ACORN ENERGY, INC. - Quarter Report: 2018 March (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 March 31, 2018

Commission file number: 001-33886

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, smaller reporting company, or an emerging company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

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 March 31, 2018

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. UNAUDITED CONDENSED CONSOLIDATED 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 unaudited 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 unaudited condensed consolidated financial statements.

ACORN ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (DEFICIT) (UNAUDITED)

(IN THOUSANDS)

* Less than $1

The accompanying notes are an integral part of these unaudited 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 unaudited 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 three-month period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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-month period ended March 31, 2017 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, 2017.

NOTE 2—RECENT AUTHORITATIVE GUIDANCE

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). This update outlines a new comprehensive revenue recognition model that supersedes most current revenue recognition guidance and requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has issued several updates to ASU 2014-09, which collectively with ASU 2014-09, represent the FASB Accounting Standards Codification Topic 606 (“ASC 606”). On January 1, 2018, we adopted ASC 606 for all contracts using the modified retrospective method, which means the historical periods are presented under the previous revenue standards with the cumulative net income effect being adjusted through retained earnings. See Note 10.

In February 2016, the FASB issued ASU 2016-02, Leases, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right-to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customer (Topic 606), Leases (Topic 840) and Leases (Topic 842), which provides additional implementation guidance on the previously issued ASU 2016-02 Leases (Topic 842). The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.

Other recently issued accounting updates are not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 3—INVESTMENT IN DSIT SOLUTIONS, LTD. (“DSIT”)

On February 14, 2018 (the “Closing Date”), the Company closed on a transaction (the “2018 DSIT Transaction”) initially entered into on January 18, 2018 for the sale of the Company’s remaining 41.15% interest in its DSIT Solutions Ltd. business to an Israeli investor group, and received gross proceeds of $5,800 before transaction costs, professional fees and withholding taxes. From the gross proceeds, the Company paid $388 of withholding taxes, paid or accrued $441 of transaction costs and recorded a loss of $829 as the carrying value of the Company’s investment in DSIT had previously been written down to the gross proceeds of the 2018 DSIT Transaction. From the proceeds, the Company also repaid $1,600 of amounts due to DSIT and $1,428 of loan principal and interest due to directors.

The Company’s share of DSIT’s net income for the period from January 1, 2018 to the Closing Date and the three-month period ended March 31, 2017 can be seen below:

The activity of the Company’s Investment in DSIT for the period from January 1, 2018 to March 31, 2018 can be seen below:

NOTE 4—Discontinued Operations

In April 2016, the Company announced that it had decided to cease operations of its GridSense activities. As a result of this decision, GridSense activities are reported as a discontinued operation.

GridSense’s operating results for the three months ended March 31, 2018 and 2017 are included in “Income from discontinued operations, net of income taxes” in the Company’s Condensed Consolidated Statements of Operations. Summarized financial information for GridSense’s operations for the three months ended March 31, 2018 and 2017 are presented below:

NOTE 5—Loans from Directors AND OTHER COMMITMENTS

(a) Director Loans to Acorn

On February 16, 2017, the Company secured commitments for $1,900 in funding in the form of loans from members of the Company’s Board of Directors, of which $900 was immediately funded and an additional $400 was funded in the third quarter of 2017. On February 22, 2018, following the receipt of the proceeds from the 2018 DSIT Transaction (see Note 3), the Company repaid in full $1,300 of principal and $128 accrued interest due through that date with respect to these loans.

The Company accrued $21 and $13 of interest expense in the three months ended March 31, 2018 and 2017, respectively, with regard to these director loans.

(b) Director Investment and Loans to OmniMetrix Holdings

In 2015, one of the Company’s directors (the “Director”) acquired a 20% interest in the Company’s OmniMetrix Holdings, Inc. subsidiary (“Holdings”) through the purchase of $1,000 of OmniMetrix Preferred Stock (“Preferred Stock”). Holdings is the holder of 100% of the membership interests OmniMetrix, LLC through which the Company operates its Power Generation and Cathodic Protection monitoring activities. The $1,000 investment by the director was recorded as an increase in non-controlling interests.

