, 2015, DSIT was not in compliance with one of its financial covenants following the receipt of the $6,168 down payment from its recently received $15,420 order. The bank is working with DSIT to reformulate this covenant to take this into account.

See Note 12 for additional developments with respect to the Company’s liquidity.

NOTE 4—REPAYMENT OF GRIDSENSE LOAN

The Company’s GridSense subsidiary is a party to a Loan and Security Agreement with Square 1 Bank (the “Bank”) dated as of November 2, 2012, as amended from time to time (the “Loan Agreement”) and a related Financing Agreement (the “Financing Agreement”). The obligations of GridSense to the Bank under the Loan Agreement are guaranteed by the Company.

On April 13, 2015, the Company received notice stating that the Company had failed to maintain compliance with covenants thereby creating an event of default under the Loan Agreement and under the Financing Agreement and declaring all obligations of GridSense owing under the Loan Agreement and the Financing Agreement to be immediately due and payable. As of the date of the notice, GridSense owed approximately $1,480 and $158 under the Loan Agreement and the Financing Agreement, respectively.

Effective as of April 30, 2015, GridSense and the Bank entered into an amendment to the Loan Agreement pursuant to which (i) the Bank waived events of default under the Loan Agreement and Financing Agreement, (ii) GridSense paid $500 to the Bank in reduction of its obligations under the Loan Agreement, (iii) the Company deposited $250 on May 4, 2015 and $250 on May 14, 2015 into a restricted account (the “Restricted Account”) at the Bank to secure the Company’s guaranty of GridSense’s obligations under the Loan Agreement and agreed to make an additional deposit into the Restricted Account of $250 by July 31, 2015, (iv) GridSense agreed to the repayment, commencing September 1, 2015, of an aggregate of $250 of advances under the Loan Agreement in equal monthly installments through May 1, 2016, and (v) the Company is required to have an unrestricted cash balance equal to no less than the amount of all obligations of GridSense to the Bank which are not secured by the Restricted Account.

As at June 30, 2015, the Company had deposited a total of $500 into the Restricted Account (see Note 10) and GridSense owed $980 to the Bank under the Loan Agreement.

 See Note 12 (Subsequent Events) with respect to developments regarding the Loan Agreement and Restricted Account.

NOTE 5—Discontinued Operations

In early 2015, the Company’s Board of Directors decided that it would no longer continue to fund USSI’s activities following the significant decline in oil prices which led to significantly reduced demand for USSI’s products. USSI has suspended operations and terminated substantially all employees. The Company intends to sell its USSI assets and is exploring ways to maximize value for creditors and other stakeholders, expecting that most of the proceeds from any sale of its assets will be used to pay creditors. It is uncertain whether there will be any proceeds available to Acorn Energy or other USSI shareholders.

Assets and liabilities related to the discontinued operations of USSI are as follows:

USSI has granted a lien to its bank on substantially all of its assets including intellectual property. The debt due to the bank under USSI’s line-of-credit ($1,460) has matured, is currently due and is bearing interest at the default rate of 11.5% per annum. The Company has not guaranteed the line-of-credit.

USSI’s losses for the three and six months ended June 30, 2014 and 2015 are included in “Loss from discontinued operations, net of income taxes” in the Company’s Condensed Consolidated Statements of Operations. Summarized financial information for USSI’s operations for the three and six months ended June 30, 2014 and 2015 are presented below:

NOTE 6—RESTRUCTURING AND RELATED CHARGES

(a) GridSense^®

In 2013 and 2014, GridSense restructured operations in both its U.S. and Australian entities. This action was taken primarily in order to improve efficiency based on GridSense’s revenue mix and skills mix. The restructurings included terminations of employees in both the United States and Australia and a shut-down of GridSense’s Australian offices in an effort to further reduce costs and streamline operations. GridSense continues to sell its current products in Australia and the surrounding areas through a network of distributors.

At December 31, 2014, $38 of the costs associated with employee severance and termination benefits charge remained unpaid. During the six months ended June 30, 2015, GridSense made no additional payments. The $38 of remaining accrued restructuring charge is expected to be paid in full by June 30, 2016. The balance is included in Other current liabilities in the Company’s condensed consolidated balance sheets.

