ACORN ENERGY, INC. - Quarter Report: 2019 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, 2019

Commission file number: 001-33886

ACORN ENERGY, INC.

(Exact name of registrant as specified in charter)

410-654-3315

(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 every Interactive Data File required to be submitted 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 such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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]

Securities registered pursuant to Section 12(b) of the Act:

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, 2019

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

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 STATEMENTS 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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. All dollar and New Israeli Shekel (“NIS”) 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, 2019 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, 2018.

NOTE 2—RECENT AUTHORITATIVE GUIDANCE

In February 2016, the FASB issued ASU 2016-02, Leases, which is effective for fiscal years beginning as of December 15, 2018, and interim periods within those years 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.

The Company adopted this standard on January 1, 2019 and applied the transition guidance as of the date of adoption, under the current period adjustment method. As a result, the Company recognized right-of-use assets and lease liabilities associated with its leases on January 1, 2019, with a cumulative-effect adjustment to the opening balance of accumulated deficit, while the comparable prior periods in its consolidated financial statements will continue to be reported in accordance with Topic 840, including the disclosures of Topic 840.

The standard includes a number of optional practical expedients under the transaction guidance. The Company has elected the package of practical expedients which allows it to not reassess prior conclusions about lease identification, lease classification, and initial direct costs. The Company also made accounting policy elections by class of underlying asset to not apply the recognition requirements of the standard to leases with terms of 12 months or less and to not separate non-lease components from lease components. Consequently, each separate lease component and the non-lease components associated with that lease component will be accounted for as a single lease component for lease classification, recognition, and measurement purposes. Upon adoption of the standard, the Company recognized a lease obligation liability of $44 recorded in other current liabilities, and a right-of-use asset of $44 recorded in property and equipment, net. An adjustment of $26 was made to reduce the right-of-use asset and deferred rent to reflect the impact of the retrospective approach on adopting this guidance. The lease obligation liability was $33 as of March 31, 2019.

In June 2018, the FASB issued ASU 2018-07, which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard will be effective in the first quarter of fiscal year 2020, although early adoption is permitted (but no sooner than the adoption of Topic 606). The Company is currently evaluating the effect the adoption of this ASU will have on its consolidated financial statements.

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

NOTE 3—INVESTMENT IN OMNIMETRIX

In 2015, one of the Company’s then-current directors (the “Investor”) acquired a 20% interest in the Company’s OMX 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 of OmniMetrix, LLC through which the Company operates its Power Generation and Cathodic Protection monitoring activities. The $1,000 investment by the Investor 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 Investor 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 Investor provided Holdings with an additional $50 loan under the same terms as the abovementioned accrued dividends.

On May 14, 2018, Holdings and the Investor 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 Investor (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 pursuant to an agreed-upon payment schedule which ends on June 30, 2020. During the year ended December 31, 2018, Holdings made payments of $100 in the aggregate in accordance with the agreed upon payment schedule and accrued additional quarterly dividends of $87 in the aggregate. During the three months ended March 31, 2019, the Company accrued $20 for the quarterly dividend. At March 31, 2019, the obligation to the Investor was $303, representing unpaid accrued dividends. The amount accrued as of March 31, 2019 is expected to be paid to the Investor by Holdings quarterly as shown in the table below. This table does not include any future dividends that shall accrue over this period (five quarters) on the Preferred Stock of $20 per quarter ($100 in the aggregate):

Dividends shall be paid only to the extent provided under Holdings’ Amended and Restated Certificate of Incorporation and as permitted under applicable law. The scheduled dividend payment of $40 was not paid in the three-month period ended March 31, 2019 because Holdings did not have funds lawfully available for the payment of such dividend as its assets did not exceed its liabilities on the scheduled payment date. The Company plans to propose a complete buy-out of the Investor’s ownership interest upon completion of the rights offering. See Note 8.

The OmniMetrix Preferred Stock may convert at the option of the holder on a one-for-one basis into OmniMetrix common stock, subject to appropriate adjustments for corporate reorganizations, mergers, stock splits, etc. The OmniMetrix Preferred Stock has full ratchet anti-dilution protection and will not be diluted by any issuances below a pre-money equity valuation of $5,500 for OmniMetrix.

