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EX-32.2 - ACORN ENERGY, INC.ex32-2.htm
EX-32.1 - ACORN ENERGY, INC.ex32-1.htm
EX-31.2 - ACORN ENERGY, INC.ex31-2.htm
EX-31.1 - ACORN ENERGY, INC.ex31-1.htm
EX-23.1 - ACORN ENERGY, INC.ex23-1.htm
EX-21.1 - ACORN ENERGY, INC.ex21-1.htm
EX-10.7 - ACORN ENERGY, INC.ex10-7.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019   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   Name of each exchange on which registered
None    

 

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

 

Common Stock, par value $.01 per share

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [  ] No [X]

 

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 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. (Check one):

 

  Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ]
  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 Act). Yes [  ] No [X]

 

As of the last day of the second fiscal quarter of 2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $8.7 million based on the closing sale price on that date as reported on the OTCQB marketplace. As of March 20, 2020 there were 39,687,589 shares of Common Stock, $0.01 par value per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

None.

 

 

 

 
 

 

TABLE OF CONTENTS

 

    PAGE
PART I    
     
Item 1. BUSINESS 3
     
Item 1A. RISK FACTORS 8
     
Item 1B. UNRESOLVED STAFF COMMENTS 16
     
Item 2. PROPERTIES 16
     
Item 3. LEGAL PROCEEDINGS 16
     
PART II    
     
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 17
     
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
     
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
     
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 27
     
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 27
     
Item 9A CONTROLS AND PROCEDURES 27
     
Item 9B. OTHER INFORMATION 28
     
PART III    
     
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 29
     
Item 11. EXECUTIVE COMPENSATION 31
     
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 37
     
Item 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE 38
     
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 40
     
PART IV    
     
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 41
     
Item 16. FORM 10-K SUMMARY 41

 

Certain statements contained in this report are forward-looking in nature. These statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “should” or “anticipates”, or the negatives thereof, or comparable terminology, or by discussions of strategy. You are cautioned that our business and operations are subject to a variety of risks and uncertainties and, consequently, our actual results may materially differ from those projected by any forward-looking statements. Certain of such risks and uncertainties are discussed below under the heading “Item 1A. Risk Factors.”

 

OmniMetrix®, OmniView®, ScopeViewTM, TrueGuardTM and TrueShieldTM are trademarks of OmniMetrix, LLC.

 

2
 

 

PART I

ITEM 1. BUSINESS

 

OVERVIEW

 

Acorn Energy, Inc. (“Acorn” or “the Company”) is a holding company focused on technology driven solutions for energy infrastructure asset management. Following the sale of our remaining interests in DSIT Solutions Ltd. (“DSIT”) in February 2018 (see below), we provide the following services and products through our OmniMetrixTM, LLC (“OmniMetrix”) subsidiary:

 

  Power Generation (“PG”) monitoring. OmniMetrix’s PG activities provide wireless remote monitoring and control systems and services for critical assets as well as Internet of Things applications.
     
 

Cathodic Protection (“CP”) monitoring. OmniMetrix’s CP activities provide for remote monitoring of cathodic protection systems on gas pipelines for gas utilities and pipeline companies.

 

During 2019, each of our PG and CP activities represented a reportable segment.

 

On January 28, 2016, we entered into a Share Purchase Agreement for the sale of a portion of our interest in DSIT to Rafael Advanced Defense Systems Ltd. (“Rafael”), a major Israeli defense company (the “2016 DSIT Transaction”). Following the closing of the transaction on April 21, 2016, we owned approximately 41.2% of DSIT and had limited representation on its Board. Accordingly, from that date, we no longer consolidated the results of DSIT and instead reported DSIT’s results on the equity method. Consequently, from April 21, 2016, we no longer reported segment information with respect to DSIT’s Energy & Security Sonar Solutions segment or its other activities.

 

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

 

We continually evaluate opportunities related to our activities and our goal is to maximize shareholder value and position our holdings for a strategic event, which may include co-investment by one or more third parties and/or a synergistic acquisition of another company.

 

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.

 

   Year ended December 31, 2019 
   OmniMetrix   Acorn   Total
Continuing
Operations
 
Revenues  $5,490   $   $5,490 
Cost of sales   1,900        1,900 
Gross profit   3,590        3,590 
Gross profit margin   65%        65%
R& D expenses   559        559 
Selling, general and administrative expenses   2,854    876    3,730 
Operating income (loss)  $177   $(876)  $(699)

 

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   Year ended December 31, 2018 
   OmniMetrix   Acorn   Total
Continuing
Operations
 
Revenues  $5,087   $   $5,087 
Cost of sales   1,965        1,965 
Gross profit   3,122        3,122 
Gross profit margin   61%        61%
R& D expenses   542        542 
Selling, general and administrative expenses   2,726    1,260    3,986 
Operating loss  $(146)  $(1,260)  $(1,406)

 

OMNIMETRIX – POWER GENERATION MONITORING AND CONTROL AND CATHODIC PROTECTION MONITORING AND CONTROL

 

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 and other industrial equipment) as well as cathodic protection for the pipeline industry (gas utilities and pipeline companies). Acorn owned 80% of OmniMetrix until July 1, 2019 when it purchased 19% of OmniMetrix from a former director, which brought its ownership interest to 99%, with the remaining 1% owned by OmniMetrix’s former CEO.

 

Following the emergence of machine-to-machine (“M2M”) and IoT applications whereby companies aggregate multiple sensors and monitors into a simplified dashboard for customers, OmniMetrix believes it plays a key role in this new economic ecosystem. In addition, OmniMetrix sees a rapidly growing need for backup power infrastructure to secure critical military, government, and private sector assets against emergency events including terrorist attacks, natural disasters, and cybersecurity threats. As residential and industrial standby generators, turbines, compressors, pumps, pumpjacks, light towers and other industrial equipment are part of the critical infrastructure increasingly becoming monitored in Internet of Things applications, and given that OmniMetrix monitors all major brands of critical equipment, OmniMetrix believes it is well-positioned as a competitive participant in this market.

 

Products & Services

 

In the PG segment, OmniMetrix sells a line of devices and services built on its baseline TrueGuard wireless remote monitor. This device is broadly applicable across all brands and models of emergency power generators and industrial engine applications. The TrueGuard product family connects directly to the engine’s control panel, and captures all data flowing through the control panel. As a result, the product provides the ability to identify whether an emergency generator is capable of operating as expected. OmniMetrix also currently sells its AIRGuard product which remotely monitors and controls industrial air compressors.

 

In the CP segment, OmniMetrix offers two primary product lines: the Hero Rectifier Monitor and the Patriot Test Station Monitor. Both of these products are used to monitor cathodic protection systems, a process which reduces rust and corrosion on the steel pipes used to transport natural gas. As the name suggests, the Hero Rectifier Monitor product monitors the operation of the rectifiers, which are a critical component in the effort to prevent corrosion and are also the most common point of failure in the pipeline system. The Patriot Test Station Monitor is also used to provide data points along the pipeline segment powered by the rectifier.

 

Customers and Markets

 

At its core, the OmniMetrix PG monitors (Trueguard PRO and Truegard 2) can remotely monitor and control a variety of industrial engine applications, including engines, standby generators, air and gas compressors, fire pumps, batteries, turbines, pumps and other equipment. Early in the company’s history, a strategic decision was made to focus primarily on the standby power generation market. Recently, the company has expanded its focus to add several additional applications where it sees demand. Standby generator monitoring is rapidly becoming part of the Internet of Things (IoT) ecosystem, whereby multiple sensing and monitoring devices are aggregated into one simple dashboard for customers.

 

4
 

 

As OmniMetrix can monitor and control all major brands of standby generators, it is well-positioned to compete in this market.

 

In the first stages of OmniMetrix’s PG product and market development, relatively unsophisticated generator controls and early generation cellular and satellite communication processes limited the applications to alarm delivery. Customers were notified that some event had taken place after the fact. There was no diagnostic data opportunity, but service organizations could, at best, practice a proactive service approach.

 

With the advent of second-generation cellular systems and newer, computerized engine controls, OmniMetrix migrated to a design point of collecting large amounts of performance data from the remote machinery, allowing service organizations to perform diagnostics on remote equipment before dispatching service. This was the beginning of the OmniMetrix SmartServiceTM Program. It allowed the service organization to put the right person in the right truck with the right parts to affect a one-trip or a zero-trip solution. At this phase, service organizations could be efficient, as well as proactive, in their operations. They could also manage more customers by using remote monitoring. Customers have provided OmniMetrix feedback telling how customer service teams are able to work “smarter” and more efficiently by going directly to sites with problems, thus increasing the value of their businesses.

 

OmniMetrix is now in its third phase of evolution, maturing the high-performance data collection design point into the first provider offering of automated prognostic solutions. As most generator failures are the result of consumables, and as those consumables can be monitored, the consumption trends can be extrapolated into predictions of the most common failure modes.

 

OmniMetrix’s PG monitors have been installed on commercial, industrial and residential generators from original equipment manufacturers (“OEMs”) such as Caterpillar, Kohler, Generac, Cummins, MTU Energy and other generator manufacturers. OmniMetrix provides dual value propositions to the generator service organizations as well as to the machine owner. The dealers benefit from the receipt of performance data and status conditions from the generators they service for their customers, which allows the dealer service organization to be proactive in their delivery of service to their customers, as well as to implement the OmniMetrix SmartServiceTM approach to analyzing the remote machines before dispatching a service truck. Since the majority of service and warranty costs are incurred from service people driving trucks, preemptive analysis of customer site conditions prior to dispatch can reduce their labor cost. From the machine owner’s perspective, the OmniMetrix product provides a powerful tool to be used in their constant effort to avoid failures that come from consumables such as batteries and fuel. With proper monitoring, the large majority of machine failures can be avoided completely. This migration from failure reporting to failure prevention is fundamental to the OmniMetrix focus and is the result of a strong data collection and analysis design point. We believe that this transition to prognostics sets OmniMetrix apart from its competitors, many of whom are still in the failure reporting phase of application development. We have also increased our marketing efforts to end-users in an effort to increase demand for our services. These efforts have proven to be very successful, and OmniMetrix continues to execute on that strategy.

 

In 2019, no single customer of OmniMetrix provided more than 10% of its sales. OmniMetrix has successfully been able to mitigate the risk of customer dependency by increasing its penetration rate, its sales pipeline and supporting a larger base of customers. OmniMetrix expects to continue to expand its base of customers in 2020.

 

Competition

 

OmniMetrix is a vertical market company, deeply focused on providing an excellent customer experience and product and service designs for a complete end-to-end program for its customers. Having been the first provider of wireless remote monitoring systems for standby generators and pipeline corrosion programs, the company has had the opportunity to mature its offering to a level not offered by others who might like to compete in these two segments. This long experience working with key brand project partners over the years has resulted in product offerings that are competitive.