A dividend of 10% per annum accrued on the Preferred Stock. The dividend was payable on the first anniversary of the funding of the investment and quarterly thereafter for so long as the Preferred Stock is outstanding and has not been converted to Common Stock. Through December 31, 2016, a dividend payable of $115 was recorded with respect to the Preferred Stock. On December 31, 2016, the Director agreed to treat the $115 of accrued dividends and all subsequent accrued and unpaid dividends as a loan to Holdings which bears interest at 8% per year. In December 2016, the Director provided Holdings with an additional $50 loan under the same terms as the abovementioned accrued dividends.

Through March 31, 2018, a total of $241 of dividends accrued on the Preferred Stock and was added to the loan balance. Accrued interest on unpaid balances at March 31, 2018 was $22. All principal and interest were due on April 30, 2018. In May 2018, the Company entered into a payment arrangement with the Director. See Note 11 – Subsequent Events.

(c) OmniMetrix Amounts due to Acorn

OmniMetrix owes Acorn approximately $3,480 for loans, accrued interest and expenses advanced to it by Acorn since its acquisition in 2012. Such amounts are eliminated in consolidation and will only be repaid to Acorn when OmniMetrix is generating sufficient cash to allow such repayment.

NOTE 6— RESTRUCTURING AND RELATED CHARGES

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, 2017, $129 of lease payments associated with the reduced utilization of leased facilities remained unpaid. During the three months ended March 31, 2018, OmniMetrix paid $16 of this liability. The total remaining accrued restructuring balance of $113 is expected to be paid in full by December 31, 2019 and is included in Other current liabilities ($64) and Other liabilities ($49) in the Company’s condensed consolidated balance sheets.

NOTE 7—SHORT-TERM CREDIT FACILITY

In October 2017, OmniMetrix renewed its Loan and Security Agreement providing OmniMetrix with access to accounts receivable formula-based financing of the lesser of 75% of eligible receivables or $1,000. Debt incurred under this financing arrangement bears interest at the greater of prime (4.75% at March 31, 2018) plus 2% or 6% per year. In addition, OmniMetrix is to pay a monthly service charge of 0.9% of the average aggregate principal amount outstanding for the prior month, for a current effective rate of interest on advances of 17.3%. OmniMetrix also agreed to continue to maintain a minimum loan balance of $150 in its line-of-credit with the lender for a minimum of one year beginning November 1, 2017.

OmniMetrix had an outstanding balance of $503 and $313 as of March 31, 2018 and December 31, 2017, respectively, pursuant to the Loan and Security Agreement. OmniMetrix’s availability under the Loan and Security agreement was $69 and $182 at March 31, 2018 and December 31, 2017, respectively.

NOTE 8—EQUITY

(a) Acorn Stock Options

A summary of stock option activity for the three months ended March 31, 2018 is as follows:

The options granted in 2018 were to directors (55,000) and a non-employee (5,000) with an exercise price of $0.23. The fair value of the options granted was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:

(b) Stock-based Compensation Expense

Stock-based compensation expense included in Selling, general and administrative expenses in the Company’s Condensed Statements of Operations was $7 and $13 for the three month-periods ended March 31, 2018 and March 31, 2017, respectively.

(c) Common Stock in Lieu of Board Fees

Each Director of the Company may elect by written notice delivered on or before the first day of each calendar year whether to receive, in lieu of some or all of his or her retainer and board fees, that number of shares of Company Common Stock as shall have a value equal to the applicable retainer and board fees, based on the closing price of the Company’s Common Stock on its then-current trading platform or exchange on the last trading day immediately preceding the first day of the applicable year. Once made, the election shall be irrevocable for such election year and the shares subject to the election shall vest and be issued one-fourth upon the first day of the election year and one-fourth as of the first day of each of the second through fourth calendar quarters thereafter during the remainder of the election year. For the 2018 calendar year, Mr. Woolard elected to receive Common Stock in lieu of retainer and board fees of $17. Accordingly, Mr. Woolard was issued 18,479 shares of Common Stock in January 2018 for the first quarter of 2018, and 18,478 shares of Common Stock on April 2, 2018 for the second quarter of 2018. He is to receive an additional 18,478 shares on each of July 1 and October 1, 2018.