(b) OmniMetrix^TM

In 2013, OmniMetrix restructured its operations to better align expenses with revenues following a change in management. The restructuring involved employee severance and termination benefits as well as a charge for a significant reduction in the utilization of its leased facility in Buford and a write-down of a majority of the remaining book value of leasehold improvements associated with the leased facility. At December 31, 2014, $248 of lease payments associated with the reduced utilization of leased facilities remained unpaid. During the six months ended June 30, 2015, OmniMetrix paid $22 of this liability. The total remaining accrued restructuring balance of $226 is expected to be paid in full by December 31, 2019 and is included in Other current liabilities ($44) and Other liabilities ($182) in the Company’s condensed consolidated balance sheets.

NOTE 7—INVENTORY, NET

The composition of inventory is as follows:

At December 31, 2014 and June 30, 2015, the Company’s inventory reserve was $319 and $342, respectively.

NOTE 8—GOODWILL AND INTANGIBLE ASSETS

(a) Goodwill

The changes in the carrying amounts of goodwill by segment from December 31, 2014 to June 30, 2015 were as follows:

In the second quarter of 2015, the Company determined that the goodwill associated with its Smart Grid Distribution Automation segment (GridSense) was fully impaired as a result of below-projected revenues for the first six months of 2015 and for the balance of 2015.

(b) Intangibles

The changes in the carrying amounts and accumulated amortization of intangible assets from December 31, 2014 to June 30, 2015 were as follows:

In the second quarter of 2015, the Company’s Smart Grid Distribution Automation segment recorded an impairment charge of $337 representing an impairment of certain technologies and the value of customer relationships and trade name associated with GridSense’s historic operations in Australia. The impairment charge follows declining second quarter 2015 revenue and expected future revenues in Australia through GridSense’s distributor relationship in Australia following the fulfillment of a major order in the first quarter of 2015.

The Company’s intangibles are in its Smart Grid Distribution Automation segment and include technologies, customer relationships and trade name. The weighted average estimated useful life of the intangibles is 10.7 years. Amortization expense for the six months ended June 30, 2014 and 2015 amounted to $142 and $93, respectively. Amortization expense with respect to intangible assets is estimated to be $125 for each of the years ending June 30, 2016 through 2019 and $116 for the year ending June 30, 2020.

NOTE 9—EQUITY

(a) Acorn Stock Options

A summary of stock option activity for the six months ended June 30, 2015 is as follows:

The fair value of the options granted ($0.52 per option during the six months ended June 30, 2015) was estimated on the grant dates using the Black-Scholes option-pricing model with the following weighted average assumptions:

(b) Stock-based Compensation Expense

Stock-based compensation expense included in Selling, general and administrative expenses in the Company’s Condensed Statements of Operations for the six and month period ended June 30, 2014 and 2015 was $557 and $377, respectively and was $247 and $169 for the three month period ended June 30, 2014 and 2015, respectively. In addition, $63 and $6 was recorded in the Company’s USSI subsidiary included in Discontinued Operations for the six month periods ended June 30, 2014 and 2015, respectively and $31 and $0 for the three month periods ended June 30, 2014 and 2015, respectively - See Note 5.

NOTE 10—FAIR VALUE MEASUREMENTS

Financial items measured at fair value are classified in the table below in accordance with the hierarchy established in applicable accounting principles.

Current restricted deposits are comprised of $4,457 of security deposits with respect to various performance and bank guarantees provided in the normal course of business for DSIT’s operations that are expected to be released by June 30, 2016. Current restricted deposits also include $500 deposited by Acorn in connection with the GridSense Loan (see Note 4). DSIT has also provided $2,991 of security deposits for guarantees that are expected to be released through the middle of 2018.

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

Derivative liabilities are with respect to the fair value of the liability of stock options and warrants outstanding in excess of the Company’s authorized shares.

See Note 12 (Subsequent Events) with respect to developments regarding restricted deposits.

NOTE 11—SEGMENT REPORTING

The Company currently operates in three reportable operating segments:

Other operations include certain IT activities (protocol management software for cancer patients and billing software) and outsourced consulting activities performed by the Company’s DSIT subsidiary as well as pipeline monitoring activities in the Company’s OmniMetrix subsidiary (for remote monitoring and control of corrosion protection systems on gas pipelines for gas utilities and pipeline companies) that do not meet the quantitative thresholds under applicable accounting principles.

Reconciliation of Segment Income (Loss) to Consolidated Net Loss Before Income Taxes

* Includes stock compensation expense of $550 and $376 for the six month periods ended June 30, 2014 and 2015 and $240 and $168 for the three month periods ended June 30, 2014 and 2015, respectively.

