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 September 30, 2020

 

Commission file number: 001-33886

 

ACORN ENERGY, INC.

(Exact name of registrant as specified in charter)

 

Delaware   22-2786081

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1000 N West Street, Suite 1200, Wilmington, Delaware   19801
(Address of principal executive offices)   (Zip Code)

 

410-654-3315

(Registrant’s telephone number, including area code)

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None        

 

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.

 

  Large accelerated filer [  ]   Accelerated filer [  ]
       
  Non-accelerated filer [X]   Smaller reporting company [X]
       
  Emerging growth company [  ]    

 

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.

 

Class   Outstanding at November 9, 2020
Common Stock, $0.01 par value per share   39,687,589

 

 

 

     
     

 

ACORN ENERGY, INC.

Quarterly Report on Form 10-Q

for the Quarterly Period Ended September 30, 2020

 

TABLE OF CONTENTS

 

  PAGE
PART I Financial Information  
   
Item 1. Unaudited Condensed Consolidated Financial Statements: 3
   
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 3
   
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 4
   
Condensed Consolidated Statements of Changes in Deficit for the three and nine months ended September 30, 2020 and 2019 5
   
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 6
   
Notes to Condensed Consolidated Financial Statements 7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
   
Item 4. Controls and Procedures 25
   
PART II Other Information  
   
Item 6. Exhibits 26
   
Signatures 27

 

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.

 

  2  
     

 

PART I

 

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

ACORN ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

 

   

As of

September 30, 2020

   

As of

December 31, 2019

 
ASSETS                
Current assets:                
Cash and cash equivalents   $ 1,966     $ 1,247  
Accounts receivable, net     732       962  
Inventory, net     299       291  
Deferred charges     806       741  
Other current assets     117       189  
Total current assets     3,920       3,430  
Property and equipment, net     264       189  
Right-of-use assets, net     518       587  
Other assets     670       778  
Total assets   $ 5,372     $ 4,984  
LIABILITIES AND DEFICIT                
Current liabilities:                
Short-term credit   $ 171     $ 136  
Loan payable – current portion     256       ―  
Accounts payable     273       197  
Accrued expenses     55       136  
Deferred revenue     3,289       3,004  
Current operating lease liabilities     97       53  
Other current liabilities     143       68  
Total current liabilities     4,284       3,594  
Non-current liabilities:                
Loan payable     207       ―  
Deferred revenue     1,357       1,491  
Noncurrent operating lease liabilities     468       542  
Other non-current liabilities     5       2  
Total non-current liabilities     2,037       2,035  
Commitments and contingencies                
Deficit:                
Acorn Energy, Inc. shareholders                
Common stock - $0.01 par value per share:                
Authorized – 42,000,000 shares; Issued – 39,687,589 and 39,591,339 shares at September 30, 2020 and December 31, 2019, respectively     397       396  
Additional paid-in capital     102,718       101,655  
Warrants     3       1,021  
Accumulated deficit     (101,030 )     (100,682 )
Treasury stock, at cost – 801,920 shares at September 30, 2020 and December 31, 2019     (3,036 )     (3,036 )
Total Acorn Energy, Inc. shareholders’ deficit     (948 )     (646 )
Non-controlling interests     (1 )     1  
Total deficit     (949 )     (645 )
Total liabilities and deficit   $ 5,372     $ 4,984  

 

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

 

  3  
     

 

ACORN ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
    2020     2019     2020      2019   
                         
Revenue   $ 1,517     $ 1,386     $ 4,323     $ 4,090  
Cost of sales – products and services     460       465       1,322       1,417  
Cost of sales – other     (20 )     (1 )     (20 )     29  
Gross profit     1,077       922       3,021       2,644  
Operating expenses:                                
Research and development expenses     160       137       453       420  
Selling, general and administrative expense     940       906       2,887       2,815  
Total operating expenses     1,100       1,043       3,340       3,235  
Operating loss     (23 )     (121 )     (319 )     (591 )
Finance expense, net     (8 )     ―       (28 )     5  
Loss before income taxes     (31 )     (121 )     (347 )     (586 )
Income tax expense     ―             ―        
Net loss     (31 )     (121 )     (347 )     (586 )
Non-controlling interest share of net (income) loss     (1 )     ―       (1 )     29  
Net loss attributable to Acorn Energy, Inc. shareholders   $ (32 )   $ (121 )   $ (348 )   $ (557 )
                                 
Basic and diluted net loss per share attributable to Acorn Energy, Inc. shareholders:   $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.02 )
Weighted average number of shares outstanding attributable to Acorn Energy, Inc. shareholders – basic and diluted     39,687       40,393       39,669       33,844  

 

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

 

  4  
     

 

ACORN ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT (UNAUDITED)

(IN THOUSANDS)

 

    Three and Nine Months Ended September 30, 2020  
    Number of Shares     Common Stock     Additional Paid-In Capital     Warrants     Accumulated Deficit     Number of Treasury Shares     Treasury Stock    

Total Acorn

Energy, Inc.