(d) Warrants

The Company previously issued warrants at exercise prices equal to or greater than market value of the Company’s common stock at the date of issuance. A summary of warrant activity follows:

NOTE 9— SEGMENT REPORTING

The Company currently operates in two reportable operating segments, both of which are performed though the Company’s OmniMetrix subsidiary:

● The Power Generation (“PG”) segment provides wireless remote monitoring and control systems and services for critical assets as well as Internet of Things applications.

● The Cathodic Protection (“CP”) segment provides for remote monitoring of cathodic protection systems on gas pipelines for gas utilities and pipeline companies.

The following tables represent segmented data for the three-month periods ended March 31, 2018 and March 31, 2017:

Reconciliation of Segment Loss to Consolidated Net Loss Before Income Taxes

NOTE 10—REVENUE

The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to achieve this core principle, which includes: (1) identifying contracts with customers, (2) identifying performance obligations within those contracts, (3) determining the transaction price, (4) allocating the transaction price to the performance obligation in the contract, which may include an estimate of variable consideration, and (5) recognizing revenue when or as each performance obligation is satisfied.

Sales of OmniMetrix monitoring systems include the sale of equipment (“HW”) and of monitoring services (“Monitoring”). Revenue (and related costs) associated with sale of equipment are recorded to deferred revenue (and deferred charges) upon shipment for PG and CP monitoring units. Revenue and related costs with respect to the sale of equipment are recognized over the estimated life of the units which are currently estimated to be three years (two years up to December 31, 2017). Revenues from the prepayment of monitoring fees (generally paid twelve months in advance) are initially recorded as deferred revenue upon receipt of payment from the customer and then amortized to revenue over the monitoring service period.

The following table disaggregates the Company’s revenue for the three-month periods ended March 31, 2018 and 2017:

Deferred revenue activity for the three months ended March 31, 2018 can be seen in the table below:

Deferred charges relate only to the sale of equipment. Deferred charges activity for the three months ended March 31, 2018 can be seen in the table below:

* Amounts included in Other Assets in the Company’s Unaudited Condensed Consolidated Balance Sheets at March 31, 2018.

The Company pays its employees sales commissions for sales of HW and for first sales of monitoring services (not for renewals). In accordance with Topic 606, Revenue from Contracts with Customers, of the FASB Accounting Standards Codification ( “ASC 606”), the Company capitalizes as a contract asset the sales commissions on these sales. Contract assets associated with HW are amortized over the estimated life of the units which are currently estimated to be three years (two years up to December 31, 2017). Contract assets associated with monitoring services are amortized over the expected monitoring life including renewals. The contract asset balance at December 31, 2017 of $152 has been recorded as an adjustment to retained earnings in adopting ASC 606 under the modified retrospective method.

The following table provides a reconciliation of the Company’s sales commissions contract assets for the three-month period ended March 31, 2018:

The capitalized sales commissions are included in Other Current Assets ($111) and Other Assets ($41) in the Company’s Unaudited Condensed Consolidated Balance Sheets at March 31, 2018.

NOTE 11—SUBSEQUENT EVENTS

New CEO Consulting Agreement

On April 9, 2018, the Company entered into a new consulting agreement (the “New Consulting Agreement”) with Jan H. Loeb extending the arrangements for compensation of Mr. Loeb for his services as President and CEO of the Company. The New Consulting Agreement expires on December 31, 2019. Pursuant to the New Consulting Agreement, Mr. Loeb will receive cash compensation of $12 per month commencing May 1, 2018. Mr. Loeb also received a bonus of $100 payable as of May 1, 2018, in recognition of his performance in the sale of the Company’s remaining shares of DSIT Solutions Ltd. He will be eligible for two additional bonuses during the term of the New Consulting Agreement: $150 upon consummation of a corporate acquisition transaction approved by the Company’s Board, and $150 upon consummation of a corporate financing/funding transaction approved by the Company’s Board. Mr. Loeb also received a grant on May 1, 2018 of options to purchase 35,000 shares of the Company’s common stock, which shall be exercisable at an exercise price of $0.35 per share, which was the closing price of the Company’s common stock on April 30, 2018. Fifty percent (50%) of the options vested immediately; the remaining options shall vest in two equal increments on July 1, 2018 and October 1, 2018. The exercise period and other terms are substantially the same as the terms of the options granted by the Company to its outside directors.