NOTE 12—SUBSEQUENT EVENTS

Financing

On August 13, 2015, the Company executed a Loan and Security Agreement with Leap Tide Capital Partners III, LLC (“Leap Tide”), pursuant to which the Company borrowed, on such date, $2,000 from Leap Tide (the “LT Loan”). Principal and accrued interest shall be due and payable on August 13, 2016, the first anniversary of the date of funding. Interest accrues and is payable quarterly at a rate of 10% per annum. At the closing, $100 of the proceeds were deposited into an escrow account which will be used to fund the payment of interest; the escrow account shall be maintained at not less than $50 until the last three months before maturity.

In addition to the interest payable in cash described above, Leap Tide received 850,000 shares of the Company’s common stock (the “Initial Shares”) at the closing and became entitled to vested rights to receive 179,167 additional shares of the Company’s common stock (each vested right to receive one share, a “Vested Share Right”) per month for each full month that the full principal amount of the LT Loan remains outstanding, subject to immediate vesting upon acceleration of the LT Loan for the Company’s failure to timely increase its authorized shares of common stock as described below. The number of Vested Share Rights that accrue in a given month shall be prorated to the extent less than the full principal amount is outstanding and/or for any partial month in which no principal amount is outstanding. Leap Tide is entitled to receive the Company’s common stock underlying its Vested Share Rights after the expiration of the Cash Settlement Period (defined below).

The Company may pre-pay all principal and interest accrued on the LT Loan at any time. In addition, the Company may on or prior to 30 days after the maturity or earlier acceleration or repayment of the LT Loan (such 30-day period being referred to herein as the “Cash Settlement Period”) repurchase any or all Initial Shares and settle any or all Vested Share Rights accrued under the LT Loan for cash in lieu of stock. The cash repurchase/settlement price shall be an amount equal to $0.30 for each Initial Share so repurchased and each Vested Share Right so settled. The Company’s right to repurchase Initial Shares and settle Vested Share Rights for cash in lieu of stock shall be subject to Lender’s right to put the same to the Company at a higher price as described below.

The Company does not have sufficient authorized common stock to cover the full amount of Vested Share Rights that will accrue through maturity of the LT Loan. Failure by the Company to effectuate a charter amendment to authorize sufficient additional common stock by March 31, 2016 shall be deemed an event of default, triggering Leap Tide’s right to accelerate the LT Loan and entitling Leap Tide to put to the Company, at a price equal to $0.40 per Initial Share and Vested Share Right, any Initial Shares and any Vested Share Rights.

Subject to customary permitted liens, the LT Loan is secured by a first priority lien on the assets of the Company, except that the lien on the Company’s shares of DSIT is pari passu with a preexisting lien held by DSIT to secure its loans to the Company in the principal amount of up to $5,000. DSIT and Leap Tide have entered into an intercreditor and collateral agency agreement reflecting the pari passu nature of their respective liens. Each of the Company’s domestic subsidiaries (GridSense, OMX Holdings, Inc. and OmniMetrix) have guaranteed the repayment of the LT Loan, and GridSense and OmniMetrix have pledged their respective IP as security.

Certain members of the management of the Company's DSIT Solutions subsidiary (including its CEO and its CFO--who also serves as CFO of the Company) have invested in Leap Tide (which is a special entity formed to make the loan) on the same terms as the other investors in Leap Tide. None of these persons has any role in the management of Leap Tide. 

GridSense Loan

Under the latest amendment to the Loan Agreement (Note 4), the Company was required to make a $250 payment to the Restricted Account by July 31, 2015. The Bank agreed to delay this required payment until the Company completed its recent financing (see above). Following the completion of the financing, the Company paid $480 to the Bank and applied the $500 in current restricted deposits (see Note 10) to the outstanding debt to the Bank in full satisfaction of amounts due under the Loan Agreement.

ACORN ENERGY, INC.

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

The following discussion includes statements that are forward-looking in nature. Whether such statements ultimately prove to be accurate depends upon a variety of factors that may affect our business and operations. Certain of these factors are discussed in this report and in our Annual Report on Form 10-K for the year ended December 31, 2014.

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 in continuing operations.