 

5
 

 

There are two types of competitors in the PG marketplace:

 

  (1) Independent monitoring organizations (such as OmniMetrix) that produce the monitoring systems, but not the equipment being monitored. Among these are companies such as Ayantra, FleetZOOM, Gen-Tracker, and PowerTelematics. The other competitors operate in the reactive “failure notification” mode described in the early stages of the OmniMetrix business model. In the past, those competitors positioned themselves at a lower performance, lower price quadrant of the market.
     
  (2) OEMs such as generator manufacturers or generator controls manufacturers offer customer connectivity to their machinery. They offer a current generation connectivity replacing telephone dial-up modems that had been used in the past. Their offerings are limited to their own brands, so they do not fit into a broad application such as does the OmniMetrix SmartServiceTM, supporting service organizations that service all brands. They are also generally designed for the machine owners’ use, in a reactive application.

 

We believe OmniMetrix has a well-established and well-defended position in the high-performance PG monitoring segment, due to its long history and numerous industry partner projects. The company is currently applying an aggressive sales effort into both the market segment requiring less technology and lower price (including the extremely large residential generator market) as well as developing more sophisticated, diagnostic products and custom solutions for commercial and industrial clientele.

 

Within the CP marketplace, there are no OEM competitors, but there are several independent monitoring companies similar to OmniMetrix such as Abriox, Elecsys, and American Innovations. We believe that OmniMetrix systems provide greater functionality than these competitors, though those competitors are much larger and have greater resources, potentially enabling better channel penetration than OmniMetrix can accomplish.

 

Intellectual Property

 

OmniMetrix has always focused on being the technology leader in its markets, and as a result has created many “industry firsts”. Initially, the company only pursued patents on the most valuable processes and systems and otherwise made public disclosure of many processes to prevent others from making later patent claims on those items. Nonetheless, OmniMetrix has five issued patents. Furthermore, the company has agreements with its employees and consultants which establish certain non-disclosure and, in some cases, non-compete, requirements. OmniMetrix continually evaluates whether and how to best protect its intellectual property, but there can be no assurance that its efforts will be successful in all cases.

 

Facilities

 

OmniMetrix’s activities are currently conducted in approximately 21,000 square feet of office and production space in the Hamilton Mill Business Park located in Buford, Georgia under a lease that has been extended from its original expiration date of April 30, 2020 to September 30, 2025. OmniMetrix is currently utilizing only a portion of these leased facilities and expects to grow into a portion of the currently unused space and potentially sublease several available executive office spaces.

 

DSIT

 

We recorded $450,000 as our 41.2% share of DSIT’s net income for the year ending December 31, 2017. On February 14, 2018, we closed on the sale of our remaining interest in DSIT to a group of Israeli investors for $5.8 million before transaction costs and withholding taxes. Accordingly, we adjusted our equity investment balance in DSIT to be equal to the gross proceeds received from the sale and recorded an impairment charge in 2017 of $308,000. In 2018, we recorded our 41.2% share of DSIT’s income or loss through the closing of the 2018 DSIT Transaction as well as our estimated transaction costs and withholding taxes on the transaction ($441,000 and $388,000, respectively) offset by $222,000, net of professional fees less interest income, refunded by the Israel Tax Authorities related to our 2016 Israeli tax return. In 2019, we recorded an income tax recovery of $61,500 from the Israel Tax Authority related to the 2017 and 2018 Israeli tax returns, net of professional fees of $11,200 for a gain on the transaction of $50,300 in 2019.

 

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BACKLOG

 

As of December 31, 2019, OmniMetrix had a backlog of approximately $4.5 million, primarily comprised of deferred revenue, of which approximately $3.0 million is expected to be recognized as revenue in 2020.

 

RESEARCH AND DEVELOPMENT EXPENSE, NET

 

Research and development expense recorded for the years ended December 31, 2019 and 2018 for our OmniMetrix subsidiary in continuing operations is as follows (amounts in thousands of U.S. dollars):

 

   Years ended
December 31,
 
   2019   2018 
OmniMetrix  $559   $542 
           

 

EMPLOYEES

 

At December 31, 2019, we employed a total of 23 employees – all of which were full-time employees employed by OmniMetrix in the U.S. Our CEO and CFO are hired as consultants to us.

 

Eleven of OmniMetrix’s 23 employees are engaged in production, engineering and technical support, seven in marketing and sales and five in finance and IT in addition to our CEO. We consider our relationship with our employees to be satisfactory. We have no collective bargaining agreements with any of our employees.

 

ADDITIONAL FINANCIAL INFORMATION

 

For additional financial information regarding our operating segments, foreign and domestic operations and sales, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 14 to our Consolidated Financial Statements included in this Annual Report.

 

AVAILABLE INFORMATION

 

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). These filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.

 

Our website can be found at http://www.acornenergy.com. We make available free of charge on or through our website, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such material is electronically filed, or furnished, to the SEC. Our website also includes our Code of Business Conduct and Ethics, and our Board of Directors’ Committee Charter for the Audit Committee.

 

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ITEM 1A. RISK FACTORS

 

We may from time to time make written or oral statements that contain forward-looking information. However, our actual results may differ materially from our expectations, statements or projections. The following risks and uncertainties, together with other factors not presently determinable, could cause actual results to differ from our expectations, statements or projections.

 

GENERAL FACTORS

 

We have a history of operating losses and have used significant amounts of cash for operations and to fund our acquisitions and investments.

 

We have a history of losses from our OmniMetrix subsidiary and corporate overhead and have used significant amounts of cash to fund our operating activities over the years. In 2019 and 2018, we had operating losses of $699,000 and $1.4 million, respectively. Cash used in operating activities of continuing operations was $1.2 million in 2019 and $2.4 million in 2018.

 

On March 20, 2020, we had approximately $1.5 million of consolidated cash and cash equivalents.

 

During 2019, we provided OmniMetrix $323,000 for the repayment of a loan to a former director in addition approximately $234,000 was added to the intercompany amounts owed to Acorn for accrued interest and dividends net of repayments of approximately $52,000. In 2018, we provided OmniMetrix with $300,000 of financing. We believe that with OmniMetrix’s continued growth and increased credit availability, that OmniMetrix will not need financing from us during 2020 and will be able to make nominal repayments each month towards the balance outstanding but interest will continue to accrue. Our corporate overhead has also been significantly reduced and has stabilized. Based on the above, we believe we have sufficient cash to finance our operations for at least twelve months from the issuance of the financial statements contained in this Annual Report. However, we may need to seek additional sources of funding for long-term corporate costs or if OmniMetrix were not to grow at the rate anticipated and needed additional funds for their operations. Additional sources of funding may include additional loans from related and/or non-related parties, partial sale of, or finding a strategic partner for, OmniMetrix or equity financings. There can be no assurance additional funding will be available at acceptable terms or that we will be able to successfully utilize any of these possible sources to provide additional liquidity.

 

We depend on key management for the success of our business.

 

Our success is largely dependent on the skills, experience and efforts of our senior management team, including Jan Loeb and Tracy Clifford. The loss of the services of any of these key managers could materially harm our business, financial condition, future results and cash flow. We do not maintain “key person” life insurance policies on any members of senior management. We may also not be able to locate or employ on acceptable terms qualified replacements for our senior management if their services were no longer available.

 

Loss of the services of a few key employees could harm our operations.

 

We depend on key technical employees and sales personnel. The loss of certain personnel could diminish our ability to develop and maintain relationships with customers and potential customers. The loss of certain technical personnel could harm our ability to meet development and implementation schedules. The loss of key sales personnel could have a negative effect on sales to certain current customers. Although most of our significant employees are bound by confidentiality and non-competition agreements, the enforceability of such agreements cannot be assured. Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified technical and managerial personnel. If we fail to attract or retain highly qualified technical and managerial personnel in the future, our business could be disrupted.

 

8
 

 

There is a limited trading market for our common stock and the price of our common stock may be volatile

 

Our common stock is traded on the OTCQB marketplace under the symbol “ACFN.” The OTCQB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities and provides significantly less liquidity than a listing on the NASDAQ Stock Markets or other national securities exchanges. The OTCQB securities are traded by a community of market makers that enter quotes and trade reports. This market is limited in comparison to the national stock exchanges and any prices quoted may not be a reliable indication of the value of our common stock. Quotes for stocks included on the OTCQB are not listed in the financial sections of newspapers as are those for the NASDAQ Stock Market or the NYSE. Therefore, prices for securities traded solely on the OTCQB may be difficult to obtain.

 

Trading on the OTCQB marketplace as opposed to a national securities exchange has resulted and may continue to result in a reduction in some or all of the following, each of which could have a material adverse effect on the price of our common stock and our company:

 

  the liquidity of our common stock;
  the market price of shares of our common stock;
  our ability to obtain financing for the continuation of our operations;
  the number of institutional and other investors that will consider investing in shares of our common stock;
  the number of market markers in shares of our common stock;
  the availability of information concerning the trading prices and volume of shares of our common stock; and
  the number of broker-dealers willing to execute trades in shares of our common stock.

 

In addition, the market price of our common stock could be subject to wide fluctuations in response to:

 

  quarterly variations in our revenues and operating expenses;
  announcements of new products or services by us;
  fluctuations in interest rates;
  significant sales of our common stock;
  the operating and stock price performance of other companies that investors may deem comparable to us; and
  news reports relating to trends in our markets or general economic conditions.

 

Penny stock rules will limit the ability of our stockholders to sell their stock

 

The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock; however, we have the option to execute a reverse split which could mitigate this issue.

 

9
 

 

Compliance with changing regulation of corporate governance, public disclosure and financial accounting standards may result in additional expenses and affect our reported results of operations.

 

Keeping informed of, and in compliance with, changing laws, regulations and standards relating to corporate governance, public disclosure and accounting standards, including the Sarbanes-Oxley Act, Dodd-Frank Act, as well as new and proposed SEC regulations and accounting standards, has required an increased amount of management attention and external resources. Compliance with such requirements may result in increased general and administrative expenses and an increased allocation of management time and attention to compliance activities.

 

We may not be able to successfully integrate companies which we may invest in or acquire in the future, which could materially and adversely affect our business, financial condition, future results and cash flow.

 

Part of our business model includes the acquisition of new companies either as new platform companies or complimentary companies. Although we do not presently foresee making such acquisitions in the near term unless they support our existing business, if we did so, any failure to effectively integrate any future acquisition’s management into our controls, systems and procedures could materially adversely affect our business, results of operations and financial condition.

 

In order to grow, we may decide to pursue growth through acquisitions, although we do not currently plan any significant acquisitions. Any significant acquisition could require substantial use of our capital and may require significant debt or equity financing. We anticipate the need to closely manage our cash for the foreseeable future and cannot provide any assurance as to the availability or terms of any such financing or its effect on our liquidity and capital resources.