Executive Chairman of the Board

On April 9, 2018, Christopher E. Clouser, a member of the Company’s Board of Directors, was appointed to the newly-created position of Executive Chairman of the Board, and Edgar S. Woolard, Jr., another member of our Board of Directors, was appointed to the newly-created position of Vice Chairman of the Board.

For the performance of his additional duties as Executive Chairman, Mr. Clouser’s compensation will be increased by $36 per year (to an annual rate of $71). Mr. Clouser was also awarded a bonus, payable as of May 1, 2018, of $50 in recognition of his performance in the sale of the Company’s shares of DSIT Solutions Ltd.

Loans to OmniMetrix Holdings

On May 14, 2018, Holdings and the Director entered into an agreement whereby effective May 1, 2018, the dividend on the Preferred Stock was reduced to 8%. In addition, all the amounts due to the Director (accrued dividends, loan and accrued interest) and all future dividends that shall accrue on the Preferred Stock through June 30, 2020 will be paid by Holdings to the Director as follows:

The payments in the agreement will be made only to the extent permitted under OmniMetrix’s credit facility. Dividends shall be paid only to the extent provided under Holdings’ Amended and Restated Certificate of Incorporation and permitted under Delaware law.

ACORN ENERGY, INC.

The following discussion includes statements that are forward-looking in nature. Whether such statements ultimately prove to be accurate depends upon a variety of factors that may affect our business and operations. Certain of these factors are discussed in this report and in our Annual Report on Form 10-K for the year ended December 31, 2017.

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.

BACKLOG

As of March 31, 2018, our backlog of work to be completed (primarily deferred revenue) at our OmniMetrix subsidiary totaled approximately $3.8 million.

RECENT DEVELOPMENTS

New CEO Consulting Agreement

On April 9, 2018, we entered into a new consulting agreement (the “New Consulting Agreement”) with Jan H. Loeb extending the arrangements for compensation of Mr. Loeb for his services as President and CEO. The previous consulting agreement with Mr. Loeb (the “2017 Consulting Agreement”) expired on January 7, 2018. Following the expiration of the 2017 Consulting Agreement, Mr. Loeb continued to provide us with consulting and other services and was compensated at the same rate of monthly cash compensation provided for in the 2017 Consulting Agreement. The New Consulting Agreement expires on December 31, 2019.

Pursuant to the New Consulting Agreement, Mr. Loeb will receive cash compensation of $12,000 per month commencing May 1, 2018. Mr. Loeb also received a bonus of $100,000, payable as of May 1, 2018, in recognition of his performance in the sale of our remaining shares of DSIT Solutions Ltd. He will be eligible for two additional bonuses during the term of the New Consulting Agreement: $150,000 upon consummation of a corporate acquisition transaction approved by our Board, and $150,000 upon consummation of a corporate financing/funding transaction approved by our Board. Mr. Loeb also received a grant on May 1, 2018 of options to purchase 35,000 shares of our common stock, which shall be exercisable at an exercise price of $0.35 per share, which was the closing price of our common stock on April 30, 2018. Fifty percent (50%) of the options vested immediately; the remaining options shall vest in two equal increments on July 1, 2018 and October 1, 2018. The exercise period and other terms are substantially the same as the terms of the options we have granted to our outside directors.

Executive Chairman of the Board

On April 9, 2018, Christopher E. Clouser, a member of our Board of Directors, was appointed to the newly-created position of Executive Chairman of the Board, and Edgar S. Woolard, Jr., another member of our Board of Directors, was appointed to the newly-created position of Vice Chairman of the Board.

For the performance of his additional duties as Executive Chairman, Mr. Clouser’s compensation will be increased by $36,000 per year (to an annual rate of $71,000). Mr. Clouser was also awarded a bonus, payable as of May 1, 2018, of $50,000 in recognition of his performance in the sale of our shares of DSIT Solutions Ltd.

