ACORN ENERGY, INC. - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

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)

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

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]

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

ACORN ENERGY, INC.

Quarterly Report on Form 10-Q

for the Quarterly Period Ended June 30, 2020

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.

ACORN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

(UNAUDITED)

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-and-six-month periods ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Certain reclassifications have been made to the Company’s unaudited condensed consolidated financial statements for the six-month period ended June 30, 2019 to conform to the current period’s unaudited condensed consolidated financial statement presentation. There was no effect on total assets, equity and net loss. A reclassification of $6,000 from finance expense to SG&A expense was recorded to reclass the Intuit processing fees for customer payments made through the Intuit portal via credit card or bank draft that was previously included in finance expense as of March 31, 2019 and is included in SG&A as of June 30, 2020. 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, 2019.

NOTE 2—RECENT AUTHORITATIVE GUIDANCE

Recently Issued Accounting Principles

Other than the pronouncement noted below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six-month period ended June 30, 2020, that are of material significance, or have potential material significance, to the Company.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASC 326”), authoritative guidance amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2022. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements and related disclosures.

Recently Adopted Accounting Principles

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 was effective in the first quarter of fiscal year 2020, although early adoption was permitted (but no sooner than the adoption of Topic 606). The Company concluded that the adoption of this ASU did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

NOTE 3—LIQUIDITY

At June 30, 2020, the Company had negative working capital of $282,000. The Company’s working capital includes approximately $1,760,000 of cash, deferred revenue of approximately $3,115,000 and $180,000 representing the current portion of our PPP loan which the Company expects to be substantially forgiven. The deferred revenue does not require significant cash outlay for the revenue to be recognized. During the first six months of 2020, the Company’s OmniMetrix subsidiary provided $528,000 from operations while the Company’s corporate headquarters used $450,000 during the same period.

OmniMetrix is considered an essential business because it provides infrastructure support to both government and commercial sectors and across key industries. The Company has experienced minimal negative impacts due to the COVID-19 pandemic to date. The Company has continued to realize new equipment sales (although not at the anticipated growth rate due to travel restrictions which have negatively impacted the sales closing timeline), has continued to collect its monthly recurring monitoring revenues and has retained its customer base. While the impacts of COVID-19 in the future are uncertain, the Company believes that due to the need for backup power and the desirability of remote monitoring services, it should be positioned for stable financial performance.

As of August 9, 2020, the Company had cash of approximately $1,775,000. The Company believes that such cash, plus the cash generated from operations and borrowing from the OmniMetrix Loan and Security Agreement, will provide sufficient liquidity to finance the operating activities of Acorn and OmniMetrix at their current level of operations for the foreseeable future and for the twelve months from the issuance of these unaudited condensed consolidated financial statements in particular.

NOTE 4—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 $1,000,000 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 $1,000,000 investment by the Investor was recorded as an increase in non-controlling interests.

On July 1, 2019, in accordance with terms established in 2015 at the time of the original investment, the Company repurchased from the Investor the shares of Preferred Stock then held by the Investor for a purchase price of $1,273,000 in cash (which included $323,000 of unpaid accrued dividends through June 30, 2019). The repurchase raised the Company’s ownership in Holdings from 80% to 99%, with the remaining 1% owned by the then-CEO of OmniMetrix, LLC.

NOTE 5—LEASES

OmniMetrix leases office space and office equipment under operating lease agreements. The office lease expires on September 30, 2025. The office equipment lease was entered into in April 2019 and has a sixty-month term. Operating lease payments for the three months ended June 30, 2020 and 2019 were $10,000 and $27,000, respectively. Operating lease payments for the six months ended June 30, 2020 and 2019 were $38,000 and $54,000, respectively. The lease payments were less in the current year periods due to two months of rent abatement provided for in the new lease amendment that were in effect during the six months period ended June 30, 2020. The future minimum lease payments on non-cancelable operating leases as of June 30, 2020 using a discount rate of 4.5% are $570,000.