BACKLOG

 As of June 30, 2015, our backlog of work to be completed was as follows (amounts in millions of U.S. dollars):

RECENT DEVELOPMENTS

Financing

On August 13, 2015, Acorn executed a Loan and Security Agreement with Leap Tide Capital Partners III, LLC (“Leap Tide”), pursuant to which Acorn borrowed, on such date, $2 million from Leap Tide (the “LT Loan”). Principal and accrued interest shall be due and payable on August 13, 2016, the first anniversary of the date of funding. Interest accrues and is payable quarterly at a rate of 10% per annum. At the closing, $100,000 of the proceeds were deposited into an escrow account which will be used to fund the payment of interest; the escrow account shall be maintained at not less than $50,000 until the last three months before maturity.

In addition to the interest payable in cash described above, Leap Tide received 850,000 shares of Acorn common stock (the “Initial Shares”) at the closing and became entitled to vested rights to receive 179,167 additional shares of Acorn common stock (each vested right to receive one share, a “Vested Share Right”) per month for each full month that the full principal amount of the LT Loan remains outstanding, subject to immediate vesting upon acceleration of the LT Loan for Acorn’s failure to timely increase its authorized shares of common stock as described below. The number of Vested Share Rights that accrue in a given month shall be prorated to the extent less than the full principal amount is outstanding and/or for any partial month in which no principal amount is outstanding. Leap Tide is entitled to receive the Acorn common stock underlying its Vested Share Rights after the expiration of the Cash Settlement Period (defined below). We relied on the exemption from registration contained in Section 4(2) of the Securities Act, and Regulation D, Rule 506 thereunder, for the issuance of the Initial Shares and any shares underlying the Vested Share Rights, based on Leap Tide’s status as an accredited investor.

Acorn may pre-pay all principal and interest accrued on the LT Loan at any time. In addition, Acorn may on or prior to 30 days after the maturity or earlier acceleration or repayment of the LT Loan (such 30-day period being referred to herein as the “Cash Settlement Period”) repurchase any or all Initial Shares and settle any or all Vested Share Rights accrued under the LT Loan for cash in lieu of stock. The cash repurchase/settlement price shall be an amount equal to $0.30 for each Initial Share so repurchased and each Vested Share Right so settled. Acorn’s right to repurchase Initial Shares and settle Vested Share Rights for cash in lieu of stock shall be subject to Lender’s right to put the same to Acorn at a higher price as described below.

Acorn does not have sufficient authorized common stock to cover the full amount of Vested Share Rights that will accrue through maturity of the LT Loan. Failure by Acorn to effectuate a charter amendment to authorize sufficient additional common stock by March 31, 2016 shall be deemed an event of default, triggering Leap Tide’s right to accelerate the LT Loan and entitling Leap Tide to put to Acorn, at a price equal to $0.40 per Initial Share and Vested Share Right, any Initial Shares and any Vested Share Rights.

Subject to customary permitted liens, the LT Loan is secured by a first priority lien on the assets of Acorn, except that the lien on Acorn’s shares of DSIT is pari passu with a preexisting lien held by DSIT to secure its loans to Acorn in the principal amount of up to $5.0 million. DSIT and Leap Tide have entered into an intercreditor and collateral agency agreement reflecting the pari passu nature of their respective liens. Each of Acorn’s domestic subsidiaries (GridSense, OMX Holdings, Inc. and OmniMetrix) have guaranteed the repayment of the LT Loan, and GridSense and OmniMetrix have pledged their respective IP as security.

Pursuant to the terms of the Loan and Security Agreement, Jan Loeb was appointed as a director of Acorn on August 13, 2015 and, at the request of Leap Tide, Acorn shall cause Mr. Loeb to be included in the slate of Acorn-nominated directors at each annual meeting of stockholders held at a time when the LT Loan or any portion thereof continues to remain outstanding. As a non-employee director, Mr. Loeb will receive Acorn’s standard director compensation as described in Item 11 of our Annual Report on Form 10-K. It is not currently known which committees of the Acorn board, if any, Mr. Loeb will serve on. Also pursuant to the terms of the Loan and Security Agreement, Mr. Loeb was designated by Acorn as a director of DSIT and, at the request of Leap Tide, Acorn shall cause him to be remain on the DSIT board as an Acorn designee for so long as the LT Loan or any portion thereof continues to remain outstanding. Mr. Loeb is the sole manager of Leap Tide, with sole voting and dispositive power over the Acorn shares held by Leap Tide.

Certain members of the management of the Company's DSIT Solutions subsidiary (including its CEO and its CFO--who also serves as CFO of the Company) have invested in Leap Tide (which is a special entity formed to make the loan) on the same terms as the other investors in Leap Tide. None of these persons has any role in the management of Leap Tide.