NOTE 4—DEBT

In March 2019, OmniMetrix reinstated 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 6% and prime (5.5% at March 31, 2019) plus 1.5% per year. In addition, OmniMetrix is to pay a monthly service charge of 0.75% of the average aggregate principal amount outstanding for the prior month, for a current effective rate of interest on advances of 16%. 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 two years beginning March 1, 2019. From time to time, the balance outstanding may fall below $150 based on collections applied against the loan balance and the timing of loan draws. The monthly service charge and interest is calculated on the greater of the outstanding balance or $150. Interest expense for the three months ended March 31, 2019 and 2018 was $1 and $23, respectively.

OmniMetrix had an outstanding balance of $140 at March 31, 2019, pursuant to the Loan and Security Agreement and $267 was available to borrow.

NOTE 5—EQUITY

(a) General

At December 31, 2018 the Company had issued and outstanding 29,555,786 shares of its common stock, par value $0.01 per share. Holders of outstanding common stock are entitled to receive dividends when, as and if declared by the Board and to share ratably in the assets of the Company legally available for distribution in the event of a liquidation, dissolution or winding up of the Company. Holders of common stock do not have subscription, redemption, conversion or other preemptive rights. Holders of the common stock are entitled to elect all of the Directors on the Company’s Board. Holders of the common stock do not have cumulative voting rights, meaning that the holders of more than 50% of the common stock can elect all of the Company’s Directors. Except as otherwise required by Delaware General Corporation Law, all stockholder action is taken by vote of a majority of shares of common stock present at a meeting of stockholders at which a quorum (a majority of the issued and outstanding shares of common stock) is present in person or by proxy or by written consent pursuant to Delaware law (other than the election of Directors, who are elected by a plurality vote).

On August 6, 2018, the Company’s stockholders approved an amendment to the Company’s restated certificate of incorporation to authorize a reverse split of the Company’s common stock at any time prior to August 6, 2019, at a ratio between one-for-ten and one-for-twenty, if and as determined by the Company’s Board of Directors.

The Company is not authorized to issue preferred stock. Accordingly, no preferred stock is issued or outstanding.

See Note 8, Subsequent Events.

(b) Summary Employee Option Information

The Company’s stock option plans provide for the grant to officers, directors and other key employees of options to purchase shares of common stock. The purchase price may be paid in cash or at the end of the option term, if the option is “in-the-money”, it is automatically exercised “net”. In a net exercise of an option, the Company does not require a payment of the exercise price of the option from the optionee, but reduces the number of shares of common stock issued upon the exercise of the option by the smallest number of whole shares that has an aggregate fair market value equal to or in excess of the aggregate exercise price for the option shares covered by the option exercised. Each option is exercisable to one share of the Company’s common stock. Most options expire within five to ten years from the date of the grant, and generally vest over three-year period from the date of the grant. At the annual meeting of stockholders on September 11, 2012, the Company’s stockholders approved an Amendment to the Company’s 2006 Stock Incentive Plan to increase the number of available shares by 1,000,000 and an Amendment to the Company’s 2006 Stock Incentive Plan for Non-Employee Directors to increase the number of available shares by 200,000. In February 2019, the Company’s Board extended the expiration date of the 2006 Stock Incentive Plan until December 31, 2024.

At March 31, 2019, 1,537,114 options were available for grant under the 2006 Amended and Restated Stock Incentive Plan and no options were available for grant under the 2006 Director Plan. During the three months ended March 31, 2019, 30,000 options were granted to directors. The fair value of the options issued was $7.

No options were exercised in the three months ended March 31, 2019. The intrinsic value of options outstanding and of options exercisable at March 31, 2019 was $25 and $24, respectively.

A summary of stock option activity for the three months ended March 31, 2019 is as follows:

The options granted in 2019 were to directors with an exercise price of $0.31. 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:

(c) Stock-based Compensation Expense

Stock-based compensation expense included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations was $6 and $7 for the three month-periods ended March 31, 2019 and 2018, respectively.

The total compensation cost related to non-vested awards not yet recognized was $16 as of March 31, 2019.