Loans to OmniMetrix Holdings

In 2015, Edgar S. Woolard, Jr., one Acorn’s directors, acquired a 20% interest in Acorn’s OmniMetrix Holdings, Inc. subsidiary (“Holdings”) through the purchase of preferred stock (the “Preferred Stock”) for $1.0 million. Holdings is the holder of 100% of the membership interests OmniMetrix, LLC through which our OmniMetrix subsidiary operates.

On May 14, 2018, Holdings and Mr. Woolard entered into an agreement whereby effective May 1, 2018, the dividend on the Preferred Stock was reduced to 8%. In addition, all the amounts due to the Director (accrued dividends, loan and accrued interest) and all future dividends that shall accrue on the Preferred Stock through June 30, 2020 will be paid by Holdings to the Mr. Woolard as follows:

The payments in the agreement will be made only to the extent permitted under OmniMetrix’s credit facility. Dividends shall be paid only to the extent provided under Holdings’ Amended and Restated Certificate of Incorporation and permitted under Delaware law.

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. We provide the following services and products through our OmniMetrix^TM, LLC (“OmniMetrix”) subsidiary:

On January 18, 2018, we entered into a Share Purchase Agreement for the sale of our remaining interest in DSIT to an Israeli investor group (the “2018 DSIT Transaction”). Following the closing of the transaction on February 14, 2018, we will no longer report DSIT’s results on the equity method.

Each of our PG and CP activities represents a reportable segment. The following analysis should be read together with the segment information provided in Note 9 to the interim unaudited condensed consolidated financial statements included in this quarterly report.

OmniMetrix

OmniMetrix LLC is a Georgia limited liability company based in Buford, Georgia that develops and markets wireless remote monitoring and control systems and services for multiple markets in the Internet of Things (“IoT) ecosystem: critical assets (including stand-by power generators, pumps, pumpjacks, light towers, turbines, compressors, as well as other industrial equipment) as well as cathodic protection for the pipeline industry (gas utilities and pipeline companies). Acorn owns 80% of OmniMetrix with one of Acorn’s directors owning the remaining 20%.

Following the emergence of machine-to-machine and IoT applications whereby companies aggregate multiple sensors and monitors into a simplified dashboard for customers, OmniMetrix believes it plays a key role in this new economic ecosystem and can expand that role in the years ahead. In addition, OmniMetrix sees a 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 residential and industrial standby generators, as well as turbines, compressors, pumps, engines and other industrial equipment that are part of the critical infrastructure, increasingly becoming monitored in IoT applications, and given that OmniMetrix monitors all major brands of critical equipment, OmniMetrix believes it is well-positioned to be a competitive participant in this market.

Sales of OmniMetrix monitoring systems include the sale of equipment and of monitoring services. Revenue (and related costs) associated with sale of equipment are recorded to deferred revenue (and deferred charges) upon shipment for PG and CP monitoring units. Revenue and related costs with respect to the sale of equipment are recognized over the estimated life of the units which are currently estimated to be three years (two years up to December 31, 2017). Revenues from the prepayment of monitoring fees (generally paid twelve months in advance) are initially recorded as deferred revenue upon receipt of payment from the customer and then amortized to revenue over the monitoring service period.

OmniMetrix has two divisions: PG and CP. In the first three months of 2018, OmniMetrix recognized $1,209,000 of revenue ($886,000 in PG activities and $323,000 in CP activities) as compared to $1,096,000 ($898,000 in PG activities and $198,000 in CP activities) recorded in the first three months of 2017, representing an increase in revenue of 10%. Revenue from monitoring revenue increased 18% from $542,000 in the first three months of 2017 to $642,000 in the first three months of 2018 while revenue recognized from the sale of hardware increased 2% from $554,000 in the first three months of 2017 to $567,000 in the first three months of 2018. The increase in revenue is driven by a significant increase in monitoring revenue resulting from the increased number of units being monitored. First quarter 2018 revenue increased 8% as compared to fourth quarter 2017’s revenue.

Gross profit of $745,000 for the first three months of 2018 reflected a gross margin of 62% on the period’s revenue. Such gross profit represents significant increase from first three months of 2017’s gross profit of $614,000 (gross margin of 56%). The increase in the gross profit compared to the first three months of 2017 was attributable to a combination of increased revenue as well as increased gross margins.