 

Integrating acquisitions is often costly, and we may not be able to successfully integrate acquired companies with existing operations without substantial costs, delays or other adverse operational or financial consequences. Integrating acquired companies involves a number of risks that could materially and adversely affect our business, including:

 

  failure of the acquired companies to achieve the results we expect;
  inability to retain key personnel of the acquired companies;
  dilution of existing stockholders;
  potential disruption of our ongoing business activities and distraction of our management;
  difficulties in retaining business relationships with suppliers and customers of the acquired companies;
  difficulties in coordinating and integrating overall business strategies, sales and marketing, and research and development efforts; and
  difficulties in establishing and maintaining uniform standards, controls, procedures and policies, including accounting controls and procedures.

 

We incur substantial costs as a result of being a public company.

 

As a public company, we incur significant legal, accounting, and other expenses in connection with our reporting requirements. The Sarbanes-Oxley Act of 2002, Dodd-Frank Act and the rules subsequently implemented by the Securities and Exchange Commission (“SEC”) have required changes in corporate governance practices of public companies. These rules and regulations have already increased our legal and financial compliance costs and the amount of time and effort we devote to compliance activities. We expect that as a result of continued compliance with these rules and regulations, we will continue to incur significant legal and financial compliance costs. We continue to regularly monitor and evaluate developments with respect to these new rules with our legal counsel, but we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

 

We may in the future become involved in litigation that may materially adversely affect us.

 

From time to time in the ordinary course of our business, we may become involved in various legal proceedings, including commercial, product liability, employment, class action and other litigation and claims, as well as governmental and other regulatory investigations and proceedings. Any legal proceedings can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Because litigation is inherently unpredictable, the results of any such actions may have a material adverse effect on our business, operations or financial condition.

 

10
 

 

We have reported material weaknesses in internal controls over financial reporting as of December 31, 2019 and we cannot assure you that additional material weaknesses will not be identified in the future or that we can effectively remediate our reported weaknesses. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement, or our filings may not be timely, and investors may lose confidence in our reported financial information.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K.

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

As a result, we cannot assure you that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future or that we can effectively remediate our reported weaknesses. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information.

 

If we are unable to protect our intellectual property, or our intellectual property protection efforts are unsuccessful, others may duplicate our technology.

 

We rely on a combination of patents, trademarks, copyrights, trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our ability to compete effectively will depend, in part, on our ability to protect our proprietary technology, systems designs and manufacturing processes. The ability of others to use our intellectual property could allow them to duplicate the benefits of our products and reduce our competitive advantage. In the future, should we apply for new patents, we do not know whether any of our pending patent applications will be issued or, in the case of patents issued, that the claims allowed are or will be sufficiently broad to protect our technology or processes. Further, a patent issued covering one use of our technology may not be broad enough to cover uses of that technology in other business areas. Even if all our patent applications are issued and are sufficiently broad, they may be challenged or invalidated, or our competitors may independently develop or patent technologies or processes that are equivalent or superior to ours. We could incur substantial costs in prosecuting patent and other intellectual property infringement suits and defending the validity of our patents and other intellectual property. While we have attempted to safeguard and maintain our property rights, we do not know whether we have been or will be completely successful in doing so. These actions could place our patents, trademarks and other intellectual property rights at risk and could result in the loss of patent, trademark or other intellectual property rights protection for the products, systems and services on which our business strategy partly depends. Furthermore, it is not practical from a cost/benefit perspective to file for patent or trademark protection in every jurisdiction where we now or in the future may conduct business. In those territories where we do not have the benefit of patent or trademark protections, our competitors may be able to prevent us from selling our products or otherwise limit our ability to advertise under our established product names and we may face risks associated with infringement litigation as discussed below.

 

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We rely, to a significant degree, on contractual provisions to protect our trade secrets and proprietary knowledge. These trade secrets either cannot be protected by patent protection or we have determined that seeking a patent is not in our interest. These agreements may be breached, and we may not have adequate remedies for any breach. Our trade secrets may also be known without breach of such agreements or may be independently developed by competitors.

 

It can be difficult or expensive to obtain the insurance we need for our business operations.

 

As part of our business operations, we maintain insurance as a corporate risk management strategy. Insurance products are impacted by market fluctuations and can become expensive and sometimes very difficult to obtain. There can be no assurance that we can secure all necessary or appropriate insurance at an affordable price for the required limits. Our failure to obtain such insurance could lead to uninsured losses that could have a material adverse effect on our results of operations or financial condition or cause us to be out of compliance with our contractual obligations.

 

We may in the future be involved in product liability and product warranty claims relating to the products we manufacture and distribute that, if adversely determined, could adversely affect our financial condition, results of operations, and cash flows. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods, regardless of the ultimate outcome. Claims of this nature could also have a negative impact on customer confidence in our products and our company. While insurance can mitigate some of this risk, due to our current size and limited operating history, we have been unable to obtain product liability insurance with significant coverage. Our customers may not accept the terms we have been able to procure and seek to terminate our existing contracts or cease to do business with us.

 

Concentrations of credit risk

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, restricted cash, and trade accounts receivable. The Company’s cash and cash equivalents were deposited primarily with U.S. banks and brokerage firms amounted to $1.2 million at December 31, 2019. Approximately 35% of the accounts receivable at December 31, 2019 was due from two customers, 18% from one and 14% from another, who pay their receivables over usual credit periods. 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. The Company does not believe there is significant risk of non-performance by these counterparties.

 

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.

 

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.

 

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If our operations are curtailed, we may need to seek alternate sources of supply for services and staff, which may be more expensive. Alternate sources may not be available or may result in delays in shipments to us from our supply chain and subsequently to our customers, each of which would affect our results of operations. Further, if our customers’ businesses are similarly affected, they might delay or reduce purchases from us, which could adversely affect our results of operations.

 

RISKS RELATED TO OMNIMETRIX

 

OmniMetrix has a history of incurring net losses since our acquisition of the company and may never achieve sustained profitability.

 

OmniMetrix has a history of incurring operating losses since our acquisition of the company in 2012, including operating losses of $0.2 million in 2018. OmniMetrix did realize an operating profit of $0.2 million in 2019. While OmniMetrix has significantly reduced its losses and its cash needs from us and we expect positive cash flow from its operations in 2020, we can provide no assurance that OmniMetrix will be able to generate sufficient revenues and cash flow to allow it to become profitable or to eventually sustain profitability or to have positive cash flows.

 

An increase in customer terminations would negatively affect our business by reducing OmniMetrix revenue or requiring us to spend more money to grow our customer base.

 

Non-renewals or other monitoring service terminations could increase in the future due to customer dissatisfaction with our products and services, increased competition from other providers or alternative technologies.

 

If we have an increase in our non-renewal rate, we will have to acquire new customers on an ongoing basis just to maintain our existing level of customers and revenues. As a result, marketing expenditures are an ongoing requirement of our business. We incur significant costs to acquire new customers, and those costs are an important factor in determining our net profitability. Therefore, if we are unsuccessful in retaining customers or are required to spend significant amounts to acquire new customers, our revenue could decrease, and our operating results could be affected.

 

OmniMetrix is a relatively small company with limited resources compared to some of its current and potential competitors, which may hinder its ability to compete effectively.

 

Some of OmniMetrix’s current and potential competitors have significantly greater resources and broader name recognition than it does. As a result, these competitors may have greater credibility with OmniMetrix’s existing and potential customers. They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products which would allow them to respond more quickly to new or emerging technologies or changes in customer requirements. In particular at the present time we are facing significant competition from generator manufacturers who offer their own monitoring solutions.

 

OmniMetrix may not be able to access sufficient capital to support growth.

 

OmniMetrix has been dependent on Acorn’s ability and willingness to provide funding to support its business and growth strategy. Since our acquisition of OmniMetrix in February 2012, we have invested approximately $14.0 million and, through March 20, 2020, have lent $3,234,000, net of repayments to OmniMetrix, not including $1,271,000 of accrued interest and expenses advanced to it by Acorn since 2014. The loans included $323,000 lent in 2019 to repay a loan from a former director. OmniMetrix borrowed $300,000 from Acorn in 2018. OmniMetrix is not expected to need funding support from us in 2020 to support its growth and working capital needs.

 

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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 (4.25% at March 20, 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.

 

We have no assurance that this financing arrangement will provide sufficient liquidity for OmniMetrix’s working capital needs in 2020. 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.

 

OmniMetrix sells equipment and services which monitor third-party products, thus its revenues are dependent on the continued sales of such third-party products.

 

OmniMetrix’s end-user customer base is comprised exclusively of parties who have chosen to purchase either generators or construct gas pipelines. OmniMetrix has no ability to control the rate at which new generators or cathodic protection systems are acquired. If purchases of such products decline, the associated need for OmniMetrix’s products and services is expected to decline as well.

 

If OmniMetrix is unable to keep pace with changing market or customer-mandated product and service improvements, OmniMetrix’s results of operations and financial condition may suffer.

 

Many of OmniMetrix’s existing products may require ongoing engineering and upgrades in conjunction with market developments as well as specific customer needs. There can be no assurance that OmniMetrix will continue to be successful in its engineering efforts regarding the development of its products, and future technological difficulties could adversely affect its business, results of operations and financial condition.

 

The cellular networks used by OmniMetrix are also subject to periodic technical updates that may require corresponding updates to, or replacement of, OmniMetrix’s monitoring equipment.

 

Cellular networks have evolved over time to offer more robust technical capabilities in both voice and data transmission. At the present time, the changes from the so-called “2G” to “3G” and “LTE” service have resulted in only limited service interruptions. OmniMetrix anticipates, however, that as these new capabilities come online, it will be necessary to have equipment that can readily interface with the newer cellular networks to avoid negative impacts on customer service. Not all of the costs associated with OmniMetrix’s corresponding equipment upgrades can be passed on to customers and any increased expenses are expected to have a negative impact on OmniMetrix’s operating results.

 

A substantial portion of OmniMetrix’s revenues are expected to be generated not from product sales, but from periodic monitoring fees and thus it is continually exposed to risks associated with its customers’ financial stability.

 

OmniMetrix sells on-going monitoring services to both PG and CP customers. It is therefore dependent on these customers continuing to timely pay service fees on an on-going basis. If a significant portion of these fees are not renewed from year-to-year, OmniMetrix could expect to experience deterioration in its financial condition.

 

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OmniMetrix’s ability to provide, and to collect revenues from, monitoring services is dependent on the reliability of cellular networks not controlled by OmniMetrix.

 

OmniMetrix provides monitoring services through the use of cellular and satellite technology utilizing the networks of third-party providers. These providers generally do not warrant their services to either OmniMetrix or the end users and any dropped transmissions could result in the loss of customer renewals and potential claims against OmniMetrix. While OmniMetrix uses contractual measures to limit its liability to customers, there is no assurance that such limitations will be enforced or that customers will not cancel monitoring services due to network issues.

 

OmniMetrix’s business is dependent on its ability to reliably store and manage data, but there can be no guarantee that it has sufficient capabilities to mitigate potential data loss in all cases.