(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 6— SEGMENT REPORTING

As of March 31, 2019, the Company operates in two reportable operating segments, both of which are performed though the Company’s OmniMetrix subsidiary:

The Company’s reportable segments are strategic business units, offering different products and services and are managed separately as each business requires different technology and marketing strategies.

The following tables represent segmented data for the three-month periods ended March 31, 2019 and March 31, 2018:

The gross profit of the PG segment during the three months ended March 31, 2019 included a $30 accrual, which unfavorably impacted gross margin by 2%. The accrual was for an estimated payment of approximately $30 related to a long-term purchase commitment of what is now discontinued technology that has been replaced with upgraded technology. This adjustment is recorded in cost of sales – other.

The Company does not currently break out total assets by reportable segment as there is a high level of shared utilization between the segments. Further, the Chief Decision Maker (CDM) does not review the assets by segment.

Reconciliation of Segment Loss to Consolidated Net Loss Before Income Taxes

NOTE 7—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, 2019 and 2018:

Deferred revenue activity for the three months ended March 31, 2019 can be seen in the table below:

Other revenue of approximately $87 is related to accessories, repairs, and other miscellaneous charges that are recognized to revenue when sold and are not deferred.

Deferred charges relate only to the sale of equipment. Deferred charges activity for the three months ended March 31, 2019 can be seen in the table below:

* Amounts included in other assets in the Company’s unaudited condensed consolidated balance sheets at March 31, 2019.

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 following table provides a reconciliation of the Company’s sales commissions contract assets for the three-month period ended March 31, 2019:

The capitalized sales commissions are included in other current assets ($70) and other assets ($69) in the Company’s unaudited condensed consolidated balance sheets at March 31, 2019. The capitalized sales commissions are included in Other Current Assets ($76) and Other Assets ($67) in the Company’s Consolidated Balance Sheets at December 31, 2018.

NOTE 8—SUBSEQUENT EVENTS

On April 1, 2019, the Company awarded a total of 167,500 stock options, in the aggregate, to employees of its OmniMetrix subsidiary at an exercise price of $0.32. These options vest ratably over three years starting on the first anniversary date of the option grant date.

On May 6, 2019, the Company filed an S-1 Registration Statement for a rights offering seeking to raise gross proceeds of $2,400. The rights offering would be in the form of a distribution, to the Company’s stockholders and holders of certain of its warrants, of non-transferable rights to purchase additional shares of the Company’s Common Stock at a discount that is expected to be between 15% and 20% to the market price. The final terms and timing of the rights offering have not yet been determined.

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, 2018.

FINANCIAL RESULTS BY COMPANY

The following tables show, for the periods indicated, the financial results (dollar amounts in thousands) attributable to each of our consolidated companies.

In the three months ended March 31, 2019, OmniMetrix recorded an accrual for an estimated payment of approximately $30,000 for a long-term purchase commitment of what is now discontinued technology that has been replaced with upgraded technology. This adjustment is recorded as cost of sales – other and is included in the OmniMetrix gross profit in the table above. Gross profit excluding this non-recurring adjustment would be $851,000, or 64%. We will pursue selling the inventory in the secondary market to recover some of this write-off but we have no guarantee that we will find a buyer for the inventory.

BACKLOG

As of March 31, 2019, our backlog of work to be completed (primarily deferred revenue) at our OmniMetrix subsidiary totaled approximately $4.0 million.

RECENT DEVELOPMENTS

In March 2019, OmniMetrix reinstated 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 million. Debt incurred under this financing arrangement bears interest at the greater of 6% and prime (5.5% at May 10, 2019) plus 1.5% per year. In addition, OmniMetrix is to pay a monthly service charge of 0.75% of the average aggregate principal amount outstanding for the prior month, for a current effective rate of interest on advances of 16%. The monthly service charge and interest is calculated on the greater of the outstanding balance or $150,000. From time to time, the balance outstanding may fall below $150,000 based on collections applied against the loan balance and the timing of loan draws.

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 6 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.