OmniMetrix’s gross margin on hardware revenue increased from 27% in the first quarter of 2017 to 37% in the first quarter of 2018. The increase in hardware gross margin was the result of increased PG hardware margins from 20% in the three-month period in 2017 to 32% in the three-month period in 2018. This increase was due to a change in the sales mix to higher-margin PG products. The margin on monitoring revenue decreased slightly from 86% in the first three months of 2017 to 83% in the first three months of 2018. The decline in the monitoring margin was due to a change in the product mix of products monitored.

During the first three months of 2018, OmniMetrix recorded $129,000 of R&D expense as compared to approximately $92,000 of R&D in the first three months of 2017. The increase is related to the continued development of next generation PG and CP monitors.

During the first three months of 2018, OmniMetrix recorded $671,000 of SG&A (“Selling, General and Administrative”) expense. Such costs reflect a decrease of $47,000 (7%) as compared to SG&A expense of $718,000 in the first quarter of 2017. First quarter 2018 SG&A expense was also slightly below fourth quarter 2017 SG&A expense of $687,000. We do not expect SG&A expense to materially change in the coming quarters.

Corporate

Corporate general and administrative (“G&A”) expense of $313,000 in the first three months of 2018 reflected an increase of $172,000 from the $141,000 of expense reported in the first three months of 2017. First quarter 2017 G&A expense includes the $167,000 benefit recorded from a settlement reached with a professional service provider on an outstanding invoice. Excluding this one-time adjustment, G&A expense in the first quarter of 2018 was virtually unchanged from G&A expense in the first quarter of 2017. First quarter 2018 G&A expense was also slightly below fourth quarter 2017 G&A expense of $331,000. With the exception of the bonuses to be paid to our CEO and Executive Chairman of the Board (see Recent Developments) in recognition of their performance in the 2018 DSIT Transaction, which will be recorded in the second quarter of 2018, we believe our quarterly corporate G&A expense will not materially change.

On February 14, 2018, we closed on the 2018 DSIT Transaction initially entered into on January 18, 2018 for the sale of our remaining 41.15% interest in our DSIT Solutions Ltd. business to an Israeli investor group. At closing, we received gross proceeds of $5.8 million before transaction costs, professional fees and withholding taxes. From the gross proceeds, we paid $388,000 of withholding taxes, paid or accrued $441,000 of transaction costs and recorded a loss of $829,000 as the carrying value of our investment in DSIT had previously been written down to the gross proceeds of the 2018 DSIT Transaction. From the proceeds, we also repaid $1,600,000 of amounts due to DSIT and $1,428,000 of loan principal and interest due to directors.

On February 21, 2018, following the receipt of the proceeds from the 2018 DSIT Transaction, we repaid the entire $1.3 million borrowed from certain directors during 2017 along with accrued interest of $128,000.

Results of Operations

The following table sets forth certain information with respect to the consolidated results of operations of the Company for the three-month periods ended March 31, 2018 and March 31, 2017, 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 9 to the Unaudited Condensed Consolidated Financial Statements included in this quarterly report.

Revenue. Revenue in the first three months of 2018 increased by $113,000, or 10%, from $1,096,000 in the first three months of 2017 to $1,209,000 in the first three months of 2018. OmniMetrix’s increased revenue was primarily attributable to increased monitoring which increased from $542,000 in the first three months of 2017 to $642,000 in the first three months of 2018. The increase in monitoring revenue resulted from an increase in the number of units being monitored.

Gross profit. Gross profit in the first three months of 2018 reflected an increase of $131,000 (21%) as compared to the first three months of 2017. OmniMetrix’s gross profit increased from $614,000 in the first three months of 2017 to $745,000 in the first three months of 2018. OmniMetrix’s increased gross profit was attributable to a combination of its increased revenue and increased gross margin from 56% in the first three months of 2017 to 62% in the first three months of 2018. The increased gross margin is due to a change in the sales mix to higher-margin products.

Research and development (“R&D”) expenses. OmniMetrix’s R&D expense increased from $92,000 in the first three months of 2017 to $129,000 in the first three months of 2018 as it continues development of next-generation PG and CP monitors.