GridSense Loan

Under the latest amendment to the Loan Agreement, GridSense was required to make a $250,000 payment to the Restricted Account by July 31, 2015. The Bank agreed to delay this required payment until Acorn completed its recent financing (see above). Following the completion of the financing, Acorn paid $480,000 to the Bank and applied the $500,000 that was in current restricted deposits to the outstanding debt to the Bank in full satisfaction of amounts due under the Loan Agreement.

Transfer of Listing

Following receipt of a Staff Determination Letter on July 15, 2015 from the Nasdaq Listing Qualifications Department stating that we had not regained compliance with the minimum bid price requirement under Listing Rule 5550(a)(2), our common stock was delisted from The Nasdaq Capital Market beginning with the start of trading on Friday, July 24, 2015, and began trading at such time on the OTCQB trading platform operated by OTC Markets Group. Our ticker symbol remains “ACFN” and we continue to make quarterly and other regulatory filings with the U.S. Securities and Exchange Commission.

 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. Each of our three businesses is focused on helping its customers achieve greater productivity, reliability, security and efficiency.

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.

● Machine-to-Machine Critical Asset Monitoring & Control (“M2M”). These products and services are provided by our OmniMetrix, LLC (“OmniMetrix”) subsidiary. OmniMetrix’s M2M activities provide wireless remote monitoring and control systems and services for critical assets including gas pipelines and backup generators.

During 2015, each of the three abovementioned activities represents a reportable segment. Each of our reportable operating segments is deemed to be a reporting unit for goodwill impairment. We review our goodwill for impairment annually at the reporting unit level in the fourth quarter of each fiscal year and analyze whether any indicators of impairment for goodwill and intangibles exist each quarter. In the second quarter of 2015, we wrote-off the remaining $513,000 of goodwill (as well as $337,000 of other intangibles) related to our Smart Grid Distribution Automation segment. We currently have $535,000 of goodwill remaining – all in our Energy & Security Sonar Solutions segment. Should assumptions used in the development of the fair values of our reporting units change in the coming quarters, we may recognize future goodwill impairment.

Our “Other” segment represents certain IT activities (protocol management software for cancer patients and billing software) and outsourced consulting activities performed by our DSIT subsidiary as well as pipeline monitoring (“PM”) activities (for remote monitoring and control of corrosion protection systems on gas pipelines for gas utilities and pipeline companies) in our OmniMetrix subsidiary, that do not meet the quantitative thresholds and which may be combined for reporting under applicable accounting principles.

Previously, Acorn reported the activities of its US Seismic Systems, Inc. subsidiary (“USSI”) in its Oil and Gas Sensor Systems segment which developed and produced fiber optic sensing systems for the energy and security markets. With the suspension of operations at USSI, its activities are reflected as discontinued operations.

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

In late 2014 and in the first half of 2015, DSIT received over $21 million of new orders. The bulk of this amount ($15.4 million) was related to an order for four Hull Mounted Sonar (HMS) systems and an Anti-Submarine Warfare (ASW) Trainer for an undisclosed navy. The HMS systems are planned to be delivered within a period of three years while the ASW Trainer is planned to be delivered in 2015. In June 2015, DSIT received a down payment of $6.2 million as a result of this order. In addition, DSIT received a $2.2 million order from a returning customer (an undisclosed navy) as well as several follow-on orders with a total value of $1.6 million for development and production from a number of its customers in Israel. The projects involve development of both hardware and embedded software.

DSIT revenue of $6,452,000 in the first half of 2015 was $807,000 or 14% above its revenue for the first half of 2014 ($5,645,000). Second quarter 2015 revenue ($3,415,000) also represents an increase of $620,000 (22%) as compared to the second quarter 2014 revenue ($2,795,000) and an increase of $378,000 (12%) compared to first quarter 2015 revenue. Gross profit, gross margin and operating income all improved for DSIT in 2015. Gross profit increased as a result of increased revenue and an increase gross margin from 25% in 2014 (for all of DSIT’s activities) to 32% in 2015.

Revenue in Acorn’s Energy & Security Sonar Solutions segment increased from $5,037,000 for the first half of 2014 to $5,748,000 for the first half of 2015. The increase in revenues was primarily due to revenue recorded from DSIT’s $15.4 million project received in the first quarter of 2015 for Hull Mounted Sonar (HMS) systems and an Anti-Submarine Warfare (ASW) Trainer as well as increases in revenue from DSIT’s non-Naval projects following the receipt of a number of new project orders in the first half of 2015. Revenue from DSIT’s other IT and consulting activities which are included in Acorn’s Other segment activities also increased in 2015 (an increase of $96,000 to $704,000). The increase in first half 2015 revenue from DSIT’s other IT and consulting activities was primarily to due to revenues generated from upgrade and support services related to a new version of DSIT’s protocol management software for cancer patients.