 

The efficient operation of OmniMetrix’s business is dependent on its information technology systems. In addition, OmniMetrix’s ability to assist customers in analyzing data related to the performance of such customers’ power and cathodic protection monitoring systems is an important component of its customer value proposition. OmniMetrix utilizes off-site data servers, housed within a commercial data center utilizing accepted data and power monitoring and protection processes, but whether a data loss can be avoided cannot be assured in every case. OmniMetrix’s information technology systems are vulnerable to damage or interruption from natural disasters, sabotage (including theft and attacks by computer viruses or hackers), power outages; and computer systems, Internet, telecommunications or data network failure. Any interruption of OmniMetrix’s information technology systems could result in decreased revenue, increased expenses, increased capital expenditures, customer dissatisfaction and potential lawsuits, any of which could have a material adverse effect on its results of operations and financial condition.

 

RISKS RELATED TO OUR SECURITIES

 

Our stock price is highly volatile and we do not expect to pay dividends on shares of our common stock for the foreseeable future. Investors may never obtain a return on their investment.

 

The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. During 2019, our common stock traded at prices as low as $0.20 and as high as $0.45 per share. Fluctuations in our stock price may continue to occur in response to various factors, many of which we cannot control, including:

 

  general economic and political conditions and specific conditions in the markets we address;
  quarter-to-quarter variations in our operating results;
  strategic investments or divestments;
  announcements of changes in our senior management;
  the gain or loss of one or more significant customers or suppliers;
  announcements of technological innovations or new products by our competitors, customers or us;
  the gain or loss of market share in any of our markets;
  changes in accounting rules;
  changes in investor perceptions; or
  changes in expectations relating to our products, plans and strategic position or those of our competitors or customers.

 

We do not intend to pay dividends to our stockholders in the foreseeable future. We intend to reinvest earnings, if any, in the development and expansion of our business. Accordingly, you will need to rely on sales of your common stock after price appreciation, which may never occur, in order to realize a return on your investment.

 

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Our share price may decline due to the large number of shares of our common stock eligible for future sale in the public market including shares underlying warrants and options.

 

Almost all of our outstanding shares of common stock are, or could upon exercise of options or warrants become, eligible for sale in the public market as described below. Sales of a substantial number of shares of our common stock in the public market, or the possibility of these sales, may adversely affect our stock price.

 

As of March 20, 2020, 39,687,589 shares of our common stock were issued and outstanding. As of that date we had 2,177,857 warrants outstanding and exercisable with a weighted average exercise price of $1.28 per share and 1,190,156 options outstanding and exercisable with a weighted average exercise price of $2.10 per share, which if exercised would result in the issuance of additional shares of our common stock. In addition to the options noted above, at March 20, 2020, 239,334 options are outstanding, but have not yet vested and are not yet exercisable.

 

Substantially all of our currently outstanding shares and shares issuable under our outstanding options and warrants are or would be freely tradable.

 

We may have to offer additional securities for sale in the near future.

 

As of March 20, 2020, we had consolidated cash of approximately $1.2 million which we believe is sufficient for at least the next twelve months. Despite this, we may ultimately not have sufficient cash to allow us to execute our plans and the occurrence of one or more unanticipated events may require us to make significant expenditures. Accordingly, we may need to raise additional amounts to finance our operations. If we were to do so by selling shares of our common stock and/or other securities convertible into shares of our common stock, current investors may incur additional dilution in the value of their shares.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

OmniMetrix’s activities are currently conducted in approximately 21,000 square feet of office and production space in the Hamilton Mill Business Park located in Buford, Georgia under a lease that has been extended from its original expiration date of April 30, 2020 to September 30, 2025. The lease provides for annual rent of approximately $75,000 which includes four months of free rent in 2020. OmniMetrix is currently utilizing only a portion of these leased facilities and expects to grow into a portion of the currently unused space and potentially sublease several available executive office spaces.

 

ITEM 3. LEGAL PROCEEDINGS

 

None.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is traded under the symbol “ACFN” on the OTCQB marketplace. The following table sets forth, for the periods indicated, the high and low bid prices on the OTCQB marketplace.

 

   High   Low 
2019:          
First Quarter  $0.45   $0.26 
Second Quarter   0.36    0.25 
Third Quarter   0.36    0.20 
Fourth Quarter   0.38    0.24 
2018:          
First Quarter  $0.32   $0.15 
Second Quarter   0.45    0.29 
Third Quarter   0.35    0.20 
Fourth Quarter   0.35    0.15 

 

As of March 20, 2020, the last reported sales price of our common stock on the OTCQB marketplace was [$0.XX], there were 87 record holders of our common stock and we estimate that there were approximately 3,759 beneficial owners of our common stock.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW AND TREND INFORMATION

 

The following discussion includes statements that are forward-looking in nature. Whether such statements ultimately prove to be accurate depends upon a variety of factors that may affect our business and operations. Certain of these factors are discussed in “Item 1A. Risk Factors.”

 

We currently operate in two reportable operating segments, both of which are performed though our OmniMetrix subsidiary:

 

  The PG segment which provides wireless remote monitoring and control systems and services for critical assets as well as Internet of Things applications; and
     
  The CP segment which provides for remote monitoring of cathodic protection systems on gas pipelines for gas utilities and pipeline companies.

 

Following the closing of the 2016 DSIT Transaction, the Company no longer consolidated the results of DSIT, but rather reported on its investment in DSIT on the equity method (until the closing of the 2018 DSIT Transaction).

 

On February 14, 2018, we closed on the sale of our remaining interest in DSIT to a group of Israeli investors for $5.8 million before transaction costs and withholding taxes. Accordingly, we adjusted our equity investment balance in DSIT to be equal to the gross proceeds received from the sale and recorded an impairment charge in 2017 of $308,000. In 2018, we recorded our 41.2% share of DSIT’s income or loss through the closing of the 2018 DSIT Transaction as well as our estimated transaction costs and withholding taxes on the transaction ($441,000 and $388,000, respectively) offset by $222,000, net of professional fees less interest income, refunded by the Israel Tax Authorities related to our 2016 Israeli tax return. In 2019, we recorded an additional gain of approximately $50,300 which was net of professional fees of $11,200, on the 2018 DSIT Transaction as a result of the final settlement with the Israel tax authorities and the related refund of withholding taxes net of professional fees related to the 2017 and 2018 Israeli tax returns.

 

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The following analysis should be read together with the segment information provided in Note 14 to our Consolidated Financial Statements included in this report.

 

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.

 

OmniMetrix has two divisions: PG and CP. In 2019, OmniMetrix recorded revenue of $5,490,000 ($4,282,000 in its PG activities and $1,208,000 in its CP activities) as compared to revenue of $5,087,000 recorded in 2018 ($3,656,000 in its PG activities and $1,431,000 in its CP activities). Increased revenue in 2019 was driven by monitoring revenue which increased 23% from $2,712,000 in 2018 to $3,327,000 in 2019. The increase in monitoring revenue was offset by a decrease in hardware revenue which decreased 9% from $2,375,000 in 2018 to $2,163,000 in 2019. The increase in monitoring revenue is the result of an increase in the number of units being monitored. The decrease in hardware revenue is the result of not being fully staffed on the sales team for the majority of the year. We have now filled the open positions, including the director of sales role.

 

Gross profit during 2019 was $3,590,000 reflecting a gross margin of 65% on revenue compared with a gross profit of $3,122,000 reflecting a 61% gross margin in 2018. The increased gross profit in 2019 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 as well as to higher gross margin realized on hardware revenue. Gross margin on hardware revenue increased in 2019 to 38% from 36% in 2018. This increase was the result of increased gross margins for PG hardware which grew from 32% in 2018 to 34% in 2019. The increased margin was the result of reduced costs in our PG units as we benefit from our redesigned products. CP hardware gross margin increased to 43% in 2019 from 39% in 2018 due to product mix. Gross margin on monitoring revenue remained strong at 84% during 2019 and 2018.

 

During 2019, OmniMetrix recorded $559,000 of R&D expense as compared to $542,000 in 2018. The increase in R&D expense in 2019 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 in 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.

 

During 2019, OmniMetrix recorded $2,853,000 of SG&A costs compared to SG&A costs of $2,726,000 for 2018, an increase of $127,000 or 5%. This increase was primarily due to increases in personnel costs, computer software, travel and entertainment and payment processing service charges. We anticipate that our annual SG&A costs in 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 including completing the implementation of a fully integrated Enterprise Resource Planning Systm.

 

OmniMetrix Line of Credit

 

In October 2017, OmniMetrix renewed its Loan and Security Agreement providing OmniMetrix with access to accounts receivable formula-based financing of the lesser of 75% of eligible receivables or $1 million. Debt incurred under this financing arrangement bore interest at the greater of prime plus 2% or 6% per year. In addition, OmniMetrix was to pay a monthly service charge of 0.9% of the average aggregate principal amount outstanding for the prior month. 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 one year beginning November 1, 2017. OmniMetrix allowed this line to expire according to its terms at October 31, 2018.

 

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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 (4.25% at March 20, 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 2019, the intercompany amount due to Acorn from OmniMetrix increased by approximately $557,000. This included $323,000 in funding for the repayment of the loan from a former director, accrued interest and dividends of $286,000 due to Acorn, less repayments from OmniMetrix of $52,000, net of expenses paid by Acorn on OmniMetrix’s behalf. 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”) expense of $876,000 in 2019 reflected a decrease of $384,000 or 30% from the $1,260,000 of G&A expense reported in 2018 which included combined one-time bonuses of $150,000 paid to our CEO and former Executive Chairman of the Board in recognition of their performance in the 2018 DSIT Transaction and $20,000 in the aggregate of transition consulting fees paid to our former CFO. Excluding these non-recurring items from 2018, G&A expense decreased in 2019 by $214,000 as compared to 2018 due to reductions in corporate overhead, primarily in compensation expense, board fees and legal fees. 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 decreased from $26,000 in 2018 to $22,000 in 2019.

 

The closing of the 2018 DSIT Transaction provided us with approximately $1.9 million after assigning $1.6 million of the amounts we owed to DSIT to the purchasers, paying transaction costs, withholding taxes and the repayment of director loans and associated accrued interest. In our sale of shares of DSIT Solutions Ltd. (“DSIT”), the Israel Tax Authorities (“ITA”) withheld tax of NIS 1,008,000, NIS 146,000 and NIS 1,359,000 in 2016, 2017 and 2018, respectively. Such amounts were recorded as expense ($266,000, $41,000, and $388,000) in each of those years. In August 2018, we received back from the ITA NIS 1,087,000 ($293,000 at the then exchange rate) consisting of $266,000 of tax, $21,000 of interest income and $6,000 of exchange rate gain. We received the refund following the filing of our 2016 Israeli tax return in which we claimed that we were due a refund of the withheld taxes in full as we believe that each of the sale transactions is exempt from tax under Israeli tax law.