Supplemental cash flow information related to leases consisted of the following (in thousands):

Supplemental balance sheet information related to leases consisted of the following:

The table below reconciles the undiscounted future minimum lease payments under non-cancelable lease agreements having initial terms in excess of one year to the total operating lease liabilities recognized on the consolidated balance sheet as of June 30, 2020 (in thousands):

NOTE 6—DEBT

On April 24, 2020, Acorn Energy, Inc. received Paycheck Protection Program (“PPP”) loan proceeds in the amount of $41,600.

On April 30, 2020, OmniMetrix, LLC received PPP loan proceeds in the amount $419,800.

Under the PPP of the Coronavirus Aid, Relief and Economic Security Act (the “Act”), up to the full principal amount of a loan and any accrued interest can be forgiven if the borrower uses all of the loan proceeds for forgivable purposes (payroll, benefits, lease/mortgage payments and/or utilities) required under the Act and any rule, regulation, or guidance issued by the SBA pursuant to the Act (collectively, the “Forgiveness Provisions”). The amount of forgiveness of the PPP loan depends on the borrower’s payroll costs over either an eight-week or twenty-four-week period beginning on the date of funding. Any processes or procedures established under the Forgiveness Provisions must be followed and any requirements of the Forgiveness Provisions must be fully satisfied to obtain such loan forgiveness. Pursuant to the provisions of the Act, the first six monthly payments of principal and interest will be deferred. Interest will accrue during the deferment period. The borrower must pay principal and interest payments on the fifth day of each month beginning seven months from the date of the applicable promissory note.

If no portion of the Acorn Energy PPP loan is forgiven under the Forgiveness Provisions, the monthly payments on that loan will be in the amount of $2,330 each; if no portion of the OmniMetrix PPP loan is forgiven under the Forgiveness Provisions, the monthly payments on that loan will be in the amount of $23,510 each. If any portion of a loan is forgiven under the Forgiveness Provisions, the payments will be in equal amounts which are sufficient to repay all principal and interest over the remaining term of the loan. The lender will apply each installment payment first to pay interest accrued to the day the lender receives the payment, then to bring principal current, then to pay any late fees, and will apply any remaining balance to reduce principal. All remaining principal and accrued interest is due and payable two years from the date of the applicable promissory note. In any event any payment is not made within ten days of the due date, the borrower will pay the lender a late charge in the amount not to exceed 5% of the payment. The borrower may prepay the principal at any time without penalty. Upon default, the loan shall bear interest at 6% per year until paid in full.

Interest expense on these loans for the three and six months ended June 30, 2020 was less than $1,000. The Company intends to use the PPP loan proceeds for qualified expenses and expects the full amount of the loan to be forgiven.

(b) 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 $1,000,000. Debt incurred under this financing arrangement bears interest at the greater of 6% and prime (3.25% at June 30, 2020) 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 an effective rate of interest on advances of 15% at June 30, 2020. 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. 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. The monthly service charge and interest is calculated on the greater of the outstanding balance or $150,000. Interest expense for the three-months-ended June 30, 2020 and 2019 was $9,000 and $2,000, respectively. Interest expense for the six-months-ended June 30, 2020 and 2019 was $16,000 and $9,000, respectively.

OmniMetrix had an outstanding balance of $181,000 and $136,000 as of June 30, 2020 and December 31, 2019, respectively, pursuant to the Loan and Security Agreement and $122,000 was available to borrow at June 30, 2020.

NOTE 7—COMMITMENTS AND CONTINGENCIES

On April 28, 2020, the Company entered into a new agreement for data hosting and business continuity services, replacing an expiring agreement with the same vendor, effective May 1, 2020. The agreement has a twelve-month term and the total payments under this agreement are $148,000 in the aggregate. This represents an increase of $21,000 for additional services under this agreement from the prior twelve-month period.

NOTE 8—EQUITY

(a) General

At June 30, 2020, the Company had issued and outstanding 39,687,589 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 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 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).

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

(b) Rights Offering

On June 28, 2019, the Company completed a rights offering, raising $2,184,000 in proceeds of which $1,628,000 was from related parties, net of $210,000 in expenses. Pursuant to the rights offering, Acorn securityholders and parties to a backstop agreement purchased 9,975,553 shares of Acorn common stock for $0.24 per share.