Following the emergence of machine-to-machine (“M2M”) 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. In addition, OmniMetrix sees a rapidly growing need for backup power infrastructure to secure critical military, government, and private sector assets against emergency events including terrorist attacks, natural disasters, and cybersecurity threats. As residential and industrial standby generators, turbines, compressors, pumps, pumpjacks, light towers and other industrial equipment are part of the critical infrastructure increasingly becoming monitored in Internet of Things applications, and given that OmniMetrix monitors all major brands of critical equipment, OmniMetrix believes it is well-positioned as a competitive participant in this new 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 2019, OmniMetrix recognized $1,327,000 of revenue ($996,000 in PG activities and $331,000 in CP activities) as compared to $1,209,000 ($886,000 in PG activities and $323,000 in CP activities) recorded in the first three months of 2018, representing an increase in revenue of 10%. Revenue from monitoring revenue increased 19% from $642,000 in the first three months of 2018 to $766,000 in the first three months of 2019 while revenue recognized from the sale of hardware decreased 1% from $567,000 in the first three months of 2018 as compared to $561,000 in the first three months of 2019. The increase in revenue is driven by a significant increase in monitoring revenue resulting from the increased number of units being monitored as a result of focused sales initiatives on the industrial and commercial markets. The decrease in hardware revenue was due to two sizeable orders that were placed in March 2018.

Gross profit of $821,000 for the first three months of 2019 reflected a gross margin of 62% on the period’s revenue. However, the gross profit during this period included a $30,000 accrual, which unfavorably impacted our gross margin by 2%. The accrual was for an estimated payment of approximately $30,000 for a long-term purchase commitment of what is now discontinued technology that has been replaced with upgraded technology. This adjustment is recorded in cost of sales – other. We will pursue selling the inventory in the secondary market to recover some of this write-off but we have no guarantee that we will find a buyer for the inventory.

Such gross profit represents significant increase from first three months of 2018’s gross profit of $745,000 (gross margin of 62%). The increase in the gross profit compared to the first three months of 2018 was attributable to increased revenue. OmniMetrix’s gross margin on hardware revenue increased 1% from 37% in the first quarter of 2018 to 38% in the first quarter of 2019. The margin on monitoring revenue remained flat at 83% when compared to the same period in the prior year.

During the first three months of 2019, OmniMetrix recorded $144,000 of Research and Development (“R&D”) expense as compared to approximately $129,000 of R&D expense in the first three months of 2018. The increase is related to the continued development of next generation PG and CP monitors.

During the first three months of 2019, OmniMetrix recorded $729,000 of selling, general and administrative (“SG&A”) expense. Such costs reflect an increase of $58,000 (9%) as compared to SG&A expense of $671,000 in the first quarter of 2018. First quarter 2019 SG&A expense was also 9% higher than the fourth quarter 2018 SG&A expense which was also $671,000. This increase is primarily due to an increase in personnel costs of $47,000 from the same period in the prior year as a result of investments in the growth of the business. The Company plans to continue to make investments to expand its sales department, upgrade its software monitoring options, and implement a new ERP (Enterprise Resource Planning) system to provide more integrated backoffice operations.

Corporate

Corporate general and administrative (“G&A”) expense of $209,000 in the first three months of 2019 reflected a decrease of $104,000, or 33%, from the $313,000 of G&A expense reported in the first three months of 2018. The decrease is primarily due to a material reduction in personnel costs as well as a reduction in board fees and other professional service fees. First quarter 2019 G&A expense also decreased 9% from fourth quarter 2018 G&A expense of $230,000. We do not expect the quarterly corporate overhead to change materially except as may be required to support the growth of our OmniMetrix subsidiary.

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 the entire $1.3 million of loan principal borrowed from certain directors during 2017 along with accrued interest thereon 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, 2019 and March 31, 2018, 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 Notes 6 and 7 to the Unaudited Condensed Consolidated Financial Statements included in this quarterly report.

Revenue. Revenue increased by $118,000, or 10%, from $1,209,000 in the first three months of 2018 to $1,327,000 in the first three months of 2019. OmniMetrix’s increased revenue was primarily attributable to increased monitoring which increased from $642,000 in the first three months of 2018 to $766,000 in the first three months of 2019. The increase in monitoring revenue resulted from an increase in the number of units being monitored.