 

We have recorded the $222,000, net of fees of $65,000 offset by interest income of $21,000, as part of the gain (loss) on sale of interest of DSIT in the third quarter of 2018 relating to the 2016 DSIT transaction withholding. This offsets the loss on the 2018 DSIT transaction which reduced the loss recorded in 2018 to $607,000. We committed not to transfer those funds out of Israel until the completion of the ITA’s review, such funds were deemed to be restricted and were reflected as such on our balance sheet as of December 31, 2018. By statute, the funds would no longer be restricted the earlier of December 31, 2022 or the completion of the ITA’s review of our tax position which occurred at the end of 2019.

 

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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 March 20, 2020, Acorn’s corporate operations (excluding cash at our OmniMetrix subsidiary) held a total of approximately $1,555,000 in cash and cash equivalents.

 

CRITICAL ACCOUNTING POLICIES

 

The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

 

The following discussion of critical accounting policies represents our attempt to report on those accounting policies, which we believe are critical to our consolidated financial statements and other financial disclosure. It is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in Note 2 of the Notes to the Consolidated Financial Statements included in this Annual Report. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which the selection of an available alternative policy would not produce a materially different result.

 

We have identified the following as critical accounting policies affecting our Company: principles of consolidation and investments in associated companies; revenue recognition and stock-based compensation.

 

Following the closing of the 2018 DSIT Transaction, we no longer have any equity method investments.

 

Principles of Consolidation and Investments in Associated Companies

 

Our consolidated financial statements include the accounts of all majority-owned subsidiaries. All intercompany balances and transactions have been eliminated.

 

Revenue Recognition

 

Our revenue recognition policy is consistent with applicable revenue recognition guidance and interpretations. The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to achieve this core principle, which includes: (1) identifying contracts with customers, (2) identifying performance obligations within those contracts, (3) determining the transaction price, (4) allocating the transaction price to the performance obligation in the contract, which may include an estimate of variable consideration, and (5) recognizing revenue when or as each performance obligation is satisfied. We assess whether payment terms are customary or extended in accordance with normal practice relative to the market in which the sale is occurring. Our sales arrangements generally include standard payment terms. These terms effectively relate to all customers, products, and arrangements regardless of customer type, product mix or arrangement size.

 

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If revenue recognition criteria are not satisfied, amounts received from customers are classified as deferred revenue on the balance sheet until such time as the revenue recognition criteria are met.

 

Sales of OmniMetrix monitoring systems include the sale of equipment (“HW”) and of monitoring services (“Monitoring”). Sales of OmniMetrix equipment do not qualify as a separate unit of accounting. As a result, 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. See Notes 14 and 15 for the disaggregation of our revenue for the periods presented.

 

Stock-based Compensation

 

We recognize stock-based compensation expense based on the fair value recognition provision of applicable accounting principles, using the Black-Scholes option valuation method. Accordingly, we are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize that cost over the period during which an employee is required to provide service in exchange for the award. Under the Black-Scholes method, we make assumptions with respect to the expected lives of the options that have been granted and are outstanding, the expected volatility, the dividend yield percentage of our common stock and the risk-free interest rate at the respective dates of grant.

 

For our Acorn options, the expected volatility factor used to value stock options in 2019 was based on the historical volatility of the market price of our common stock over a period equal to the expected term of the options. For the expected term of the option, we used an estimate of the expected option life based on historical experience. The risk-free interest rate used is based upon U.S. Treasury yields for a period consistent with the expected term of the options. We assumed no quarterly dividend rate. We recognize stock-based compensation expense on an accelerated basis over the requisite service period. Due to the numerous assumptions involved in calculating share-based compensation expense, the expense recognized in our consolidated financial statements may differ significantly from the value realized by employees on exercise of the share-based instruments. In accordance with the prescribed methodology, we do not adjust our recognized compensation expense to reflect these differences.

 

For the years ended December 31, 2019 and 2018, we incurred stock compensation expense with respect to options of approximately $22,000 and $26,000, respectively.

 

See Note 11 to the consolidated financial statements for the assumptions used to calculate the fair value of share-based employee compensation for our Acorn options.

 

RESULTS OF OPERATIONS

 

The selected consolidated statement of operations data for the years ended December 31, 2019 and 2018 and consolidated balance sheet data as of December 31, 2019 and 2018 has been derived from our audited Consolidated Financial Statements included in this Annual Report. The selected consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015 has been derived from our consolidated financial statements not included herein.

 

This data should be read in conjunction with our Consolidated Financial Statements and related notes included herein and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Selected Consolidated Statement of Operations Data:

 

   For the Years Ended December 31, 
   2019   2018   2017   2016   2015 
   (in thousands, except per share data) 
Revenue  $5,490   $5,087   $4,350   $8,659   $16,548 
Cost of sales   1,900    1,965    1,903    5,134    10,381 
Gross profit   3,590    3,122    2,447    3,525    6,167 
Research and development expenses, net   559    542    518    927    1,705 
Selling, general and administrative expenses   3,730    3,986    3,840    5,651    9,632 
Operating loss   (699)   (1,406)   (1,911)   (3,053)   (5,170)
Finance income (expense), net   (2)   (74)   (231)   (572)   (327)
Loss before income taxes   (697)   (1,480)   (2,142)   (3,625)   (5,497)
Income tax expense           (41)   (19)   (209)
Net loss after income taxes   (697)   (1,480)   (2,183)   (3,644)   (5,706)
Impairment of investment in DSIT       (33)   (308)        
Share of income in DSIT       33    450    268     
Gain (loss) on sale of interest in DSIT, net of transaction costs and withholding taxes   50    (607)       3,543     
Income (loss) before discontinued operations   (647)   (2,087)   (2,041)   167    (5,706)
Income from discontinued operations, net of income taxes           (698)   (286)   (5,096)
Net loss   (647)   (2,087)   (1,343)   (119)   (10,802)
Non-controlling interest share of loss – continuing operations   (29)   86    174    264    105 
Non-controlling interest share of loss - discontinued operations                   98 
Net income (loss) attributable to Acorn Energy, Inc. shareholders  $(618)  $(2,001)  $(1,169)  $145   $(10,599)
Basic and diluted net income (loss) per share attributable to Acorn Energy, Inc. shareholders:                         
Income (loss) from continuing operations  $(0.02)  $(0.07)  $(0.06)  $0.02   $(0.21)
Loss from discontinued operations           0.02    (0.01)   (0.19)
Net income (loss) per share attributable to Acorn Energy, Inc. shareholders – basic and diluted  $(0.02)  $(0.07)  $(0.04)  $0.01   $(0.40)
Weighted average number of shares outstanding attributable to Acorn Energy, Inc. shareholders – basic and diluted   35,495    29,540    29,423    28,488    26,803 

 

The following table sets forth certain information with respect to revenues and profits of our reportable business segments for the years ended December 31, 2019 and 2018 (dollars in thousands), including the percentages of revenues attributable to such segments. (See Note 14 to our Consolidated Financial Statements for the definitions of our reporting segments).

   PG   CP   Total 
Year ended December 31, 2019:               
Revenues from external customers  $4,282   $1,208   $5,490 
Percentage of total revenues from external customers   78%   22%   100%
Segment gross profit   3,030    560    3,590 
                
Year ended December 31, 2018:               
Revenues from external customers  $3,656   $1,431   $5,087 
Percentage of total revenues from external customers   72%   28%   100%
Segment gross profit   2,524    598    3,122 

 

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2019 COMPARED TO 2018

 

Revenue. Consolidated revenue of $5,490,000 during 2019 reflected an increase of $403,000 or 8% as compared to 2018 revenues of $5,087,000. The increase in revenue was due to the increase in OmniMetrix’s monitoring revenue. OmniMetrix recorded increased revenue in its PG activities but a decrease in revenue in its CP activities due to the fact that the sales team was not fully staffed during 2019. The sales director position was open for six months and three sales positions were open for the majority of the year. These four positions were filled as of December 31, 2019. PG revenue increased from $3,656,000 in 2018 to $4,282,000 in 2019 (17%) while CP revenue decreased from $1,431,000 in 2018 to $1,208,000 in 2019 (16%). Increased revenue in PG was due to an increase in the number of units being monitored

 

Gross profit. OmniMetrix’s gross profit increased from $3,122,000 in 2018 to $3,590,000 in 2019. OmniMetrix’s increased gross profit was attributable to a combination of its increased revenue and increased gross margin from 61% in 2018 to 65% in 2019. The increased gross margin is the result of the product mix of higher margin monitoring revenue and the increased gross margins in hardware revenue which grew from 36% in 2018 to 38% in 2019 while maintaining an 84% gross margin on monitoring revenue.

 

Research and development (“R&D”) expense. R&D expense increased by $17,000 (3%) from $542,000 in 2018 to $559,000 in 2019 as OmniMetrix continues development of next-generation PG and CP monitors and explore other complimentary products in response to customer needs.

 

Selling, general and administrative expense (“SG&A”). SG&A expense in 2019 decreased by $256,000 (6%) as compared to 2018. The decrease in our Corporate overhead of $384,000 was offset by an increase in OmniMetrix’s SG&A of $127,000 which increased from $2,726,000 in 2018 to $2,853,000 in 2019. OmniMetrix’s SG&A increase was due to increases in personnel costs, computer software expenses, travel and entertainment expenses and payment processing service charges. The decrease in corporate expense from $1,260,000 in 2018 to $876,000 in 2019 reflected a decrease of $384,000, or 30%. Corporate G&A expense in 2018 included combined one-time bonuses of $150,000 paid to our CEO and former Executive Chairman of the Board in recognition of their performance in the 2018 DSIT Transaction and $20,000 in the aggregate of transition consulting fees paid to our former CFO. Excluding these non-recurring items from 2018, SG&A expense decreased in 2019 by $214,000 as compared to 2018 due to reductions in corporate overhead, primarily in compensation expenses, board fees, and legal fees.

 

Finance expense, net. We had net finance related income of $2,000 in 2019 due to the gains on the exchange rate related to the funds that were held in a bank in Israel as of December 31, 2019 compared to finance expense of $74,000 in 2018 which was primarily interest from our accounts receivable factoring line in 2018. Our balances outstanding under the line during 2018 were higher than the average balances outstanding in 2019 which we maintained at an average of $150,000. Finance expense in 2019 was primarily comprised of interest expense and services charges of $23,000 associated with OmniMetrix’s line of credit, corporate interest income of $3,000 net of Corporate interest expense of $1,000 and currency exchange net gain of $23,000. The decrease in the interest expense on the credit line is due to the lower average balance outstanding during the year coupled with a reduction in the applicable aggregate interest rate and service charge when the line was reinstated in March 2019. Finance expense in 2018 was primarily comprised of interest expense and service charges of $54,000 associated with OmniMetrix’s line of credit, other OmniMetrix interest expense of $6,000, in addition to corporate interest expense of $23,000 net of Corporate interest income of $6,000 and currency exchange net gain of $3,000.