Shareholders’

Deficit

    Non-
controlling interests
    Total Deficit  
Balances as of December 31, 2019     39,591     $ 396     $ 101,655     $ 1,021     $ (100,682 )     802     $ (3,036 )   $                    (646 )   $ 1     $ (645 )
Net loss                             (283 )                 (283 )     (1 )     (284 )
Accrued dividend in OmniMetrix preferred shares                                                                    (1 )     (1 )
Proceeds from stock option exercise     96       1       18       ―       ―       ―       ―       19       ―       19  
Stock option compensation                 6                               6             6  
Balances as of March 31, 2020     39,687     $ 397     $ 101,679     $ 1,021     $ (100,965 )     802     $ (3,036 )   $ (904 )   $ (1 )   $ (905 )
Net loss                             (33 )                 (33 )     1       (32 )
Accrued dividend in OmniMetrix preferred shares                                                     (1 )     (1 )
Value of expired warrants     ―       ―*       1,018       (1,018 )     ―             ―       ―       ―       ―  
Stock option compensation                 13                               13             13  
Balances as of June 30, 2020     39,687     $ 397     $ 102,710     $ 3     $ (100,998 )     802     $ (3,036 )   $ (924 )   $ (1 )   $ (925 )
Net loss                             (32 )                 (32 )     1       (31 )
Accrued dividend in OmniMetrix preferred shares                                                     (1 )     (1 )
Stock option compensation                 8                               8             8  
Balances as of September 30, 2020     39,687     $ 397     $ 102,718     $ 3     $ (101,030 )     802     $ (3,036 )   $ (948 )   $ (1 )   $ (949 )

 

    Three and Nine Months Ended September 30, 2019  
    Number of Shares     Common Stock    

Additional Paid-

In

Capital

    Warrants     Accumulated Deficit     Number of Treasury Shares     Treasury Stock    

Total Acorn

Energy, Inc.

Shareholders’

Equity

(Deficit)

   

Non-

controlling interests

    Total Deficit  
Balances as of December 31, 2018     29,556     $ 296     $ 100,348     $ 1,118     $ (100,064 )     802     $ (3,036 )   $              (1,338 )   $ 108     $ (1,230 )
Net loss                             (237 )                 (237 )     (24 )     (261 )
Accrued dividend in OmniMetrix preferred shares                                                     (20 )     (20 )
Stock option compensation                 6                               6             6  
Balances as of March 31, 2019     29,556     $ 296     $ 100,354     $ 1,118     $ (100,301 )     802     $ (3,036 )   $ (1,569 )   $ 64     $ (1,505 )
Net loss                             (199 )                 (199 )     (5 )     (204 )
Accrued dividend in OmniMetrix preferred shares                                                     (20 )     (20 )
Shares granted in lieu of professional fees     60       *       18       ―       ―             ―       18       ―       18  
Rights offering, proceeds net of expenses     9,975       100       2,106                               2,206             2,206  
Stock option compensation                 6                               6             6  
Balances as of June 30, 2019     39,591     $ 396     $ 102,484     $ 1,118     $ (100,500 )     802     $ (3,036 )   $ 462     $ 39     $ 501  
Net loss                             (121 )                   (121 )     ―       (121 )
Accrued dividend in OmniMetrix preferred shares                                                     (1 )     (1 )
Purchase of non-controlling interest     ―       ―       (914 )     ―       ―       ―       ―       (914 )     (36 )     (950 )
Rights offering, proceeds net of expenses     ―       *       (20 )                             (20 )           (20 )
Stock option compensation                 7                               7             7  
Balances as of September 30, 2019     39,591     $ 396     $ 101,557     $ 1,118     $ (100,621 )     802     $ (3,036 )   $ (586 )   $ 2     $ (584 )

 

* Less than $1

 

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

 

  5  
     

 

ACORN ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN THOUSANDS)