Under the terms of the rights offering, each right entitled securityholders as of June 3, 2019, the record date for the rights offering, to purchase 0.312 shares of Acorn common stock at a subscription price of $0.24 per whole share. No fractional shares were issued. The closing price of Acorn’s common stock on the record date of the rights offering was $0.2925. Distribution of the rights commenced on June 6, 2019 and were exercisable through June 24, 2019.

In connection with the rights offering, Acorn entered into a backstop agreement with certain of its directors and Leap Tide Capital Management LLC, the sole manager of which is Acorn’s President and CEO, pursuant to which they agreed to purchase from Acorn any and all unsubscribed shares of common stock in the rights offering, subject to the terms, conditions and limitations of the backstop agreement. The backstop purchasers did not receive any compensation or other consideration for entering into or consummating the backstop agreement.

On July 1, 2019, the Company utilized a portion of the rights offering proceeds to complete the planned reacquisition of a 19% interest in its OMX Holdings, Inc. subsidiary (“Holdings”) for $1,273,000, including accrued dividends. Holdings owns 100% of the membership interests of OmniMetrix, LLC. The purchase price was based on terms established in November 2015 at the time of the original investment. The purchase raised Acorn’s ownership in Holdings from 80% to 99%, with the remaining 1% owned by the former CEO of OmniMetrix, LLC. See Note 4 for further discussion.

The balance of the rights offering net proceeds provided OmniMetrix with additional sales and marketing resources to facilitate expansion into additional geographic markets and new product applications, to support next-generation product development and for general working capital purposes.

(c) 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 June 30, 2020, 1,716,719 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 six months ended June 30, 2020, an aggregate of 30,000 options was issued to non-employee directors, 35,000 options were issued to the Company’s CEO and 50,000 options were issued to the Company’s CFO. The fair value of the options issued was $23,000.

96,250 options were exercised during the six months ended June 30, 2020. The intrinsic value of options outstanding and of options exercisable at June 30, 2020 was approximately $2,000.

A summary of stock option activity for the six months ended June 30, 2020 is as follows:

The fair value of the options granted of $23,000 was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:

(d) Stock-based Compensation Expense

Stock-based compensation expense included in selling, general and administrative expenses in the Company’s unaudited condensed consolidated statements of operations was $19,000 and $12,000 for the six-month periods and $13,000 and $6,000 for the three-month-periods ended June 30, 2020 and 2019, respectively.

The total compensation cost related to non-vested awards not yet recognized was $39,000 as of June 30, 2020.

(e) 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:

On May 5, 2020, 2,142,857 warrants with a fair value of $1,018,000 expired in accordance with their terms.

NOTE 9— SEGMENT REPORTING

As of June 30, 2020, the Company operates in two reportable operating segments, both of which are performed through 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-and-six-month periods ended June 30, 2020 and 2019 (in thousands):

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 does not review the assets by segment.

Reconciliation of Segment Loss to Consolidated Net Loss Before Income Taxes

NOTE 10—REVENUE

The following table disaggregates the Company’s revenue for the three-and-six-month periods ended June 30, 2020 and 2019 (in thousands):

Deferred revenue activity for the six months ended June 30, 2020 can be seen in the table below (in thousands):

Other revenue of approximately $192,000, net of certain sales rebates of $11,000, 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 six months ended June 30, 2020 can be seen in the table below (in thousands):

*Amounts included in other assets in the Company’s unaudited condensed consolidated balance sheets at June 30, 2020 and December 31, 2019

Other cost of goods sold (COGS) recognized of approximately $143,000 is related to accessories, repairs, and other miscellaneous charges that are recognized to revenue when sold and are not deferred in addition to $295,000 in monitoring COGS which is not deferred.

The following table provides a reconciliation of the Company’s sales commissions contract assets for the six-month period ended June 30, 2020 (in thousands):

The capitalized sales commissions are included in other current assets ($82,000) and other assets ($74,000) in the Company’s unaudited condensed consolidated balance sheets at June 30, 2020. The capitalized sales commissions are included in other current assets ($60,000) and other assets ($78,000) in the Company’s consolidated balance sheets at December 31, 2019.

NOTE 11—SUBSEQUENT EVENTS

ACORN ENERGY, INC.

