ACORN ENERGY, INC. - Quarter Report: 2020 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, 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 March 31, 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 DEFICIT (UNAUDITED)

(IN THOUSANDS)

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-month period ended March 31, 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 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. There was no effect on total assets, equity and net loss. A reclassification of $6,000 from interest 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 interest expense as of March 31, 2019 and is included in SG&A as of March 31, 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 three-month period ended March 31, 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 condensed consolidated financial statements.

NOTE 3—LIQUIDITY

As of March 31, 2020, the Company had approximately $1,416,000 in cash. As of May 10, 2020, the Company had cash of approximately $1,881,000 including $461,000 in PPP loan proceeds. OmniMetrix is considered an essential business due to the fact that it provides infrastructure support to both government and commercial sectors and across key industries. The Company has not experienced any material negative impacts due to the COVID-19 pandemic to date. The Company continued to realize new equipment sales just not at the anticipated growth rate and it 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. 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 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 March 31, 2020 and 2019 were $28,000 and $27,000, respectively. The future minimum lease payments on non-cancelable operating leases as of March 31, 2020 using a discount rate of 4.5% are $573,000.

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 March 31, 2020 (in thousands):

NOTE 6—DEBT

(a) OmniMetrix

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 March 31, 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% during the three months ended March 31, 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 March 31, 2020 and 2019 was $7,000 and $2,000, respectively.

OmniMetrix had an outstanding balance of $139,000 and $136,000 as of March 31, 2020 and December 31, 2019, respectively, pursuant to the Loan and Security Agreement and $54,000 was available to borrow at March 31, 2020.

NOTE 7—EQUITY

(a) General

At March 31, 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 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).

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 provides 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 March 31, 2020, 1,766,719 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 three months ended March 31, 2020, 30,000 options were issued to directors and 35,000 options were issued to the Company’s CEO. In the three months ended March 30, 2020, there were no grants to non-employees. The fair value of the options issued was $14,000.

96,250 options were exercised during the three months ended March 31, 2020. The intrinsic value of options outstanding and of options exercisable at March 31, 2020 was less than $1,000.

A summary of stock option activity for the three months ended March 31, 2020 is as follows:

The fair value of the options granted of $14,000 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 $6,000 and $6,000 for the three-month periods ended March 31, 2020 and 2019, respectively.

The total compensation cost related to non-vested awards not yet recognized was $39,000 as of March 31, 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:

NOTE 8— SEGMENT REPORTING

As of March 31, 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-month periods ended March 31, 2020 and March 31, 2019 (in thousands):

The gross profit of the PG segment during the three months ended March 31, 2019 included a $30,000 accrual, which unfavorably impacted gross margin by approximately 2%. The accrual was for an estimated payment of approximately $30,000 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 9—REVENUE

The following table disaggregates the Company’s revenue for the three-month periods ended March 31, 2020 and 2019 (in thousands):

Deferred revenue activity for the three months ended March 31, 2020 can be seen in the table below (in thousands):

Other revenue of approximately $72,000 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 three months ended March 31, 2020 can be seen in the table below (in thousands):

Other COGS recognized of approximately $63,000 is related to accessories, repairs, and other miscellaneous charges that are recognized to revenue when sold and are not deferred in addition to $145,000 in monitoring COGS which is not deferred.

*Amounts included in other assets in the Company’s unaudited condensed consolidated balance sheets at March 31, 2020.

The following table provides a reconciliation of the Company’s sales commissions contract assets for the three-month period ended March 31, 2020 (in thousands):

The capitalized sales commissions are included in other current assets ($76,000) and other assets ($69,000) in the Company’s unaudited condensed consolidated balance sheets at March 31, 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 10—SUBSEQUENT EVENTS

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 an eight-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 in order 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 $2,400 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 $24,000 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, 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.

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

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 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%.

BACKLOG

As of March 31, 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 an eight-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 in order 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 in to 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 fair 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 8 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.

Revenue. OmniMetrix has two divisions: PG and CP. In the three months ended March 31, 2020, OmniMetrix recorded revenue of $1,338,000 ($1,109,000 in its PG activities and $229,000 in its CP activities) as compared to revenue of $1,327,000 recorded in the three months ended March 31, 2019 ($996,000 in its PG activities and $331,000 in its CP activities). The nominal increase in revenue of $11,000 in the three months ended March 31, 2020 was due to an increase in monitoring revenue of $129,000 offset by a decrease in hardware revenue of $118,000. The increase in monitoring revenue 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 $102,000 as a result of the lack of a fully staffed CP sales team for the majority of 2019 and the longer sales and closing cycle of a CP sale compared to a PG sale. 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 stared in January 2020; however, the length of our CP sales cycle has been negatively impacted by restrictions related to COVID-19.

Gross Profit. Gross profit during the three months ended March 31, 2020 was $922,000 reflecting a gross margin of 69% on revenue compared with a gross profit of $821,000 reflecting a 62% gross margin in the three months ended March 31, 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 three months ended March 31, 2020 was 39% which was essentially flat over the three months ended March 31, 2019 which was 38%. Gross margin on monitoring revenue remained strong at 84% during the three months ended March 31, 2020 as compared to 83% for the three months ended March 31, 2019.

Research and development expenses. During the three months ended March 31, 2020, OmniMetrix recorded $155,000 of R&D expense as compared to $144,000 in the three months ended March 31, 2019. The increase in R&D expense in 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 three months ended March 31, 2020, OmniMetrix recorded $818,000 of SG&A costs compared to SG&A costs of $735,000 in the three months ended March 31, 2019, an increase of $83,000 or 11%. This increase was primarily due to increases in personnel costs, computer software, travel and payment processing service charges. We anticipate that our annual SG&A costs throughout 2020 will increase approximately 15% due to having a fully staffed sales team and as a result of our continuing investments in our IT infrastructure.