 

    Nine months ended September 30,  
    2020     2019  
Cash flows provided by (used in) operating activities:                
Net loss   $ (347 )   $ (586 )
Depreciation and amortization     22       56  
Non-cash lease expense     88        
Stock-based compensation     27       19  
Professional fees paid in common stock           18  
Change in operating assets and liabilities:                
Decrease (increase) in accounts receivable     230       (96 )
Increase in inventory     (8 )     (97 )
Decrease in deferred charges     48       113  
Decrease (increase) in other current assets and other assets     66       (26 )
Decrease in accounts payable and accrued expenses     (3 )     (270 )
Increase in deferred revenue     151       304  
Decrease in amounts due to DSIT and directors           (323 )
Decrease in operating lease liability     (48 )      
Increase (decrease) in other current liabilities and non-current liabilities     74       (45 )
Net cash provided by (used in) operating activities     300       (933 )
                 
Cash flows used in investing activities:                
Purchases of software     (90 )     (60 )
Payments made for patent filings     (7 )      
Purchase of non-controlling interest in OmniMetrix           (950 )
Net cash used in investing activities     (97 )     (1,010 )
                 
Cash flows provided by financing activities:                
Short-term credit, net     35       143  
Proceeds from rights offering, net of expenses of $0 and $208           2,186  
Loan proceeds     462        
Stock option exercise proceeds     19        
Net cash provided by financing activities     516       2,329  
                 
Net increase in cash, cash equivalents and restricted cash     719       386  
Cash, cash equivalents and restricted cash at the beginning of the year     1,247       1,263  
Cash, cash equivalents and restricted cash at the end of the period   $ 1,966     $ 1,649  
                 
Cash, cash equivalents and restricted cash consist of the following:                
End of period                
Cash and cash equivalents   $ 1,966     $ 1,338  
Restricted cash           311  
    $ 1,966     $ 1,649  
                 
Cash, cash equivalents and restricted cash consist of the following:                
Beginning of period                
Cash and cash equivalents   $ 1,247     $ 973  
Restricted cash           290  
    $ 1,247     $ 1,263  
                 
Supplemental cash flow information:                
Cash paid during the year for:                
Interest   $ 23     $ 15  
                 
Non-cash investing and financing activities:                
Purchase of equipment under installment agreement   $     $ 7  
Accrued preferred dividends to former Acorn director and/or former OmniMetrix CEO   $ 3     $ 41  

 

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

 

  6  
     

 

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-nine-month periods ended September 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 nine-month period ended September 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 September 30, 2019. 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 nine-month period ended September 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.

 

  7  
     

 

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 September 30, 2020, the Company had negative working capital of $364,000. The Company’s working capital includes approximately $1,966,000 of cash, deferred revenue of approximately $3,289,000 and $256,000 representing the current portion of our PPP loans (see Note 6—Debt and Note 11—Subsequent Events). The deferred revenue does not require significant cash outlay for the revenue to be recognized. During the first nine months of 2020, the Company’s OmniMetrix subsidiary provided $976,000 from operations while the Company’s corporate headquarters used $676,000 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 November 9, 2020, the Company had cash of approximately $2,006,000. 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 former 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 September 30, 2020 and 2019 were $10,000 and $42,000, respectively. Operating lease payments for the nine months ended September 30, 2020 and 2019 were $48,000 and $96,000 respectively. The lease payments were less in the current year periods due to four months of rent abatement provided for in the new lease amendment that were in effect during the nine-month period ended September 30, 2020. The future minimum lease payments on non-cancellable operating leases as of September 30, 2020 using a discount rate of 4.5% are $565,000.

 

  8  
     

 

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

 

    September,  
    2020     2019  
Cash paid for operating lease liabilities   $ 48     $ 96  

 

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

 

    2020  
Weighted average remaining lease terms for operating leases     4.970  

 

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

 

   

Twelve-month

period ended

September 30,

 
2021   $ 120  
2022     124  
2023     127  
2024     129  
2025     132  
Thereafter      
Total undiscounted cash flows     632  
Less: Imputed interest     (67 )
Present value of operating lease liabilities (a)   $ 565  

 

  (a) Includes current portion of $97 for operating leases.

 

NOTE 6—DEBT

 

  (a) Loans payable

 

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.

 

9
 

 

Aggregate interest expense on these loans for the three and nine months ended September 30, 2020 was approximately $1,000 (see Note 11—Subsequent Events).