This Form 10-Q contains “forward-looking statements” relating to the Company which represent the Company’s current expectations or beliefs including, but not limited to, statements concerning the Company’s operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “anticipate”, “intend”, “could”, “estimate” or “continue” or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, and the ability of the Company to continue its growth strategy and the Company’s competition, certain of which are beyond the Company’s control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, or any of the other risks set out under the caption “Risk Factors” in the Company’s 10-K report for the year ended December 31, 2019 occur, actual outcomes and results could differ materially from those indicated in the forward-looking statements.

Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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 June 30, 2020, our backlog of work to be completed (primarily deferred revenue) at our OmniMetrix subsidiary totaled approximately $4.5 million.

RECENT DEVELOPMENTS

On April 24, 2020, Acorn Energy, Inc. received Paycheck Protection Program (“PPP”) loan proceeds in the amount of $41,600.

On April 30, 2020, OmniMetrix, LLC received PPP loan proceeds in the amount $419,800.

Under the PPP of the Coronavirus Aid, Relief and Economic Security Act (the “Act”), up to the full principal amount of a loan and any accrued interest can be forgiven if the borrower uses all of the loan proceeds for forgivable purposes (payroll, benefits, lease/mortgage payments and/or utilities) required under the Act and any rule, regulation, or guidance issued by the SBA pursuant to the Act (collectively, the “Forgiveness Provisions”). The amount of forgiveness of the PPP loan depends on the borrower’s payroll costs over either an eight-week or twenty-four-week period beginning on the date of funding. Any processes or procedures established under the Forgiveness Provisions must be followed and any requirements of the Forgiveness Provisions must be fully satisfied to obtain such loan forgiveness. Pursuant to the provisions of the Act, the first six monthly payments of principal and interest will be deferred. Interest will accrue during the deferment period. The borrower must pay principal and interest payments on the fifth day of each month beginning seven months from the date of the applicable promissory note.

While we fully anticipate that Acorn and OmniMetrix will each comply with their applicable Forgiveness Provisions and qualify for forgiveness of their respective loans, there can be no assurance that such loan forgiveness will be obtained. If no portion of the Acorn PPP loan is forgiven under the Forgiveness Provisions, the monthly payments on that loan will be in the amount of $2,330 each; if no portion of the OmniMetrix PPP loan is forgiven under the Forgiveness Provisions, the monthly payments on that loan will be in the amount of $23,510 each. If any portion of a loan is forgiven under the Forgiveness Provisions, the payments will be in equal amounts which are sufficient to repay all principal and interest over the remaining term of the loan. The lender will apply each installment payment first to pay interest accrued to the day the lender receives the payment, then to bring principal current, then to pay any late fees, and will apply any remaining balance to reduce principal. All remaining principal and accrued interest is due and payable two years from the date of the applicable promissory note. In any event any payment is not made within ten days of the due date, the borrower will pay the lender a late charge in the amount not to exceed 5% of the payment. The borrower may prepay the principal at any time without penalty. Upon default, the loan shall bear interest at 6% per year until paid in full.

On April 28, 2020, we entered into a new agreement for data hosting and business continuity services, replacing an expiring agreement with the same vendor, effective May 1, 2020. The agreement has a twelve-month term and the total payments under this agreement are $148,000 in the aggregate. This represents an increase of $21,000 for additional services under this agreement from the prior twelve-month period.

On May 5, 2020, 2,142,857 warrants with a book value of $1,018,000 expired in accordance with their terms.

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:

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 99% of OmniMetrix with 1% owned by the former CEO of OmniMetrix.

Following the emergence of machine-to-machine (M2M) and Internet of Things (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. 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.

Results of Operations

The following table sets forth certain information with respect to the consolidated results of operations of the Company for the six-month periods ended June 30, 2020 and 2019, 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 9 and 10 to the Unaudited Condensed Consolidated Financial Statements included in this quarterly report.

*result is less than 1%.

The following table sets forth certain information with respect to the consolidated results of operations of the Company for the three-month periods ended June 30, 2020 and 2019, 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 9 and 10 to the unaudited condensed consolidated financial statements included in this quarterly report.

*result is less than 1%.