Selling, general and administrative (“SG&A”) expenses. SG&A expenses in the first three months of 2018 reflected an increase of $125,000 (15%) as compared to the first three months of 2017. OmniMetrix’s SG&A expense decreased from $718,000 in the first three months of 2017 to $671,000 in the first three months of 2018. Corporate expense increased from $141,000 in the first three months of 2017 to $313,000 in the first three months of 2018. The decrease at OmniMetrix was due to certain one-time marketing initiatives taken in 2017. The increase in corporate expense was due to a $167,000 benefit from a settlement reached with a professional service provider recorded in the first quarter of 2017. Excluding this one-time adjustment, corporate expense in the first quarter of 2018 was virtually unchanged from the first quarter of 2017.

Loss on sale of DSIT. In the first quarter of 2018, we closed on the sale of our remaining interests in DSIT Solutions Ltd., receiving gross proceeds of $5.8 million before transaction costs, professional fees and withholding taxes. We recorded a loss on the sale of $829,000 as the carrying value of our investment in DSIT had previously been written down to the gross proceeds of the 2018 DSIT Transaction.

Net loss attributable to Acorn Energy. We had a net loss attributable to Acorn shareholders of $1,222,000 in the first three months of 2018 compared to a net loss of $220,000 in the first three months of 2017. Our loss in 2018 is comprised of a loss at OmniMetrix of $85,000, corporate expense of $335,000 and the loss of $829,000 on the sale of our remaining interests in DSIT. These losses were partially offset by $27,000 representing the non-controlling interest share of our loss in OmniMetrix.

Liquidity and Capital Resources

At March 31, 2018 we had a negative working capital of $10,000. Our working capital includes approximately $2.4 million of cash and cash equivalents and deferred revenue of approximately $2.8 million. Such deferred revenue does not require significant cash outlay in order for the revenue to be recognized. Net cash increased during the three months ended March 31, 2018 by $1,940,000, of which $1,581,000 was used in operating activities, $4,971,000 was provided by investing activities and $1,450,000 was used in financing activities.

During the first three months of 2018, our OmniMetrix subsidiary used $175,000 in its operations while our corporate headquarters used $1,406,000 during the same period. Of the cash used in our corporate operating activities, $1,168,000 was used to pay off accumulated unpaid operating expenses that had been advanced in previous periods by DSIT.

Net cash of $4,971,000 was provided by investing activities from the sale of our remaining shares of DSIT.

Net cash of $1,450,000 was used in financing activities during the first three months of 2018. During the period, we repaid $1.3 million of director loans which were received in 2017 and we repaid our $340,000 loan from DSIT. These uses of cash were partially offset by the net proceeds of $190,000 by OmniMetrix under its Loan and Security Agreement (see below).

In October 2017, OmniMetrix renewed its Loan and Security Agreement with a lender providing OmniMetrix with access to accounts receivable formula-based financing of the lesser of 75% of eligible receivables or $1.0 million (an increase of $500,000 from the previous Loan and Security Agreement). Debt incurred under this financing arrangement bears interest at the greater of prime (4.75% at March 31, 2018) plus 2% or 6% per year. In addition, OmniMetrix is to pay a monthly service charge of 0.9% of the average aggregate principal amount outstanding for the prior month, for a current effective rate of interest on advances of 16.8%. OmniMetrix also agreed to maintain a minimum loan balance of $150,000 in its line-of-credit with the lender for a minimum of one year beginning November 1, 2017. At March 31, 2018, OmniMetrix’s loan balance under the Loan and Security Agreement was approximately $500,000 and it had additional availability of approximately $69,000. At May 8, 2018, OmniMetrix’s loan balance under the Loan and Security Agreement was approximately $160,000 and it had additional availability of approximately $500,000.

We have no assurance that this financing arrangement will provide sufficient liquidity for OmniMetrix’s working capital needs in 2018. Additional financing for OmniMetrix may be in the form of a bank line, a new loan or 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. Whether Acorn will have the resources necessary to provide funding, or whether alternative funds, such as third-party loans, will be available at the time and on terms acceptable to Acorn and OmniMetrix cannot be determined.