 

(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 September 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 September 30, 2020. OmniMetrix also agreed 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 September 30, 2020 and 2019 was $6,000 and $6,000 respectively. Interest expense for the nine-months-ended September 30, 2020 and 2019 was $22,000 and $15,000, respectively.

 

OmniMetrix had an outstanding balance of $171,000 and $136,000 as of September 30, 2020 and December 31, 2019, respectively, pursuant to the Loan and Security Agreement, and $253,000 was available to borrow at September 30, 2020.

 

NOTE 7—COMMITMENTS AND CONTINGENCIES

 

On April 28, 2020, the Company entered into a new agreement for data hosting 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 from the prior twelve-month term for additional services including enhanced business continuity and disaster recovery services.

 

NOTE 8—EQUITY

 

(a) General

 

At September 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.

 

10
 

 

(b) Rights Offering

 

On June 28, 2019, the Company completed a rights offering, raising $2,184,000 in proceeds (net of $210,000 in expenses) of which $1,628,000 was from related parties. 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 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 for 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 a 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 Option 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 Amended and Restated 2006 Stock Incentive Plan until December 31, 2024.

 

At September 30, 2020, 1,628,225 options were available for grant under the Amended and Restated 2006 Stock Incentive Plan and no options were available for grant under the 2006 Stock Option Plan for Non-Employee Directors. During the nine months ended September 30, 2020, an aggregate of 30,000 options was issued to non-employee directors, 35,000 options were issued to the Company’s CEO, 50,000 options were issued to the Company’s CFO and 115,000 options were issued to the Company’s other employees. The fair value of the options issued was $59,000.

 

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

 

11
 

 

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

 

   

Number

of Options

(in shares)

   

Weighted

Average

Exercise

Price Per
Share

    Weighted
Average
Remaining
Contractual Life
    Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2019     1,364,490     $ 1.87       1.81 years     $ 46,000  
Granted     230,000       0.36                  
Exercised     (96,250 )     0.19                  
Forfeited or expired     (560,936 )     2.67                  
Outstanding at September 30, 2020     937,304     $ 1.19       3.6 years     $ 15,000  
Exercisable at September 30, 2020     628,386     $ 1.61       2.3 years     $ 10,000  

 

The fair value of the options granted of $59,000 was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

Risk-free interest rate     .63 %
Expected term of options     4.4 years
Expected annual volatility     115 %
Expected dividend yield     %

 

(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 $27,000 and $19,000 for the nine-month periods and $8,000 and $6,000 for the three-month-periods ended September 30, 2020 and 2019, respectively.

 

The total compensation cost related to non-vested awards not yet recognized was $67,000 as of September 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:

 

   

Number

of Warrants

(in shares)

    Weighted
Average
Exercise
Price Per Share
    Weighted
Average
Remaining
Contractual Life
 
Outstanding at December 31, 2019     2,177,857     $ 1.28       4 months  
Granted                    
Exercised                    
Forfeited or expired     (2,142,857 )     1.30          
Outstanding at September 30, 2020     35,000     $ .13       2.4 years  

 

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

 

12
 

 

NOTE 9— SEGMENT REPORTING

 

As of September 30, 2020, the Company operates in two reportable operating segments, both of which are performed through the Company’s OmniMetrix subsidiary:

 

  The PG (Power Generation) segment provides wireless remote monitoring and control systems and services for critical assets as well as Internet of Things applications. The PG segment includes OmniMetrix’s monitoring device for industrial air compressors and dryers, and a new line of annuciators.
     
  The CP (Cathodic Protection) segment provides remote monitoring of cathodic protection systems on gas pipelines for gas utilities and pipeline companies.

 

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-nine-month periods ended September 30, 2020 and 2019 (in thousands):

 

    PG     CP     Total  
Three months ended September 30, 2020:                        
Revenues from external customers   $ 1,262     $ 255     $ 1,517  
Segment gross profit     936       141       1,077  
Depreciation and amortization                  
Segment income (loss) before income taxes   $ 210     $ (7 )   $ 203  
                         
Three months ended September 30, 2019:                        
Revenues from external customers   $ 1,090     $ 296     $ 1,386  
Segment gross profit     772       150       922  
Depreciation and amortization     18       4       22  
Segment income (loss) before income taxes   $ 126     $ (26 )   $ 100  
                         