Revenue. OmniMetrix has two divisions: PG and CP. In the six months ended June 30, 2020, OmniMetrix recorded revenue of $2,806,000 ($2,371,000 in its PG activities and $435,000 in its CP activities) as compared to revenue of $2,704,000 recorded in the six months ended June 30, 2019 ($2,053,000 in its PG activities and $651,000 in its CP activities).

The increase in revenue of $102,000, or 4%, in the six months ended June 30, 2020 was due to an increase in monitoring revenue of $283,000, or 18%, offset by a decrease in hardware revenue of $181,000, or 16%. The increase in monitoring revenue from $1,570,000 in the first six months of 2019 to $1,853,000 in the first six months of 2020 is the result of an increase in the number of units being monitored. The decrease in hardware revenue is primarily due to a decrease in the CP segment of $225,000 as a result of the longer sales and closing cycle of a CP sale compared to a PG sale and the impact of COVID-19 on our ability to meet with potential customers and to act timely and effectively on sales leads. A CP sales cycle can take twelve to eighteen months from customer introduction to closing. We have had a fully staffed CP sales team since the end of 2019 and our new sales director started in January 2020; however, the length of our CP sales cycle has been negatively impacted by restrictions related to COVID-19.

Revenue increased by $91,000 or 7%, from $1,377,000 in the second quarter of 2019 to $1,468,000 in the second quarter of 2020. OmniMetrix’s increased revenue during the quarter was primarily attributable to increased monitoring which increased $154,000, or 19% from $804,000 in the second quarter of 2019 to $958,000 in the second quarter of 2020. This increase was offset by a decrease in hardware revenue of $63,000, or 11%. These fluctuations are attributed to the same reasons as the increase in the six-month period ended June 30, 2020 discussed above.

Gross Profit. Gross profit during the six months ended June 30, 2020 was $1,944,000 reflecting a gross margin of 69% on revenue compared with a gross profit of $1,722,000 reflecting a 64% gross margin in the six months ended June 30, 2019. The increased gross profit in 2020 was due to a change in the revenue mix with a higher percentage of our total revenue being monitoring revenue which has a higher gross margin. Gross margin on hardware revenue for the six months ended June 30, 2020 was 40%, which was essentially flat as compared to 39% for the six months ended June 30, 2019. Gross margin on monitoring revenue remained strong at 84% during the six months ended June 30, 2020 as compared to 83% for the six months ended June 30, 2019.

OmniMetrix’s gross profit increased $121,000, or 13%, from $901,000 in the three months ended June 30, 2019 to $1,022,000 in the three months ended June 30, 2020.

Gross margin on hardware revenue for the three months ended June 30, 2020 was 42%, which was a 2% improvement as compared to 40% for the three months ended June 30, 2019. Gross margin on monitoring revenue remained strong at 84% during the three months ended June 30, 2020, which was flat as compared to 84% for the three months ended June 30, 2019.

Research and development expenses. During the six months ended June 30, 2020, OmniMetrix recorded $293,000 of R&D expense as compared to $283,000 in the six months ended June 30, 2019. During the three months ended June 30, 2020 and 2019, R&D expense was $138,000 and $139,000, respectively. The increase in R&D expense in the year-to-date period of 2020 is related to the continued development of next generation PG and CP products and exploration into new possible product lines. We expect a moderate increase in R&D expense throughout 2020 as we continue to work on certain initiatives to redesign products and expand product lines to increase the level of innovation and to reduce their costs in order to increase our future margins.

Selling, general and administrative expenses “SG&A”. During the six months ended June 30, 2020, OmniMetrix recorded $1,502,000 of SG&A costs compared to SG&A costs of $1,457,000 in the six months ended June 30, 2019, an increase of $45,000 or 3%. This increase was primarily due to increases in occupancy expense (in 2019 these expenses were primarily applied to a restructuring accrual), and personnel costs offset by a reduction in sales tax expenses.

For the three months ended June 30, 2020, SG&A expenses decreased $38,000, or 5%, to $684,000 from $722,000 for the three months ended June 30, 2019, primarily due to a decrease in travel expenses related to the restrictions of COVID-19. We anticipate that our annual SG&A costs throughout 2020 will increase approximately 15% due to having a fully staffed sales team and because of our continuing investments in our IT infrastructure.