In 2015, Edgar S. Woolard, Jr., one Acorn’s directors, acquired a 20% interest in Acorn’s OmniMetrix Holdings, Inc. subsidiary (“Holdings”) through the purchase of preferred stock (the “Preferred Stock”) for $1.0 million. Holdings is the holder of 100% of the membership interests OmniMetrix, LLC, through which our OmniMetrix subsidiary operates.

A dividend of 10% per annum accrued on the Preferred Stock. The dividend was payable on the first anniversary of the funding of the investment and quarterly thereafter for so long as the Preferred Stock is outstanding and has not been converted to Common Stock. Through December 31, 2016, a dividend payable of $115,000 was recorded with respect to the Preferred Stock. On December 31, 2016, the director agreed to treat the these accrued dividends and all subsequent accrued and unpaid dividends as a loan to Holdings which bears interest at 8% per year. In December 2016, the director provided Holdings with an additional $50,000 loan under the same terms as the abovementioned accrued dividends.

Through March 31, 2018, a total of $241,000 of dividends accrued on the Preferred Stock and was added to the loan balance. Accrued interest on unpaid balances at March 31, 2018 was $22,000. All principal and interest were due on April 30, 2018.

On May 14, 2018, Holdings and Mr. Woolard entered into an agreement whereby effective May 1, 2018, the dividend on the Preferred Stock was reduced to 8%. In addition, all the amounts due to the Director (accrued dividends, loan and accrued interest) and all future dividends that shall accrue on the Preferred Stock through June 30, 2020 will be paid by Holdings to the Mr. Woolard as follows:

The payments in the agreement will be made only to the extent permitted under OmniMetrix’s credit facility. Dividends shall be paid only to the extent provided under Holdings’ Amended and Restated Certificate of Incorporation and permitted under Delaware law.

In addition to the amounts owed to Mr. Woolard, OmniMetrix owes Acorn approximately $3.5 million for loans, accrued interest and expenses advanced to it by Acorn. Such amounts will only be repaid to Acorn when OmniMetrix is generating sufficient cash to allow such repayment.

We had approximately $2,370,000 of corporate cash and cash equivalents on March 31, 2018, and approximately $1,950,000 on May 8, 2018. We believe that our current cash plus the cash expected to be generated from operations and borrowing from available lines of credit, if necessary, will provide sufficient liquidity to finance the operating activities of Acorn and the operations of its operating subsidiaries for at least the next 12 months.

Contractual Obligations and Commitments

The table below provides information concerning obligations under certain categories of our contractual obligations as of March 31, 2018.

CASH PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS

We expect to finance the contractual commitments for continuing operations from cash currently on hand and cash generated from operations.

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, escrow deposits and trade accounts receivable. The Company’s cash, cash equivalents and escrow deposits were deposited primarily with U.S. banks and brokerage firms and amounted to approximately $2.4 million at March 31, 2018. The Company does not believe there is significant risk of non-performance by these counterparties. Approximately 55% of the accounts receivable at March 31, 2018 was due from two customers (42% and 13%) who pay their receivables over usual credit periods (the Company collected $441,000 of the $552,000 due from these two customers in April 2018). Credit risk with respect to the balance of trade receivables is generally diversified due to the number of entities comprising the Company’s customer base.

Fair Value of Financial Instruments

Fair values of financial instruments included in current assets and current liabilities are estimated to approximate their book values due to the short maturity of such investments.

Interest Rate Risk

In October 2017, OmniMetrix renewed its Loan and Security Agreement with a lender providing OmniMetrix with access to accounts receivable formula-based financing of the lesser of 75% of eligible receivables or $1.0 million (an increase of $500,000 from the previous Loan and Security Agreement). Debt incurred under this financing arrangement bears interest at the greater of prime (4.75% at March 31, 2018) plus 2% or 6% per year. In addition, OmniMetrix is to pay a monthly service charge of 0.9% of the average aggregate principal amount outstanding for the prior month, for a current effective rate of interest on advances of 16.8%. OmniMetrix also agreed to maintain a minimum loan balance of $150,000 in its line-of-credit with the lender for a minimum of one year beginning November 1, 2017.

Evaluation of Disclosure Controls and Procedures