Nine months ended September 30, 2020:                        
Revenues from external customers   $ 3,633     $ 690     $ 4,323  
Segment gross profit     2,656       365       3,021  
Depreciation and amortization     17       4       21  
Segment income (loss) before income taxes   $ 414     $ (79 )   $ 335  
                         
Nine months ended September 30, 2019:                        
Revenues from external customers   $ 3,143     $ 947     $ 4,090  
Segment gross profit     2,206       438       2,644  
Depreciation and amortization     43       13       56  
Segment income (loss) before income taxes   $ 231     $ (160 )   $ 71  

 

13
 

 

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

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
    2020     2019     2020     2019  
Total net income (loss) before income taxes for reportable segments   $ 203     $ 100     $ 335     $ 71  
Unallocated cost of corporate headquarters     (234 )     (221 )     (682 )     (657 )
Consolidated loss before income taxes   $ (31 )   $ (121 )   $ (347 )   $ (586 )

 

NOTE 10—REVENUE

 

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

 

    Hardware     Monitoring     Total  
Three months ended September 30, 2020:                        
PG Segment   $ 354     $ 908     $ 1,262  
CP Segment     193       62       255  
Total Revenue   $ 547     $ 970     $ 1,517  

 

    Hardware     Monitoring     Total  
Three months ended September 30, 2019:                        
PG Segment   $ 305     $ 785     $ 1,090  
CP Segment     234       62       296  
Total Revenue   $ 539     $ 847     $ 1,386  

 

    Hardware     Monitoring     Total  
Nine months ended September 30, 2020:                        
PG Segment   $ 999     $ 2,634     $ 3,633  
CP Segment     501       189       690  
Total Revenue   $ 1,500     $ 2,823     $ 4,323  

 

    Hardware     Monitoring     Total  
Nine months ended September 30, 2019:                        
PG Segment   $ 906     $ 2,237     $ 3,143  
CP Segment     767       180       947  
Total Revenue   $ 1,673     $ 2,417     $ 4,090  

 

14
 

 

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

 

    Hardware     Monitoring     Total  
Balance at December 31, 2019   $ 2,663     $ 1,832     $ 4,495  
Additions during the period     1,195       2,977       4,172  
Recognized as revenue     (1,198 )     (2,823 )     (4,021 )
Balance at September 30, 2020   $ 2,660     $ 1,986     $ 4,646  
                         
Amounts to be recognized as revenue in the twelve-month-period ending:                        
September 30, 2021   $ 1,512     $ 1,777     $ 3,289  
September 30, 2022     881       205       1,086  
September 30, 2023 and thereafter     267       4       271  
    $ 2,660     $ 1,986     $ 4,646  

 

Other revenue of approximately $302,000, net of certain sales rebates of $19,000, 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 nine months ended September 30, 2020 can be seen in the table below (in thousands):

 

Balance at December 31, 2019   $ 1,433  
Additions, net of adjustments, during the period     612  
Recognized as cost of sales     (663 )
Balance at September 30, 2020   $ 1,382  
         
Amounts to be recognized as cost of sales in the twelve-month-period ending:        
September 30, 2021   $ 806  
September 30, 2022     446 *
September 30, 2023 and thereafter     130 *
    $ 1,382  

 

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

 

Other cost of goods sold (COGS) recognized of approximately $188,000 is related to accessories, repairs, and other miscellaneous charges that are recognized to revenue when sold and are not deferred, in addition to $451,000 in monitoring COGS which is not deferred.

 

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

 

    Hardware     Monitoring     Total  
Balance at December 31, 2019   $ 101     $ 37     $ 138  
Additions during the period     77       15       92  
Amortization of sales commissions     (49 )     (14 )     (63 )
Balance at September 30, 2020   $ 129     $ 38     $ 167  

 

The capitalized sales commissions are included in other current assets ($87,000) and other assets ($80,000) in the Company’s unaudited condensed consolidated balance sheet at September 30, 2020, and in other current assets ($60,000) and other assets ($78,000) in the Company’s consolidated balance sheet at December 31, 2019.

 

NOTE 11—SUBSEQUENT EVENTS

 

On October 20, 2020, OmniMetrix, LLC submitted its PPP Loan Forgiveness Application to the Small Business Administration (SBA). On November 5, 2020, the SBA confirmed that OmniMetrix’s application for forgiveness has been approved and that its PPP loan, in the amount of $419,800, has been forgiven.

 

The Company elected not to apply for forgiveness of the PPP loan proceeds received by its parent entity, Acorn Energy, Inc., in the amount of $41,600. This loan was repaid to the lender effective October 22, 2020.