 

Loss on sale of DSIT. In the first quarter of 2018, we closed on the sale of our remaining interests in DSIT Solutions Ltd., receiving gross proceeds of $5.8 million before transaction costs, professional fees and withholding taxes. We recorded a loss on the sale of $829,000. This loss was offset by $222,000, net of fees of $44,000, from a tax benefit received in 2018 which reduced the loss to $607,000. In 2019, we received an additional tax benefit of $50,000 further reducing the loss on the sale of DSIT.

 

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Share of income in DSIT. Following the partial sale of DSIT in April 2016, we no longer consolidate their results, but rather record our share (approximately 41.2%) of their income (or loss). Our share of DSIT’s income in the period prior to the sale of our remaining interest in DSIT was $33,000.

 

Impairment of investment in DSIT. As a result of the sale of our remaining interest in DSIT in February 2018 at a gross sales price of $5.8 million which was below the carrying value of our DSIT investment, we recorded an impairment of $308,000 as of December 31, 2017 to reduce the carrying value of our investment to the selling price at which we sold our investment. We recorded an additional impairment loss of $33,000, equivalent to our share of the 2018 DSIT income.

 

Net loss attributable to Acorn Energy. We had a net loss attributable to Acorn Energy of $618,000 in 2019 as compared with a net loss of $2,001,000 in 2018. Our loss in 2019 is comprised of net income at OmniMetrix of $184,000, corporate expense of $852,000 partially offset by the gain of $50,000 related to the tax recovery on the sale of our remaining interest in DSIT which occurred in February 2018 and by $29,000 representing the non-controlling interest share of our loss in OmniMetrix. Our loss in 2018 is comprised of a loss at OmniMetrix of $206,000, corporate expense of $1,274,000 and the loss of $607,000 on the sale of our remaining interest in DSIT. These losses were partially offset by $86,000 representing the non-controlling interest share of our loss in OmniMetrix.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At December 31, 2019, we had a negative working capital of $164,000. Our working capital includes approximately $1,247,000 of cash and deferred revenue of approximately $3.0 million. Such deferred revenue does not require significant cash outlay for the revenue to be recognized. Net cash decreased during the year ended December 31, 2019 by $16,000, of which $1,220,000 was used in operating activities, $1,116,000 was used in investing activities, $2,320,000 was provided by financing activities.

 

During the year ended December 31, 2019, we used $1,220,000 in operating activities. Our OmniMetrix subsidiary used $404,000 in its operations, of which $323,000 was used to pay off a loan from a former director, while our corporate headquarters used $816,000 during the same period. Of the cash used in our corporate operating activities, $280,000 was used to pay off expenses incurred in the prior year.

 

Net cash of $1,116,000 was used in investing activities in 2019 which included purchases of software of $166,000, and $950,000 used in the reacquisition of a 19% interest in our OmniMetrix subsidiary as described below under the heading “Purchase of Non-Controlling Interest.”

 

Net cash of $2,320,000 was provided by financing activities which was comprised of $2,184,000 from our equity raise described below under the heading “Rights Offering” and $136,000 in net proceeds from OmniMetrix’s line of credit described above under the heading “OVERVIEW AND TREND INFORMATION — OmniMetrix Line of Credit.”

 

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 at this time.

 

Rights Offering

 

On June 28, 2019, we completed a rights offering, raising $2,186,000 in proceeds, net of $208,000 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 (“Holdings”) for $1,273,000 discussed below.

 

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.

 

Purchase of Non-Controlling Interest

 

In 2015, one of our then-current directors (the “Investor”) acquired a 20% interest in the 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.

 

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

 

On May 14, 2018, Holdings and the Investor entered into an agreement whereby effective May 1, 2018, the dividend on the Preferred Stock was reduced to 8%. In addition, all the amounts due to the Investor (accrued dividends, loan and accrued interest) and all future dividends that would accrue on the Preferred Stock through June 30, 2020, were to be paid by Holdings pursuant to an agreed-upon payment schedule which was scheduled to end on June 30, 2020. During the six months ended June 30, 2019, the Company accrued $40,000 in quarterly dividends in the aggregate. At June 30, 2019, the obligation to the Investor was $323,000, representing unpaid accrued dividends.

 

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 the $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 $4,500,000 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 $1,247,000 of cash on December 31, 2019, and approximately $1,555,000 on March 20, 2020. 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.

 

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Contractual Obligations and Commitments

 

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

 

CASH PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS

 

   Years Ending December 31,
(in thousands)
 
   Total   2020   2021-2022   2023-2024   2025 and thereafter 
Debt  $136   $136   $   $   $ 
Software agreements   231    130    101         
Operating leases   680    78    245    258    99 
Contractual services   23    11    12         
Total contractual cash obligations  $1,070   $355   $358   $258   $99 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

General

 

We are required to make certain disclosures regarding our financial instruments, including derivatives, if any.

 

A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that imposes on one entity a contractual obligation either to deliver or receive cash or another financial instrument to or from a second entity. Examples of financial instruments include cash and cash equivalents, deposits, trade accounts receivable, loans, investments, trade accounts payable, accrued expenses, options and forward contracts. The disclosures below include, among other matters, the nature and terms of derivative transactions, information about significant concentrations of credit risk, and the fair value of financial assets and liabilities.

 

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.

 

Concentrations of Credit Risk

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and trade accounts receivable. The Company’s cash and cash equivalents were deposited primarily with U.S. banks and brokerage firms and amounted to $1,247,000 at December 31, 2019. Approximately 35% of the accounts receivable at December 31, 2019 was due from two customers, 18% from one and 17% from another, who pay their receivables over usual credit periods. 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. The Company does not believe there is significant risk of non-performance by these counterparties.

 

Interest Rate Risk

 

In October 2017, OmniMetrix renewed its Loan and Security Agreement with a lender providing OmniMetrix with access to accounts receivable formula-based financing of the lesser of 75% of eligible receivables or $1.0 million an increase of $500,000 from the previous Loan and Security Agreement. Debt incurred under this financing arrangement bore interest at the greater of prime plus 2% or 6% per year. In addition, OmniMetrix paid a monthly service charge of 0.9% of the average aggregate principal amount outstanding for the prior month. OmniMetrix also agreed to maintain a minimum loan balance of $150,000 in its line-of-credit with the lender for a minimum of one year beginning November 1, 2017. This Loan and Security Agreement terminated pursuant to its terms October 31, 2018. The balance outstanding under this agreement was paid as of November 6, 2018.

 

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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 (4.25% at March 20, 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.

 

COVID-19 Pandemic Risk to Supply Chain

 

As discussed above under the “RISK FACTORS” heading, the COVID-19 pandemic could 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. Alternate sources may not be available or may result in delays in shipments to us from our supply chain and subsequently to our customers, each of which would affect our results of operations. Further, if our customers’ businesses are similarly affected as a result of the pandemic, they might delay or reduce purchases from us, which could adversely affect our results of operations.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Furnished at the end of this report commencing on page F-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”) as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, due to the material weaknesses in our internal control over financial reporting as described below, our disclosure controls and procedures were not effective as of December 31, 2019.

 

Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2019 based upon the document “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon this assessment and those criteria, management concluded that due to the material weaknesses described below, our internal control over financial reporting was not effective as of December 31, 2019.

 

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The Company employs a decentralized internal control methodology, coupled with management’s oversight, whereby each subsidiary is responsible for mitigating its risks to financial reporting by implementing and maintaining effective control policies and procedures and subsequently translating that respective risk mitigation up and through to the parent level and to the Company’s external financial statements. Also, as the Company’s subsidiary is not large enough to effectively mitigate certain risks by segregating incompatible duties, management must employ compensating mechanisms throughout the 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 the Company’s OmniMetrix subsidiary and limited IT system capabilities, such that individual control policies and procedures could not be implemented, maintained, or remediated when and where necessary. As a result, a majority of the significant process areas management identified for the Company’s OmniMetrix subsidiary had one or more material weaknesses present. This condition was further exacerbated as the Company could not demonstrate that each of the principles described within COSO’s document “Internal Control - Integrated Framework (2013)” were present and functioning.

 

Although a material weakness is defined as a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis, this material weakness did not result in any material misstatements of the Company’s consolidated financial statements and disclosures for any interim periods during, or for the annual period ended December 31, 2019.

 

Remediation Actions

 

Management intends to strengthen the Company’s internal controls. Management expects to make progress towards reducing the risk that the material weakness could result in a material misstatement of the Company’s annual or interim financial statements. As business conditions allow and resources permit, management will systematically build the necessary capabilities and infrastructure to implement corrective action.

 

Changes in Internal Control Over Financial Reporting

 

Other than those changes associated with our material weakness described above and the corresponding remediation actions, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended), during our last fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

28
 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

Set forth below is certain information concerning the directors and certain officers of the Company:

 

Name   Age   Position
Jan H. Loeb   61   Director, President and Chief Executive Officer of the Company and Acting CEO of OmniMetrix
Gary Mohr   61   Director and member of our Audit, Nominating and Compensation Committees
Michael F. Osterer   74   Director and member of our Audit, Nominating and Compensation Committees
Samuel M. Zentman   74   Director, Chairman of our Audit Committee and member of our Nominating and Compensation Committees
Tracy S. Clifford   51   Chief Financial Officer of the Company and COO of OmniMetrix

 

Jan H. Loeb has served as our President and CEO since January 28, 2016 and as Acting CEO of OmniMetrix since December 1, 2019. He was appointed to our Board in August 2015 pursuant to the terms of our Loan and Security Agreement with Leap Tide Capital Partners III, LLC (the “Leap Tide Loan Agreement”). He was also appointed to the Board of our then subsidiary DSIT in August 2015 pursuant to the terms of the Leap Tide Loan Agreement and held that position until the sale of our remaining interest in DSIT in February 2018. Mr. Loeb has more than 35 years of money management and investment banking experience. He has been the Managing Member of Leap Tide Capital Management LLC since 2007. From 2005 to 2007, he served as the President of Leap Tide’s predecessor, Leap Tide Capital Management Inc., which was formerly known as AmTrust Capital Management Inc. He served as a Portfolio Manager of Chesapeake Partners from February 2004 to January 2005. From January 2002 to December 2004, he served as Managing Director at Jefferies & Company, Inc. From 1994 to 2001, he served as Managing Director at Dresdner Kleinwort Wasserstein, Inc. (formerly Wasserstein Perella & Co., Inc.). He served as a Lead Director of American Pacific Corporation from July 8, 2013 to February 27, 2014, and also served as its Director from January 1997 to February 27, 2014. He served as an Independent Director of Pernix Therapeutics Holdings Inc. (formerly, Golf Trust of America, Inc.) from 2006 to August 31, 2011. He served as a Director of TAT Technologies, Ltd. from August 2009 to December 21, 2016. He served as a Director of Keweenaw Land Association, Ltd. from December 2016 until May 2019.

 

Key Attributes, Experience and Skills. Mr. Loeb brings to the Acorn Board significant financial expertise, cultivated over more than 35 years of money management and investment banking experience, together with a background in public company management and audit committee experience.