Corporate

Corporate selling, general and administrative (“SG&A”) expense of $445,000 in the first six months of 2020 reflected a decrease of $7,000, or 2%, from the $452,000 of SG&A expense reported in the first six months of 2019, which is essentially flat year over year. SG&A expense for the three months ended June 30, 2020 decreased $21,000, or 9%, to $222,000 from $243,000 for the three months ended June 30, 2019, primarily due to the timing of certain expenses. Second quarter 2020 SG&A expense was $222,000, compared to first quarter 2020 SG&A expense of $223,000. We do not expect the quarterly corporate overhead to change materially except as may be required to support the growth of our OmniMetrix subsidiary.

Net loss attributable to Acorn Energy. We recognized a net loss attributable to Acorn shareholders of $316,000 in the first six months of 2020 compared to a net loss of $436,000 in the first six months of 2019. Our loss in 2020 is comprised of net income at OmniMetrix of $133,000 plus corporate expense of $449,000.

We recognized a net loss attributable to Acorn shareholders of $33,000 in the three months ended June 30, 2020 compared to a net loss of $199,000 in the three months ended June 30, 2019. Our loss in the second quarter 2020 is comprised of net income at OmniMetrix of $190,000 offset by corporate expense of $222,000 plus a $1,000 attributed to the non-controlling interest share of our income in Omnimetrix.

Liquidity and Capital Resources

At June 30, 2020, we had negative working capital of $282,000. Our working capital includes approximately $1,760,000 of cash, deferred revenue of approximately $3,115,000 and $180,000 representing the current portion of our PPP loan which we expect to be substantially forgiven. The deferred revenue does not require significant cash outlay for the revenue to be recognized.

During the first six months of 2020, our OmniMetrix subsidiary provided $528,000 from operations while our corporate headquarters used $450,000 during the same period.

We invested $88,000 in software and $3,000 in patent related expenses.

Net cash of $526,000 was provided by financing activities during the first six months of 2020 which was $19,000 in proceeds from the exercise of stock options, net proceeds from borrowings on our line of credit of $45,000 and proceeds from our PPP loan of $462,000.

See discussion of the proceeds we received from the PPP loan above under Recent Developments.

Omnimetrix 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 (3.25% at August 9, 2020) 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 15%. 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 $181,000 at June 30, 2020, pursuant to the Loan and Security Agreement.

Rights Offering

On June 28, 2019, we completed a rights offering, raising $2,186,000 in proceeds, net of $210,000 in expenses. Pursuant to the rights offering, our securityholders and parties to a backstop agreement purchased 9,975,553 shares of our common stock for $0.24 per share.

Under the terms of the rights offering, each right entitled securityholders as of June 3, 2019, the record date for the rights offering, to purchase 0.312 shares of our common stock at a subscription price of $0.24 per whole share. No fractional shares were issued. The closing price of our common stock on the record date of the rights offering was $0.2925. Distribution of the rights commenced on June 6, 2019 and were exercisable through June 24, 2019.

In connection with the rights offering, we entered into a backstop agreement with certain of our directors and Leap Tide Capital Management LLC, the sole manager of which is our President and CEO, pursuant to which they agreed to purchase from us any and all unsubscribed shares of common stock in the rights offering, subject to the terms, conditions and limitations of the backstop agreement. The backstop purchasers did not receive any compensation or other consideration for entering into or consummating the backstop agreement.

On July 1, 2019, we utilized a portion of the rights offering proceeds to complete the planned reacquisition of a 19% interest in our OMX Holdings, Inc. subsidiary (“Holdings”) for $1,273,000 discussed below.

The balance of the rights offering net proceeds provided OmniMetrix with additional sales and marketing resources to facilitate expansion into additional geographic markets and new product applications, to support next-generation product development and for general working capital purposes.

Purchase of Non-Controlling Interest

In 2015, one of our then-current directors (the “Investor”) acquired a 20% interest in our OMX Holdings, Inc. subsidiary (“Holdings”) through the purchase of $1,000,000 of OmniMetrix Preferred Stock (“Preferred Stock”). Holdings is the holder of 100% of the membership interests of OmniMetrix, LLC through which we operate our Power Generation and Cathodic Protection monitoring activities. The $1,000,000 investment by the Investor was recorded as an increase in non-controlling interests.