DSIT’s gross profit increased 49% from $1,402,000 in the first half of 2014 to $2,095,000 in the first half of 2015. The increase in gross profit was due to both increased revenue and increased gross margins. The increase in the gross margin from 25% in 2014 to 32% in 2015 was due to the mix of projects worked on during the period as there was a larger increase in revenue reported in higher-margin Naval projects than in generally-lower-margin non-Naval projects. Gross margin in the second quarter of 2015 was 38% as compared to 26% in the first quarter of 2015. We expect that 2015’s gross margin will remain at or about the level of current gross margins which are in line with our historic gross margins (35% to 40%).

In 2012, DSIT and USSI were awarded a grant from the Israel-U.S. Binational Industrial Research and Development Foundation (“BIRD Foundation”) for the joint development of a next generation integrated passive/active threat detection system for underwater site protection (PAUSS). The BIRD Foundation provides funding money for projects involving joint innovation and development between American and Israeli companies. Due to the suspension of USSI’s operations, the BIRD Foundation has decided that it will no longer fund DSIT’s continued development of the PAUSS (either on its own or jointly with another U.S. company). DSIT is uncertain as to whether the BIRD Foundation will pursue recovery of previous amounts funded ($379,000).

During the first half of 2015, DSIT recorded $610,000 of net R&D expense ($343,000 in the second quarter), which was $55,000 greater than the $555,000 recorded in the first half of 2014. Second quarter net R&D expense was also $76,000 greater than the $267,000 of net R&D expense recorded in the first quarter of 2015. The increase in net R&D expense is due to the BIRD Foundation cancelling its participation in the funding of the PAUSS project. DSIT continues to work to develop land-based security fiber-optic products.

During the first half of 2015, DSIT recorded $1,556,000 of SG&A expense, which was approximately $85,000 or 5% below the $1,641,000 recorded in the first half of 2014. The decrease from the first half of 2014 was primarily due to the weakening of the New Israeli Shekel (NIS) in the period as most of DSIT’s SG&A expense is denominated in NIS. Second quarter SG&A expense of $844,000 was $132,000 greater than first quarter 2015 SG&A expense due to increased marketing costs (which fluctuate from period to period) during the quarter as well as increased salary costs. We expect that quarterly SG&A expense for the balance of 2015 will decrease slightly from their current levels.

At December 31, 2014, DSIT had a backlog of approximately $12.0 million. During the first six months of 2015, DSIT received new orders totaling approximately $21.1 million and at the end of June 2015 had a backlog of approximately $26.6 million. Such backlog includes approximately $14.3 million remaining from the multi-year HMS and ASW project noted above and $3.0 million for long-term maintenance and support for another project expected to begin in late 2015. While DSIT has a significant pipeline, most of its major projects come after a lengthy sales cycle over which it has little control.

GridSense

GridSense reported first half 2015 revenue of approximately $1,610,000, a decrease of $599,000 (27%) compared to its first half 2014 revenue of $2,209,000. The decrease in GridSense’s 2015 revenue was in its U.S. operations, which saw revenue decrease from $1,333,000 in 2014 to $1,138,000 in 2015, as well as in Australia, which saw revenue from sales made through its distributor network decrease from $876,000 in 2014 to $472,000 in 2015. The decreased U.S. revenue was attributable to a lower backlog entering 2015 as compared to 2014, while decreased Australian revenue was due to the fulfillment of backlog from a large 2014 order with few new orders coming in following the fulfillment of that order in 2015. Second quarter 2015 revenue ($702,000) also represents a decrease of $206,000 (23%) compared to first quarter 2015 revenue of $908,000. This decrease was also due to the previously mentioned decrease in Australian sourced revenue following the fulfillment of the large 2014 order in the first quarter of 2015.

While GridSense sees some improvement in the overall business environment in the utility industry and expects utility spending 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 around the globe. GridSense has not, however, generally been able to leverage market exposure into high volume sales. In order to expand to larger volume projects GridSense has narrowed its focus to specific applications that best line up with their product portfolio. This includes expanding pilots in those areas and expanding current deployments, which have shorter lead times. GridSense’s new management has realigned sales and engineering efforts and is focusing on these fewer and more standardized opportunities with the most perceived likelihood for successful deployment and commercial-scale orders. GridSense has hired a new Vice President of Sales to drive this strategic effort, and has added sales and application personnel to support this strategy.