 

15
 

 

ACORN ENERGY, INC.

 

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

 

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.

 

    Three months ended September 30, 2020  
    OmniMetrix     Acorn     Total Continuing Operations  
Revenue   $ 1,517     $     $ 1,517  
Cost of Sales     440             440  
Gross profit     1,077             1,077  
Gross profit margin     71 %             71 %
R&D expenses     160             160  
Selling, general and administrative expenses     707       233       940  
Operating income (loss)   $ 210     $ (233 )   $ (23 )

 

    Three months ended September 30, 2019  
    OmniMetrix     Acorn     Total Continuing Operations  
Revenue   $ 1,386     $     $ 1,386  
Cost of Sales     464             464  
Gross profit     922             922  
Gross profit margin     67 %             67 %
R&D expenses     137             137  
Selling, general and administrative expenses     679       227       906  
Operating income (loss)   $ 106     $ (227 )   $ (121 )

 

16
 

 

    Nine months ended September 30, 2020  
    OmniMetrix     Acorn     Total Continuing Operations  
Revenue   $ 4,323     $     $ 4,323  
Cost of sales     1,302             1,302  
Gross profit     3,021             3,021  
Gross profit margin     70 %             70 %
R&D expenses     453             453  
Selling, general and administrative expenses     2,210       677       2,887  
Operating income (loss)   $ 358     $ (677 )   $ (319 )

 

    Nine months ended September 30, 2019  
    OmniMetrix     Acorn     Total Continuing Operations  
Revenue   $ 4,090     $     $ 4,090  
Cost of sales     1,417             1,417  
Cost of sales - other     29             29  
Gross profit     2,644             2,644  
Gross profit margin     65 %             65 %
R&D expenses     420             420  
Selling, general and administrative expenses     2,136       679       2,815  
Operating income (loss)   $ 88     $ (679 )   $ (591 )

 

BACKLOG

 

As of September 30, 2020, our backlog of work to be completed (primarily deferred revenue) at our OmniMetrix subsidiary totaled approximately $4.6 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.

 

17
 

 

On October 20, 2020, OmniMetrix, LLC submitted its PPP Loan Forgiveness Application to the Small Business Administration (SBA). On November 5, 2020, the SBA confirmed that OmniMetrix’s application for forgiveness has been approved and that its PPP loan, in the amount of $419,800, has been forgiven.

 

The Company elected not to apply for forgiveness of the PPP loan proceeds received by its parent entity, Acorn Energy, Inc., in the amount of $41,600. This loan was repaid to the lender effective October 22, 2020.

 

On April 28, 2020, we entered into a new agreement for data hosting 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 from the prior twelve-month term for additional services including enhanced business continuity and disaster recovery services.

 

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 OmniMetrixTM, LLC (“OmniMetrix”) subsidiary:

 

  Power Generation (“PG”) monitoring. OmniMetrix’s PG segment provides wireless remote monitoring and control systems and services for critical assets as well as Internet of Things applications. The PG segments includes our monitoring device for industrial air compressors and dryers, and a new line of annunciators.
     
  Cathodic Protection (“CP”) monitoring. OmniMetrix’s CP segment provides remote monitoring of cathodic protection systems on gas pipelines for gas utilities and pipeline companies.

 

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.

 

18
 

 

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 three-month periods ended September 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.

 

    Three months ended September 30,  
    2020     2019     Change  
    ($,000)     % of revenues     ($,000)     % of revenues     from 2019
to 2020
 
Revenue   $ 1,517       100 %   $ 1,386       100 %     9 %
Cost of sales     440       29 %     464       33 %     (5 )%
Gross profit     1,077       71 %     922       67 %     17 %
R&D expenses     160       11 %     137       10 %     17 %
SG&A expenses     940       62 %     906       65 %     4 %
Operating loss     (23 )     (2 )%     (121 )     (9 )%     (81 )%
Finance expense, net     (8 )     (1 )%           *       700 %
Loss before income taxes     (31 )     (2 )%     (121 )     (9 )%     (74 )%
Income tax expense           %           %      
Net loss     (31 )     (2 )%     (121 )     (9 )%     (74 )%
Non-controlling interests share of net loss     (1 )     * %           *       (100 )%
Net loss attributable to Acorn Energy, Inc.   $ (32 )     (2 )%   $ (121 )     (9 )%     (74 )%

 

*result is less than 1%.