Gross profit. OmniMetrix’s gross profit increased $76,000, or 10%, in the first three months of 2019 compared to the first three months of 2018, from $745,000 to $821,000. However, the gross profit during this period included a $30,000 accrual, which unfavorably impacted our gross margin by 2%. The accrual was for an estimated payment of approximately $30,000 for a long-term purchase commitment of what is now discontinued technology that has been replaced with upgraded technology. This adjustment is recorded in cost of sales – other. We will pursue selling the inventory in the secondary market to recover some of this write-off but we have no guarantee that we will find a buyer for the inventory. The increase in gross profit from the same period in the prior year was attributable to OmniMetrix’s increased revenue.

Research and development expenses. OmniMetrix’s R&D expense increased from $129,000 in the first three months of 2018 to $144,000 in the first three months of 2019 as it continues development of next-generation PG and CP monitors.

Selling, general and administrative expenses. SG&A expenses in the first three months of 2019 reflected a decrease of $46,000 (5%) as compared to the first three months of 2018. OmniMetrix’s SG&A expense increased from $671,000 in the first three months of 2018 to $729,000 in the first three months of 2019. Corporate SG&A expense decreased from $313,000 in the first three months of 2018 to $209,000 in the first three months of 2019. As previously noted the increase in OmniMetrix SG&A expense was primarily due to an increase in personnel costs of $47,000 from the same period in the prior year as a result of investments in the growth of the business, and the decrease in Corporate SG&A expense is due to a material reduction in personnel costs as well as a reduction in board fees and other professional service fees.

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 recognized a net loss attributable to Acorn shareholders of $237,000 in the first three months of 2019 compared to a net loss of $1,222,000 in the first three months of 2018. Our loss in 2019 is comprised of net loss at OmniMetrix of $96,000 offset by corporate expense of $141,000. These losses were partially offset by $24,000 representing the non-controlling interest share of our loss in OmniMetrix.

Liquidity and Capital Resources

At March 31, 2019, we had a negative working capital of $1,178,000. Our working capital includes approximately $779,000 of cash (excluding restricted cash) and deferred revenue of approximately $2.7 million. Such deferred revenue does not require significant cash outlay for the revenue to be recognized.

During the first three months of 2019, our OmniMetrix subsidiary used $76,000 in its operations while our corporate headquarters used $249,000 during the same period.

Net cash of $140,000 was provided by financing activities during the first three months of 2019 which was the proceeds from our line of credit.

In March 2019, OmniMetrix reinstated 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 million. Debt incurred under this financing arrangement bears interest at the greater of 6% and prime (5.5% at May 10, 2019) plus 1.5% per year. In addition, OmniMetrix is to pay a monthly service charge of 0.75% of the average aggregate principal amount outstanding for the prior month, for a current effective rate of interest on advances of 16%. OmniMetrix also agreed to continue to maintain a minimum loan balance of $150,000 in its line-of-credit with the lender for a minimum of two years beginning March 1, 2019. The monthly service charge and interest is calculated on the greater of the outstanding balance or $150,000. From time to time, the balance outstanding may fall below $150,000 based on collections applied against the loan balance and the timing of loan draws.

OmniMetrix had an outstanding balance of $140,000 at March 31, 2019, pursuant to the Loan and Security Agreement.

On May 6, 2019, the Company filed an S-1 Registration Statement for a rights offering seeking to raise gross proceeds of $2.4 million. The rights offering would be in the form of a distribution, to the Company’s stockholders and holders of certain of its warrants, of non-transferable rights to purchase additional shares of the Company’s Common Stock at a discount that is expected to be between 15% and 20% to the market price. The final terms and timing of the rights offering have not yet been determined. Acorn intends to use the net proceeds from the rights offering to finance the contemplated reacquisition of the 20% minority interest in OmniMetrix that it does not already own and to provide OmniMetrix with additional sales and marketing resources to facilitate expansion into additional geographic markets and new product applications, as well as to support next-generation product development. Any net proceeds not so utilized will be used for general working capital purposes.

In 2015, Edgar S. Woolard, Jr., one of our then-current directors (the “Investor”), acquired a 20% interest in our OMX 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 of 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 OmniMetrix 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 Investor agreed to treat 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 Investor provided Holdings with an additional $50,000 loan under the same terms as the abovementioned accrued dividends.