GridSense's gross profit in the first half of 2015 decreased by $278,000 or 50% compared to its first half 2014 gross profit. The decrease in gross profit was attributable to both decreased revenue (see above) as well as reduced gross margins which deteriorated from 25% in the first half of 2014 to 17% in 2015. The decrease in gross margin was attributable to a combination of factors. First half 2015 gross margin was negatively impacted by the unexpected follow-on cost of a large 2014 deployment and an impairment associated with inventory being held by GridSense’s distributor in Australia, without which, GridSense’s margins would have been 37%.

In the first half of 2015, GridSense recorded $299,000 of R&D expense as compared to $651,000 in the same period of 2014. The decreased R&D expense is due to the elimination of GridSense’s Australian operations in mid-2014 as well as reduced engineering staff in the U.S. Second quarter R&D expense ($144,000) was in line with first quarter 2015 R&D expense ($155,000). GridSense expects that R&D expense going forward will remain at or about their current levels.

In the first half of 2015, GridSense recorded $986,000 of SG&A expense as compared to $1,475,000 in the same period of 2014. The decreased SG&A expense is due to the elimination of GridSense’s Australian operations as well as reduced headcount in the U.S. Second quarter 2015 SG&A expense ($527,000) was $68,000 above first quarter 2015 SG&A expense due primarily to the inclusion of approximately $60,000 of bad debt expense in second quarter 2015 results. Excluding this one-time charge, GridSense expects that SG&A expense going forward will increase slightly following the hiring of additional sales personnel.

In the second quarter of 2015, following lower than anticipated sales and results, GridSense recorded a goodwill impairment charge of $513,000. In addition, GridSense recorded an impairment charge of $337,000 representing the impairment of certain technologies and the value of customer relationships and trade name associated with GridSense’s historic operations in Australia. The impairment charge follows declining second quarter 2015 revenue and decreased expected future projected revenues through GridSense’s distributor relationship in Australia following the fulfillment of a major order in the first quarter of 2015.

GridSense is a party to a Loan and Security Agreement with Square 1 Bank (the “Bank”) dated as of November 2, 2012, as amended from time to time (the “Loan Agreement”) and a related Financing Agreement (the “Financing Agreement”). The obligations of GridSense to the Bank under the Loan Agreement are guaranteed by Acorn.

On April 13, 2015, the Company received notice stating that the Company had failed to maintain compliance with covenants thereby creating an event of default under the Loan Agreement and under the Financing Agreement and declaring all obligations of GridSense owing under the Loan Agreement and the Financing Agreement to be immediately due and payable. As of the date of the notice, GridSense owed approximately $1,480,000 and $158,000 under the Loan Agreement and the Financing Agreement, respectively.

Effective as of April 30, 2015, GridSense and the Bank entered into an amendment to the Loan Agreement pursuant to which (i) the Bank waived events of default under the Loan Agreement and Financing Agreement, (ii) GridSense paid $500,000 to the Bank in reduction of its obligations under the Loan Agreement, (iii) the Company deposited $250,000 on each of May 4, 2015 and May 14, 2015 into a restricted account (the “Restricted Account”) at the Bank to secure the Company’s guaranty of GridSense’s obligations under the Loan Agreement. As at June 30, 2015, Acorn had deposited a total of $500,000 into the Restricted Account and GridSense owed $980,000 under the Loan Agreement. Following the completion of Acorn’s recent financing (See Recent Developments), Acorn paid $480,000 to the Bank and applied the $500,000 that was in the Restricted Account to the outstanding debt to the Bank in full satisfaction of amounts due under the Loan Agreement.

We have no assurance that GridSense will generate sufficient sales or reduce its need for additional financing to support its working capital needs. Additional working capital support may be in the form of an additional or expanded bank line, new investment by others, additional 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 loans from us to GridSense may be limited by the working capital needs of our corporate activities and other operating companies.

OmniMetrix

In the first half of 2015, OmniMetrix recorded revenue of $1,363,000 ($1,113,000 in its M2M activities and $250,000 in its PM activities) as compared to $1,323,000 ($1,056,000 in its M2M activities and $267,000 in its PM activities) recorded in the first half of 2014, representing an increase of 3%. The increase in first half revenue is driven by the increase in monitoring revenue as a result of an increase in the number of critical assets and equipment being monitored, as well as an increase in the average revenue per monitor sold following a change in OmniMetrix’s pricing model. Second quarter 2015 revenue of $690,000 increased slightly from first quarter 2015’s revenues of $673,000.