 

19
 

 

The following table sets forth certain information with respect to the consolidated results of operations of the Company for the nine-month periods ended September 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.

 

    Nine months ended September 30,  
    2020     2019     Change  
    ($,000)     % of revenues     ($,000)     % of revenues     from 2019
to 2020
 
Revenue   $ 4,323       100 %   $ 4,090       100 %     6 %
Cost of sales     1,302       30 %     1,446       35 %     (10 )%
Gross profit     3,021       70 %     2,644       65 %     14 %
R&D expense     453       10 %     420       10 %     8 %
SG&A expense     2,887       67 %     2,815       69 %     3 %
Operating loss     (319 )     (7 )%     (591 )     (14 )%     (45 )%
Finance expense, net     (28 )     (1 )%     5       *       (2,700 )%
Loss before income taxes     (347 )     (8 )%     (586 )     (14 )%     (41 )%
Income tax expense                       %      
Net loss     (347 )     (8 )%     (586 )     (14 )%     (41 )%
Non-controlling interests share of net loss     (1 )     %     29       1 %     (103 )%
Net loss attributable to Acorn Energy, Inc.   $ (348 )     (8 )%   $ (557 )     (14 )%     (38 )%

 

*result is less than 1%.

 

Revenue. Revenue increased by $131,000 or 9%, from $1,386,000 in the third quarter of 2019 to $1,517,000 in the third quarter of 2020. OmniMetrix’s increased revenue during the quarter was primarily attributable to increased monitoring, which increased $123,000, or 15%, from $847,000 in the third quarter of 2019 to $970,000 in the third quarter of 2020. This increase was offset by a decrease in hardware revenue of $8,000, or 1%. These fluctuations are attributed to the same reasons as the increase in the nine-month period ended September 30, 2020 discussed below. OmniMetrix has two divisions: PG and CP.

 

In the nine months ended September 30, 2020, OmniMetrix recorded revenue of $4,323,000 ($3,633,000 in its PG activities and $690,000 in its CP activities) as compared to revenue of $4,090,000 recorded in the nine months ended September 30, 2019 ($3,143,000 in its PG activities and $947,000 in its CP activities). The period-over-period increase in revenue of $233,000, or 6%, in the nine months ended September 30, 2020 was due to an increase in monitoring revenue of $406,000, or 17%, offset by a decrease in hardware revenue of $173,000, or 10%. The increase in monitoring revenue from $2,417,000 in the first nine months of 2019 to $2,823,000 in the first nine months of 2020 is the result of an increase in the number of units being monitored. The period-over-period decrease in hardware revenue from $1,673,000 to $1,500,000 is primarily due to a decrease in the CP segment of $266,000 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 typically take twelve to eighteen months from customer introduction to closing.

 

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Gross Profit. Gross margin on hardware revenue for the three months ended September 30, 2020 was 44%, which was a 5% improvement as compared to 39% for the three months ended September 30, 2019. Gross margin on monitoring revenue remained strong at 84% during the three months ended September 30, 2020, which was flat as compared to 84% for the three months ended September 30, 2019.

 

Gross profit during the nine months ended September 30, 2020 was $3,021,000, reflecting a gross margin of 70% on revenue, compared with a gross profit of $2,644,000, reflecting a 65% gross margin, in the nine months ended September 30, 2019. The increased gross profit period-over-period 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 nine months ended September 30, 2020 was 42%, compared to 39% for the nine months ended September 30, 2019. Gross margin on monitoring revenue remained strong at 84% during the nine months ended September 30, 2020 which was flat as compared to 84% for the nine months ended September 30, 2019. OmniMetrix’s gross profit increased $155,000, or 17%, from $922,000 in the three months ended September 30, 2019 to $1,077,000 in the three months ended September 30, 2020.

 

Research and development expenses. During the three months ended September 30, 2020 and 2019, R&D expense was $160,000 and $137,000, respectively. During the nine months ended September 30, 2020, OmniMetrix recorded $453,000 of R&D expense, as compared to $420,000 in the nine months ended September 30, 2019. The period-over-period increases in R&D expense in 2020 are 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 during the remainder of 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 (“SG&A”) expenses. SG&A expenses increased $28,000, or 4%, to $707,000 for the three months ended September 30, 2020, from $679,000 for the three months ended September 30, 2019, primarily due to an increase in personnel costs. We gave performance-based salary increases to our employees effective September 1, 2020, our sales team has resumed travel where customers and potential customers are open and willing to receive outside guests, and we continue to make investments in our IT infrastructure.