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 May 15, 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. 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.

During the three months ended March 31, 2020, the intercompany amount due to Acorn from OmniMetrix increased by approximately $54,000 representing accrued interest and dividends. This included accrued interest and dividends of $83,000 offset by repayments of $29,000. We believe that OmniMetrix will not need working capital support in 2020 beyond the amounts available to it under the amended Loan and Security Agreement. However, we have no assurance that this will be the case. Additional financing for OmniMetrix may be in the form of a bank line, a new loan or investment by others, a loan by Acorn, or a combination of the above. The availability and amount of any additional loans from us to OmniMetrix may be limited by the working capital needs of our corporate activities. Whether Acorn will have the resources necessary to provide funding, or whether alternative funds, such as third-party loans, will be available at the time and on terms acceptable to Acorn and OmniMetrix cannot be determined.

Corporate

Corporate general and administrative (“G&A”) expenses were $223,000 and $209,000 during the three months ended March 31, 2020 and 2019, respectively, reflecting an increase of $14,000, or 7%. This increase was primarily due to an increase in officer and board fees and travel expenses offset by savings in insurance expenses, We do not expect our annual corporate G&A expense to materially change in 2020 other than expenses that may be required to corporately support the growth in OmniMetrix. Non-cash stock compensation was flat at $6,000 for both periods.

On December 24, 2019, we signed on an income tax assessment agreement for tax years 2013-2018, with the Israeli Tax Authority, according to which, we had additional tax liability in the amount of NIS 1,306 (approximately $373,000), in tax year 2018, with respect to our sale of DSIT Solutions Ltd. shares.

As a result, we received a tax refund in the amount of NIS 146,000 (approximately $42,000) and NIS 44,000 (approximately $12,500) as principal, with interest and linkage in the amount of approximately NIS 14,500 (approximately $4,000) and approximately NIS 1,900 (approximately $550), for the tax years 2017 and 2018, respectively. Prior to receiving this refund, the balance in our account in Israel was $313,000 which represented the $287,000 refund received for 2016 plus interest income of $21,000 and exchange gain of $5,000(the fees of $65,000 were paid out of our US bank account). Subsequent to year-end December 31, 2019, the aggregate tax refunds held in the bank account in Israel of approximately $371,000 were transferred from our bank account in Israel to our bank account in the US with exemption from withholding tax and our corporate income tax file was closed as of January 1, 2020.

As of May 10, 2020, Acorn’s corporate operations (excluding cash at our OmniMetrix subsidiary) held a total of approximately $1,881,000  in cash and cash equivalents.

Results of Operations

The following table sets forth certain information with respect to the condensed consolidated results of operations of the Company for the three-month periods ended March 31, 2020 and March 31, 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 8 and 9 to the Unaudited Condensed Consolidated Financial Statements included in this quarterly report.

See discussion of Revenue, Gross Profit and Research and development expenses above under the section titled “Omnimetrix”

Selling, general and administrative expenses. SG&A expenses in the first three months of 2020 reflected an increase of $97,000 (10%) as compared to the first three months of 2019. OmniMetrix’s SG&A expense increased from $735,000 in the first three months of 2019 to $818,000 in the first three months of 2020. Corporate SG&A expense increased from $209,000 in the first three months of 2019 to $223,000 in the first three months of 2020. See discussion of these fluctuations above under the sections titled “Omnimetrix” and “Corporate”.

Net loss attributable to Acorn Energy. We recognized a net loss attributable to Acorn shareholders of $283,000 in the first three months of 2020 compared to $237,000 in the first three months of 2019. Our loss during the three months ended March 31, 2020 is comprised of a net loss at OmniMetrix of $57,000 plus corporate expenses of $227,000 offset by $1,000 representing the non-controlling interest share of our loss in OmniMetrix. Our loss in the three months ended March 31, 2019 is comprised of net loss at OmniMetrix of $61,000 plus corporate expense of $200,000. 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, 2020, we had a negative working capital of $529,000. Our working capital includes approximately $1,416,000 of cash and deferred revenue of approximately $3.1 million. Such deferred revenue does not require significant cash outlay for the revenue to be recognized.

During the first three months of 2020, our OmniMetrix subsidiary provided $407,000 from its operations while our corporate headquarters used $170,000 during the same period.

We invested $87,000 in software and $3,000 in patent related expenses.

Net cash of $22,000 was provided by financing activities during the first three months of 2020 which was $19,000 in proceeds from the exercise of stock options and net proceeds from borrowings on our line of credit of $3,000.

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 May 10, 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 $139,000 at March 31, 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 $4,559,000 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 $1,416,000 of cash on March 31, 2020, and approximately $1,881,000  on May 10, 2020 which includes approximately $461,000 in PPP loan proceeds. On May 10, 2020, we had $184,000 outstanding on our line of credit and $157,000 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 March 31, 2020.

CASH PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS

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 Coronavirus 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 have been increasing 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. However, OmniMetrix is considered an essential business due to the fact that it provides infrastructure support to both government and commercial sectors and across key industries. So it 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. 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 in order 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 in an effort 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 $1,416,000 at March 31, 2020. The Company does not believe there is significant risk of non-performance by these counterparties. Approximately 15% of the accounts receivable at March 31, 2020 was due from one customer who pays its receivables over usual credit periods (the Company collected $50,000 of the $77,000 due from this customer as of May 10, 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