On May 14, 2018, Holdings and the Investor 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 Investor (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 pursuant to an agreed-upon payment schedule which ends on June 30, 2020. During the year ended December 31, 2018, Holdings made payments of $100,000 in the aggregate in accordance with the agreed-upon payment schedule and additional quarterly dividends of $87,000 in the aggregate were accrued. At March 31, 2019, the obligation to the Investor was $303,000, representing unpaid accrued dividends. The amount accrued as of March 31, 2019 is expected to be paid to the Investor by Holdings quarterly as shown in the table below. This table does not include any future dividends that shall accrue over this period (five quarters) on the Preferred Stock of $20,000 per quarter ($100,000 in the aggregate):

Dividends shall be paid only to the extent provided under Holdings’ Amended and Restated Certificate of Incorporation and as permitted under applicable law. The scheduled dividend payment of $40,000 was not paid in the three-month period ended March 31, 2019 because Holdings did not have funds lawfully available for the payment of such dividend as its assets did not exceed its liabilities on the scheduled payment date. The Company plans to propose a complete buy-out of the Investor’s ownership interest in Holdings upon completion of the contemplated rights offering.

In addition to the amounts owed to the Investor (who resigned from the board on August 6, 2018), OmniMetrix owes Acorn approximately $4.0 million for loans, accrued interest and expenses advanced to it by Acorn.

We had approximately $779,000 of cash (excluding restricted cash of $299,000) on March 31, 2019, and approximately $684,000 (excluding restricted cash of $299,000) on May 10, 2019. OmniMetrix had $309,000 available to draw under its credit line as of May 10, 2019. We believe that our current cash plus the cash expected to be generated from operations and borrowing from available lines of credit will provide sufficient liquidity to finance the operating activities of Acorn and the operations of OmniMetrix for at least the next twelve months. Further, assuming the consummation of the rights offering as set forth above, the expected net proceeds of the rights offering will provide additional liquidity for working capital and our growth plans for the foreseeable future.

Contractual Obligations and Commitments

The table below provides information concerning obligations under certain categories of our contractual obligations as of March 31, 2019.

CASH PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS

We expect to finance the contractual commitments from cash currently on hand and cash generated from operations and proceeds from the rights offering, if necessary.

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 $779,000 at March 31, 2019. The Company does not believe there is significant risk of non-performance by these counterparties. Approximately 16% of the accounts receivable at March 31, 2019 was due from one customer who pays its receivables over usual credit periods (the Company collected $97,000 of the $102,000 due from this customer as of May 10, 2019). 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 March 2019, OmniMetrix reinstated 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 million. Debt incurred under this financing arrangement bears interest at the greater of 6% and prime (5.5% at May 10, 2019) plus 1.5% per year. In addition, OmniMetrix is to pay a monthly service charge of 0.75% of the average aggregate principal amount outstanding for the prior month, for a current effective rate of interest on advances of 16%. OmniMetrix also agreed to continue to maintain a minimum loan balance of $150,000 in its line-of-credit with the lender for a minimum of two years beginning March 1, 2019.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to material weaknesses noted in our Annual Report on Form 10-K for the year ended December 31, 2018, to ensure that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our management (including our Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

As noted in our Annual Report on Form 10-K for the year ended December 31, 2018, we employ a decentralized internal control methodology, coupled with management’s oversight, whereby each subsidiary is responsible for mitigating its risks to financial reporting by implementing and maintaining effective control policies and procedures and subsequently translating that respective risk mitigation up and through to the parent level and to our external financial statements. In addition, as our operating subsidiary is not large enough to effectively mitigate certain risks by segregating incompatible duties, management must employ compensating mechanisms throughout our company in a manner that is feasible within the constraints it operates.

The material weaknesses management identified were caused by an insufficient complement of resources at our OmniMetrix subsidiary and limited IT system capabilities, such that individual control policies and procedures at the subsidiary could not be implemented, maintained, or remediated when and where necessary. As a result, a majority of the significant process areas management identified for our OmniMetrix subsidiary had one or more material weaknesses present.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by its principal financial officer thereunto duly authorized.