 

During the nine months ended September 30, 2020, OmniMetrix recorded $2,209,000 of SG&A costs, compared to SG&A costs of $2,136,000 in the nine months ended September 30, 2019, an increase of $73,000 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. We anticipate that our annual SG&A costs throughout 2020 will increase approximately 10% as a result of these actions.

 

Corporate

 

Corporate SG&A expense for the three months ended September 30, 2020 increased $6,000, or 3%, to $233,000 from $227,000 for the three months ended September 30, 2019, primarily due to the timing of certain expenses. Third quarter 2020 SG&A expense was $233,000, compared to second quarter 2020 SG&A expense of $222,000. SG&A expense of $678,000 in the first nine months of 2020 was flat as compared to SG&A expense of $679,000 in the first nine months of 2019. 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 $32,000 in the three months ended September 30, 2020, compared to a net loss of $121,000 in the three months ended September 30, 2019. Our loss in the third quarter 2020 is comprised of net income at OmniMetrix of $203,000 offset by corporate expense of $233,000 and $1,000 attributed to the non-controlling interest share of our income in OmniMetrix.

 

We recognized a net loss attributable to Acorn shareholders of $348,000 in the first nine months of 2020, compared to a net loss of $557,000 in the first nine months of 2019. Our loss in 2020 is comprised of net income at OmniMetrix of $334,000 plus corporate expense of $682,000.

 

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Liquidity and Capital Resources

 

At September 30, 2020, we had negative working capital of $364,000. Our working capital includes approximately $1,966,000 of cash, deferred revenue of approximately $3,289,000 and $256,000 representing the current portion of our PPP loans 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 nine months of 2020, our OmniMetrix subsidiary provided $976,000 from operations while our corporate headquarters used $676,000 during the same period.

 

Also, during the first nine months of 2020, we invested $90,000 in software and $7,000 in patent related expenses.

 

Net cash of $516,000 was provided by financing activities during the first nine months of 2020, comprising $19,000 in proceeds from the exercise of stock options, net proceeds from borrowings on our line of credit of $35,000 and proceeds from our PPP loans of $462,000.

 

See discussion of the proceeds we received from the PPP loans 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 November 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 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 $171,000 at September 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.

 

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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 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 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 $4,604,000 for loans, accrued interest, dividends 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 $1,966,000 of cash on September 30, 2020, and approximately $2,006,000 on November 9, 2020. On November 9, 2020, we had $136,000 outstanding on our line of credit and $165,000 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 September 30, 2020.

 

CASH PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS

 

   

Twelve Month Periods Ending September 30,

(in thousands)

 
    Total     2020     2021-2022     2023-2024     2025 and thereafter  
Debt *   $ 634     $ 427     $ 207     $     $  
Software agreements     128       71       57              
Operating leases     632       120       251       261        
Contractual services     110       105       5              
Total contractual cash obligations   $ 1,504     $ 723     $ 520     $ 261     $  

 

* Includes $461,400 in proceeds from the PPP loans of which $419,800 was formally forgiven by the SBA and $41,600 was repaid subsequent to September 30, 2020.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

COVID-19 Risk

 

The COVID-19 pandemic could negatively affect various aspects of our business, including our workforce and supply chain, could 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 was deposited primarily with U.S. banks and brokerage firms and amounted to approximately $1,966,000 at September 30, 2020. The Company does not believe there is significant risk of non-performance by these counterparties. Approximately 16% and 10%, respectively, of the accounts receivable at September 30, 2020 was due from two customers who both pay their receivables over usual credit periods (the Company collected 89% of the $188,000 due from these two customers, in the aggregate, as of November 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.

 

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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 November 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 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.

 

ITEM 4. CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to material weaknesses noted in our Annual Report on Form 10-K for the year ended December 31, 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.

 

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PART II

 

ITEM 6. EXHIBITS.

 

#31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
#31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
#32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
#32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
#101.1 The following financial statements from Acorn Energy’s Form 10-Q for the nine months and quarter ended September 30, 2020, filed on November 12, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Changes in Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.
   
# This exhibit is filed or furnished herewith.

 

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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.

 

  ACORN ENERGY, INC.
     
Dated: November 12, 2020    
     
  By: /s/ TRACY S. CLIFFORD
    Tracy S. Clifford
    Chief Financial Officer

 

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