On July 1, 2019, in accordance with terms established in 2015 at the time of the original investment, the Company utilized a portion of the rights offering proceeds, as discussed above, to repurchase from the Investor the shares of Preferred Stock then held by the Investor for a purchase price of $1,273,000 (which included $323,000 of unpaid accrued dividends through June 30, 2019). The repurchase raised the Company’s ownership in Holdings from 80% to 99%, with the remaining 1% owned by the former CEO of OmniMetrix, LLC.

Other Liquidity Matters

OmniMetrix owes Acorn approximately $4,582,000 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 $1,760,000 of cash on June 30, 2020, and approximately $1,775,000 on August 9, 2020. On August 9, 2020, we had $145,000 outstanding on our line of credit and $208,000 available to borrow.  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 its operating subsidiaries for at least the next twelve months.

Contractual Obligations and Commitments

The table below provides information concerning obligations under certain categories of our contractual obligations as of June 30, 2020.

CASH PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS

* Includes $462,000 in proceeds from the PPP loan which we expect to be substantially forgiven.

COVID-19 Risk

The COVID-19 pandemic could negatively affect various aspects of our business, including our workforce and supply chain, and make it more difficult and expensive to meet our obligations to our customers, and could result in reduced demand from our customers.

The outbreak of the COVID-19 pandemic has caused governments around the world to implement quarantines of certain geographic areas and implement significant restrictions on travel. Several governments have also implemented work restrictions that prohibit many employees from going to work, both around the world as well as in certain jurisdictions in the United States. The number of these quarantines, travel bans, and other restrictions has been fluctuating at a rapid pace. At this time, it is unclear if foreign governments or U.S. federal, state or local governments will further extend any of the current restrictions or if further restrictions will be put into place. In addition, many countries, including the United States, have placed significant bans on international travel. It is possible that restrictions or bans on domestic travel may be implemented by U.S. federal, state or local governments. As a result of the pandemic, businesses can be shut down, supply chains can be interrupted, slowed, or rendered inoperable, and individuals can become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions.

Although OmniMetrix is considered an essential business because it provides infrastructure support to both government and commercial sectors and across key industries and has not been forced to shut down to date, governmental mandates may require forced shutdowns of our facilities for extended or indefinite periods. In addition, the pandemic could adversely affect our workforce resulting in serious health issues and absenteeism. The pandemic could also substantially interfere with general commercial activity related to our supply chain and customer base, which could have a material adverse effect on our financial condition, results of operations, business, or prospects. Although OmniMetrix has continued to collect its monthly recurring monitoring revenues, has retained its customer base and has continued to realize new equipment sales, the rate of such new sales has not met our anticipated growth rate. Restrictions related to the pandemic have had a negative impact on our ability to meet with potential customers and to act timely and effectively on sales leads, which has had a negative impact on the length of our CP sales cycle. Some of the electronic devices and hardware we purchase, like antennas, radios, and GPS modules are very specific to our application; there are not likely to be practical alternatives. In some cases, our circuit boards were designed around specific electronic hardware that met our specifications. We are working closely with our contract manufacturers and suppliers to mitigate as much as possible the risks to our supply chain for these critical devices and hardware, including identifying any lead-time issues and any potential alternate sources. We are also examining all currently open purchase orders to identify whether we need to issue additional orders to secure product that is critical, already has questionable lead times and/or is unique to our requirements.

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and trade accounts receivable. The Company’s cash were deposited primarily with U.S. banks and brokerage firms and amounted to approximately $1,760,000 at June 30, 2020. The Company does not believe there is significant risk of non-performance by these counterparties. Approximately 22% of the accounts receivable at June 30, 2020 was due from one customer who pays its receivables over usual credit periods (the Company collected 100% of the $157,000 due from this customer as of August 9, 2020). 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 (3.25% at August 9, 2020) 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 15%. 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.

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, 2019, 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, 2019, we employ a decentralized internal control methodology, coupled with management’s oversight, whereby our OmniMetrix 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.