 

Gary Mohr was elected to the Board in August 2018 and is a member of our Audit, Compensation and Nominating Committees. Mr. Mohr is President of UE Systems, Incorporated, an international technology company specializing in the field of plant asset reliability through ultrasound. Mr. Mohr started with UE Systems in 1988 as a salesman and rapidly progressed through the ranks as regional sales manager, National Sales Manager, Vice President and eventually President of the company. It is through Mr. Mohr’s stewardship that UE Systems has grown from a national brand to an international company with offices in Toronto, Mexico City, Hong Kong, India and the Netherlands, and developed a list of loyal customers, including those in the Fortune 500.

 

Key Attributes, Experience and Skills. Mr. Mohr brings to the Board a broad range of operational and managerial experience, including a successful track record in product development and marketing leadership.

 

Michael F. Osterer was elected to the Board in August 2018 and is a member of our Audit, Compensation and Nominating Committees. He served as an advisor to our Board from October 2017 until his election as director. Since 1973, Mr. Osterer has served as Chairman of the Board of UE Systems, Incorporated, a leader in the field of plant asset reliability through ultrasound, which he founded in 1973. He also served as President of UE Systems from 1973 to 1985. Since 1987, Mr. Osterer has served as President of Libom Oil, an oil exploration, drilling and purchasing company, which he founded in 1987. He is the Acting Chairman of the Board of Radon Testing Corporation of America, Inc., which he founded in 1985 and where he served as President from 1985 through 1989. Mr. Osterer also founded Westchester Consultants, a general business consultancy nationally recognized for branding expertise of food products. He served in the United States Air Force/Air National Guard, 105th Airborne Division, from 1964 through 1970. Mr. Osterer graduated from Fordham University with a BA in Social Sciences, Magna Cum Laude.

 

29
 

 

Key Attributes, Experience and Skills. Mr. Osterer brings to Acorn a wealth of operational and managerial experience gained over his long history of successful entrepreneurial pursuits, corporate leadership and oversight.

 

Samuel M. Zentman has been one of our directors since November 2004 and currently serves as Chairman of our Audit Committee and as a member of our Compensation and Nominating Committees. From 1980 until 2006, Dr. Zentman was the president and chief executive officer of a privately-held textile firm, where he also served as vice president of finance and administration from 1978 to 1980. From 1973 to 1978, Dr. Zentman served in various capacities at American Motors Corporation. He holds a Ph.D. in Complex Analysis. Dr. Zentman serves on the board of Hinson & Hale Medical Technologies, Inc., as well as several national charitable organizations devoted to advancing the quality of education.

 

Key Attributes, Experience and Skills. Dr. Zentman’s long-time experience as a businessman together with his experience with computer systems and software enables him to bring valuable insights to the Board. Dr. Zentman has a broad, fundamental understanding of the business drivers affecting our Company and also brings leadership and oversight experience to the Board.

 

Tracy S. Clifford has served as the Company’s Chief Financial Officer since June 1, 2018 and as the COO of OmniMetrix since December 1, 2019. She serves in such positions pursuant to a Consulting Agreement between the Company and Tracy Clifford Consulting, LLC. Ms. Clifford is President and Owner of Tracy Clifford Consulting, LLC, through which she has been providing contract CFO/COO services and other advisory services and project engagements since June 2015. Between October 1999 and May 2015, she served as CFO, Principal Accounting Officer, Corporate Controller and Secretary for a publicly-traded pharmaceutical company and a publicly-traded REIT. Her prior experience includes accounting leadership positions at United Healthcare (Atlanta) and the North Broward Hospital District (Fort Lauderdale) and work on the audit team of Deloitte & Touche (Miami). Ms. Clifford obtained a Bachelor of Science Degree in Accounting from the College of Charleston and a Master’s Degree in Business Administration with a concentration in Finance from Georgia State University. Ms. Clifford is a licensed CPA in the state of South Carolina and holds a Certification in the Fundamentals of Forensic Accounting from the AICPA.

 

Audit Committee; Audit Committee Financial Expert

 

The Company has a separate designated standing Audit Committee established and administered in accordance with SEC rules. The three members of the Audit Committee are Samuel M. Zentman (who serves as Chairman of the Audit Committee), Gary Mohr and Michael F. Osterer. The Board of Directors has determined that each member of the Audit Committee meets the independence criteria prescribed by NASDAQ governing the qualifications for audit committee members and each Audit Committee member meets NASDAQ’s financial knowledge requirements. Our Board has determined that Dr. Zentman qualifies as an “audit committee financial expert,” as defined in the rules and regulations of the SEC.

 

Compensation Committee

 

Our executive compensation is administered by the Compensation Committee of the Board of Directors, which was reconstituted in 2017. The members of the Compensation Committee are Gary Mohr, Michael F. Osterer and Samuel M. Zentman, all of whom have been determined by the Board to be independent in accordance with NASDAQ’s requirement for independent director oversight of executive officer compensation.

 

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Nominating Committee

 

The Nominating Committee of our Board of Directors, which was reconstituted in 2017, has overall responsibility for identifying, evaluating, recruiting and selecting qualified candidates for election, re-election or appointment to the Board. The Members of the Nominating Committee are Gary Mohr, Samuel M. Zentman and Michael Osterer all of whom have been determined by the Board to meet the independence criteria prescribed by NASDAQ governing the qualifications of nominating committee members.

 

Our stockholders may recommend potential director candidates by contacting the Secretary of the Company to receive a copy of the procedure to recommend a potential director candidate for consideration by the Nominating Committee, who will evaluate recommendations from stockholders in the same manner that they evaluate recommendations from other sources.

 

Section 16(a) Beneficial Ownership Reporting Compliance; Delinquent Section 16(a) Reports

 

Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. These persons are also required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Further, we have implemented measures to assure timely filing of Section 16(a) reports by our executive officers and directors. Based solely on our review of such forms or written representations from certain reporting persons, we believe that during 2019 our executive officers and directors complied with the filing requirements of Section 16(a) except for Mr. Osterer who failed to file on a timely basis a Form 4 reporting the shares of common stock he beneficially acquired in our 2019 Rights Offering.

 

Code of Ethics

 

We have adopted a Code of Business Conduct and Ethics that applies to all our directors, officers and employees. This code of ethics is designed to comply with the NASDAQ marketplace rules related to codes of conduct. Our code of ethics may be accessed on the Internet under “Investor Relations” on our website at www.acornenergy.com. We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our code of ethics by posting such information on our website, www.acornenergy.com.

 

ITEM 11. EXECUTIVE COMPENSATION

 

EXECUTIVE AND DIRECTOR COMPENSATION

 

Summary Compensation Table

 

Name and Principal Position  Year  Salary
($)
   Bonus
($)
   Option Awards
($)
   All Other
Compensation
($)
   Total
($)
 
Jan H. Loeb  2019   174,000(4)                174,000 
President and CEO of the Company and Acting CEO of OmniMetrix (1)  2018   159,000(4)   100,000(5)   9,800(6)       268,800 
                             
Tracy S. Clifford  2019   129,000(4)       6,353(7)       135,353 
CFO of the Company and COO of OmniMetrix (2)  2018   61,875(4)       8,100(8)        69,975 
                             
Walter Czarnecki  2019   207,801        7,883        215,684 
Former CEO and President of OmniMetrix (3)  2018   222,696                222,696 

 

  (1) Mr. Loeb began serving as President and CEO of the Company on January 28, 2016 and as Acting CEO of OmniMetrix on December 1, 2019.

 

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  (2) Ms. Clifford began serving as CFO of the Company on June 1, 2018 and as COO of OmniMetrix on December 1, 2019.
  (3) Mr. Czarnecki resigned as CEO and President of OmniMetrix effective December 6, 2019.
  (4) Represents the consulting fee paid for the provision of Mr. Loeb’s services to the Company as President and CEO of the Company and Acting CEO of OmniMetrix and of Ms. Clifford’s services as CFO of the Company and COO of OmniMetrix, respectively.
  (5) Consists of a bonus paid in connection with the closing of the sale of the remaining interest in DSIT.
  (6) Represents the grant date fair value calculated in accordance with applicable accounting principles with respect to 35,000 options granted on May 1, 2018 with an exercise price of $0.35. The fair value of the options was determined using the Black-Scholes option pricing model using the following assumptions: (i) a risk-free interest rate of 2.69% (ii) an expected term of 3.4 years (iii) an assumed volatility of 129% and (iv) no dividends.
  (7) Represents the grant date fair value calculated in accordance with applicable accounting principles with respect to 30,000 options granted on June 25, 2019 with an exercise price of $0.28. The fair value of the options was determined using the Black-Scholes option pricing model using the following assumptions: (i) a risk-free interest rate of 1.7% (ii) an expected term of 4.0 years (iii) an assumed volatility of 122% and (iv) no dividends.
  (8) Represents the grant date fair value calculated in accordance with applicable accounting principles with respect to 30,000 options granted on June 1, 2018 with an exercise price of $0.41. The fair value of the options was determined using the Black-Scholes option pricing model using the following assumptions: (i) a risk-free interest rate of 2.67% (ii) an expected term of 4.0 years (iii) an assumed volatility of 124% and (iv) no dividends.

 

Executive compensation for 2019. Changes in each named executive officer’s base compensation for 2019, together with the methodology for determining their respective bonuses, if any, are described below. The Board of Directors of OmniMetrix determined the compensation of its own executive officers and other employees.

 

Jan H. Loeb. On April 9, 2018, the Company entered into a new consulting agreement (the “2018 Consulting Agreement”) with Mr. Loeb extending its arrangements for compensation of Mr. Loeb for his services as President and CEO of the Company. Following the expiration of his 2017 Consulting Agreement on January 7, 2018, and through April 30, 2018, Mr. Loeb continued to provide the consulting and other services to the Company called for in the agreement, and was compensated at the rate of $17,000 per month provided for in the 2017 Consulting Agreement.

 

Pursuant to the 2018 Consulting Agreement, Mr. Loeb received cash compensation of $12,000 per month commencing May 1, 2018, and $16,000 per month commencing August 15, 2019. When he assumed the additional position of Acting CEO of OmniMetrix, his monthly cash compensation was increased to $26,000 effective December 1, 2019. Mr. Loeb also received a bonus of $100,000 in recognition of his performance in the sale of the Company’s shares of DSIT Solutions Ltd. He was eligible for two additional bonuses during the term of the 2018 Consulting Agreement: $150,000 upon consummation of a corporate acquisition transaction approved by the Company’s Board, and $150,000 upon consummation of a corporate financing/funding transaction approved by the Company’s Board. On August 13, 2019, Mr. Loeb waived his right to receive the $150,000 bonus otherwise due to him under the terms of the 2018 Consulting Agreement in connection with the consummation of the Company’s June 2019 Rights Offering. Mr. Loeb also received a grant on May 1, 2018, of options to purchase 35,000 shares of the Company’s common stock, which shall be exercisable at a price of $0.35 per share (the closing price for the common stock on the last trading day preceding the date of the grant). Fifty percent (50%) of the options vested immediately; the remaining options vested in two equal increments on July 1, 2018 and October 1, 2018. The options will expire on the earlier of January 1, 2025 or 18 months from the date Mr. Loeb ceases to be a director, officer, employee or consultant of the Company.