First half 2015 gross profit of $816,000 reflected a gross margin of 60% on 2015 revenues. Such gross profit represents an increase from first half 2014 gross profit of $753,000 (gross margin of 57%). Second quarter 2015 gross profit of $378,000 (gross margin of 55%) reflects a decrease from first quarter 2015 gross profit of $438,000 (gross margin of 65%). The increase in the gross profit in 2015 compared to 2014 was primarily attributable to increased revenues while the increase in gross margin in 2015 compared to 2014 was attributable to an inventory write-off recorded in the first half of 2014. The decrease in gross profit in the second quarter of 2015 as compared to the first quarter of 2015 was due to decreased margins on hardware revenues.

During the first half of 2015, OmniMetrix recorded $292,000 of R&D costs ($143,000 and $149,000 in the first and second quarters, respectively) as compared to approximately $252,000 of R&D in the first half of 2014. We do not expect that these costs will materially change in future quarters.

During the first half of 2015, OmniMetrix recorded approximately $1,349,000 of SG&A costs. Such costs were relatively unchanged from first half 2014 SG&A costs of $1,343,000. Second quarter 2015 SG&A costs of $771,000 reflect an increase of $193,000 as compared to first quarter 2015 SG&A costs. The increased costs from first quarter of 2015 were the result of increased payroll and marketing costs following the hiring of a director of business development for our PM activities and a sales development manager. We anticipate that SG&A costs will remain relatively stable in upcoming quarters.

OmniMetrix sees a rapidly growing need for backup power infrastructure to secure critical military and government assets against emergency events including terrorist attacks, natural disasters, and cybersecurity threats. As a result, OmniMetrix is in discussions with several potential strategic partners to bring its unique product and service to that customer base. During the course of 2015, OmniMetrix has made progress with these relationships and sees an ever-growing market for protecting standby power assets at critical installations globally.

OmniMetrix currently has no other sources of financing other than its sales and financing from Acorn. Through August 12, 2015, Acorn lent OmniMetrix a total of $626,000. Over the balance of 2015 and into 2016, OmniMetrix will continue to require additional financing, the amounts dependent upon its level of penetration into the M2M and PM markets. Additional financing for OmniMetrix may be in the form of a bank line, new investment by others, a loan by Acorn, or a combination of the above. The availability and amount of any additional loans from us to OmniMetrix may be limited by the working capital needs of our corporate activities and other operating companies.

USSI

In March 2015, Acorn announced that it had stopped funding its USSI subsidiary and that USSI had suspended all operations and terminated almost all of its employees. USSI intends to sell its assets and is exploring ways to maximize value for its creditors and other stakeholders, expecting that most of the proceeds from any sale of its assets will be used to pay creditors. It is uncertain whether there will be any proceeds available to Acorn or other USSI shareholders. First half results which are included in discontinued operations reflect activity through June 30, 2015. Acorn expects that there will continue to be minimal residual activity at USSI through either the date of its sale or dissolution.

Corporate

Corporate general and administrative (“G&A”) expense of $1,888,000 in the first half of 2015 was slightly below the $1,985,000 of expense in the first half of 2014, reflecting a decrease of $97,000 or 5%. Second quarter 2015 G&A expense of $856,000 was $178,000 (17%) below first quarter 2015 G&A expense and $87,000 (9%) below second quarter 2014 G&A expense. The decrease in G&A expense in 2015 was due to reduced salary costs ($375,000 in 2015 vs. $526,000 in 2014) and non-cash stock compensation expense ($377,000 in 2015 vs. $551,000 in 2014). Those decreases were partially offset by increased professional and consulting fees which included approximately $200,000 of professional and consulting fees associated with exploring potential strategic events for various operating subsidiaries and other one-time expenses. The decrease in second quarter 2015 G&A expense as compared to the first quarter of 2015 was primarily due to the aforementioned $200,000 of professional and consulting fees. We expect corporate general and administrative quarterly expense for the remainder of 2015 to approximate the current quarter’s expense.

Results of Operations

The following table sets forth certain information with respect to the consolidated results of operations of the Company for the three and six month periods ended June 30, 2014 and 2015, 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.