 

The 2018 Consulting Agreement expired on December 31, 2019; the Company and Mr. Loeb have entered into a new Consulting Agreement for 2020 as described below.

 

32
 

 

Tracy S. Clifford. On June 1, 2018, Tracy S. Clifford was appointed CFO of the Company, replacing outgoing CFO, Michael Barth, who resigned from this position as of that date. Concurrent with the appointment of Ms. Clifford as CFO, the Company entered into a consulting arrangement with Ms. Clifford pursuant to which she initially received a monthly fee of $8,500, increased to $9,500 effective November 1, 2018 as allowed by the agreement for the additional hours worked in excess of the average monthly hours covered by the original retainer, in exchange for her services as CFO. Her monthly fee was increased to $11,500 effective August 15, 2019. Ms. Clifford was appointed to the additional position of COO of OmniMetrix on November 18, 2019 and her monthly fee was increased to $16,500 effective December 1, 2019. Ms. Clifford is not an employee of the Company. Unless otherwise terminated in accordance with its provisions, her consulting agreement with the Company automatically renews for an additional year upon the expiration of each one-year term. Ms. Clifford also received a grant on June 1, 2018 of options to purchase 30,000 shares of our common stock, with an exercise price of $0.41 per share, which was the closing price of the common stock on May 31, 2018. The options vested and became exercisable on the first anniversary of the date of grant and shall expire upon the earlier of (a) seven years from the date of the grant or (b) 18 months from the date Ms. Clifford ceases to be a consultant to the Company. At the beginning of each additional one-year term, the Company shall grant Ms. Clifford an additional 30,000 stock options, which shall have an exercise price equal to the most recent closing price immediately preceding the grant date and otherwise have the same terms as the options described above. Ms. Clifford received a grant on June 25, 2019 of options to purchase 30,000 shares of our common stock, with an exercise price of $0.28 per share, which was the closing price of the common stock on June 24, 2019, and similar vesting and expiration terms as her 2018 option grant.

 

Walter Czarnecki. Mr. Czarnecki’s base compensation was increased to $242,000 from $220,000 effective June 1, 2018 pursuant to the terms of his employment agreement. Mr. Carnecki resigned from the Company effective December 6, 2019.

 

Stockholder input on executive compensation. Stockholders can provide the Company with their views on executive compensation matters at each year’s annual meeting through the stockholder advisory vote on executive compensation and during the interval between stockholder advisory votes. The Company welcomes stockholder input on our executive compensation matters, and stockholders are able to reach out directly to our independent directors by emailing to samzentman@yahoo.com to express their views on executive compensation matters.

 

Employment Arrangements

 

The employment arrangements of each named executive officer and certain other officers are described below. From time to time, the Company has made discretionary awards of management options as reflected in the table above.

 

Jan H. Loeb. On January 30, 2020, the Company entered into a new consulting agreement (the “2020 Consulting Agreement”) with Jan H. Loeb, extending its arrangements for compensation of Mr. Loeb for his services as President and CEO of the Company and as principle executive officer of the Company’s OmniMetrix subsidiary in the capacity of Acting CEO.

 

Pursuant to the 2020 Consulting Agreement, Mr. Loeb will receive cash compensation, effective retroactively as of January 1, 2020, of $16,000 per month for service as President and CEO of the Company, and an additional $10,000 per month for so long as he serves as Acting CEO of OmniMetrix. Mr. Loeb also received a grant of options on January 30, 2020, to purchase 35,000 shares of the Company’s common stock, which are exercisable at an exercise price equal to the December 31, 2019, closing price of the common stock of $0.37 per share. Twenty-five percent (25%) of the options were vested immediately; the remaining options shall vest in three equal increments on April 1, 2020, July 1, 2020 and October 1, 2020. The exercise period and other terms are otherwise substantially the same as the terms of the options granted by the Company to its outside directors.

 

Tracy S. Clifford serves as both CFO of the Company and COO of OmniMetrix pursuant to a Consulting Agreement with Tracy Clifford Consulting, LLC, for the provision of Ms. Clifford’s services. In such capacity, Ms. Clifford acts as a consultant to, and not an employee of, Acorn. The current term of the Consulting Agreement began on June 1, 2019, and expires on June 1, 2020. The Consulting Agreement automatically renews for an additional year upon the expiration of each one-year term. Pursuant to the Consulting Agreement, Ms. Clifford currently receives cash compensation of $16,500 per month. Ms. Clifford also receives additional cash compensation at the rate of $200 per hour for each hour worked in excess of an aggregate of five hundred twenty (520) hours during any one-year term. At the beginning of each one-year term of the Consulting Agreement, Ms. Clifford also receives a grant of options to purchase 30,000 shares of the Company’s common stock, with an exercise price equal to the closing price of the common stock on trading day immediately preceding the commencement of such one-year term. The options will vest and become exercisable on the first anniversary of the date of grant and shall expire upon the earlier of (a) seven years from the date of grant or (b) 18 months from the date Ms. Clifford ceases to be a consultant to the Company.

 

Walter Czarnecki. Mr. Czarnecki resigned as President and COO of OmniMetrix effective December 6, 2019. Mr. Czarnecki served as President and COO of OmniMetrix beginning in March 2014 and as CEO beginning in March 2015. Until June 1, 2017, Mr. Czarnecki had no employment agreement and was employed on an “at-will” basis. Mr. Czarnecki’s annual salary for 2016 and until June 1, 2017 was $200,000. Mr. Czarnecki and OmniMetrix entered into an Employment Agreement on June 19, 2017. The Employment Agreement had a three-year term and provided for a base annual salary of $220,000 which was increased to $242,000 on June 1, 2018. Upon the achievement by OmniMetrix and Mr. Czarnecki of certain performance goals established annually by the Board of OmniMetrix, Mr. Czarnecki would have been entitled to increases in his annual salary and an annual bonus. If his employment had been terminated without Cause (as defined in the Employment Agreement), Mr. Czarnecki would have been eligible for a severance payment equal to six-months’ base salary at the rate in effect at the time of termination, to be paid in equal installments over a six-month period subject to his continuing fulfillment of his ongoing obligations under the Agreement. Mr. Czarnecki did not receive a bonus for 2016 or 2017.

 

33
 

 

Outstanding Equity Awards at 2019 Fiscal Year End

 

The following tables set forth all outstanding equity awards made to each of the Named Executive Officers that were outstanding at December 31, 2019.

 

OPTIONS TO PURCHASE ACORN ENERGY, INC. STOCK
Name  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
   Option
Exercise
Price
($)
   Option
Expiration Date
                
Jan H. Loeb   25,000        0.20   August 13, 2022
    35,000        0.36   January 8, 2024
    35,000        0.35   January 1, 2025
                   
Tracy S. Clifford   30,000    30,000    0.41   June 1, 2025
        30,000    0.28   June 24, 2026
                   
Walter Czarnecki             

 

WARRANTS TO PURCHASE ACORN ENERGY, INC. STOCK
Name  Number of
Securities
Underlying
Unexercised
Warrants (#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Warrants (#)
Unexercisable
   Warrant
Exercise
Price
($)
   Warrant
Expiration Date
Jan H. Loeb   35,000(1)       0.13   March 16, 2023
                   
Tracy S. Clifford             
                   
Walter Czarnecki             

 

(1) Warrants held by Leap Tide Capital Management, LLC.

 

Option and Warrant Exercises

 

None.

 

Non-qualified Deferred Compensation

 

The following table provides information on the executive non-qualified deferred compensation activity for each of our named executive officers for the year ended December 31, 2019.

 

Named Executive Officer   Executive
Contributions in Last
Fiscal Year
($)
    Registrant
Contributions
in Last
Fiscal Year
($)
    Aggregate
Earnings
(Losses) in
Last Fiscal
Year ($)
    Aggregate
Withdrawals/
Distributions
($)
    Aggregate
Balance at
Last Fiscal
Year End
($)
 
Jan H. Loeb  $   $   $   $   $ 
                          
Tracy S. Clifford                    
                          
Walter Czarnecki                    

 

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Payments and Benefits Upon Termination or Change in Control

 

Jan H. Loeb

 

Under the terms of the consulting agreement with Mr. Loeb, there are no amounts due under any termination scenario.

 

Tracy S. Clifford

 

Under the terms of the consulting agreement under which Ms. Clifford serves as our CFO, there are no amounts due under any termination scenario.

 

 

Walter Czarnecki

 

Mr. Czarnecki resigned from the Company effective December 6, 2019. He was not paid any severance or any other benefits in connection with his resignation. Under the terms of the employment agreement with Mr. Czarnecki (which terminated upon his resignation), we would have been obligated to make certain payments to him upon the termination of his employment not for cause.

 

The following table describes the potential payments and benefits that would have been due upon termination of employment for Mr. Czarnecki, as if his employment terminated as of December 31, 2018, the last day of our last fiscal year assuming that there had been no earned, but unpaid base salary at the time of termination.

 

   Circumstances of Termination 
Payments and benefits  Voluntary resignation   Termination
not for cause
   Change of control   Death or disability 
Compensation:                
Base salary  $   $121,000(1)  $   $ 
Benefits and perquisites:                    
Perquisites and other personal benefits                
Total  $   $121,000   $   $ 

 

  (1) Represents a payment of six months’ salary that would have been due, payable in equal installments over a six-month period to Mr. Czarnecki.

 

Compensation of Directors

 

The Board reviews non-employee director compensation on an annual basis. Our compensation policy for non-employee Directors for 2019 was as follows:

 

Each non-employee Director (other than the Executive Chairman) receives an annual retainer of $15,000, plus an annual grant on January 1 of an option to purchase 10,000 shares of Company Common Stock.

 

Upon a non-employee Director’s first election or appointment to the Board, such newly elected/appointed Director will be granted an option to purchase 25,000 shares of Company Common Stock. Each option so granted to a newly elected/appointed Director shall vest for the purchase of one-third of the shares purchasable under such option on each of the three anniversaries following the date of first election or appointment.

 

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All options granted to non-employee Directors shall have an exercise price equal to closing price of the Company’s Common Stock on its then-current trading platform or exchange on the last trading day immediately preceding the date of grant, and shall, except as described in the preceding paragraph, vest in four installments quarterly in advance. Once vested, such options shall be exercisable in whole or in part at all times until the earliest of (i) seven years from the date of grant or (ii) 18 months from the date such Director ceases to be a Director, officer, employee of, or consultant to, the Company.

 

The chair of the Audit Committee receives an additional annual retainer of $10,000; each Audit Committee member other than the chair receives an additional annual retainer of $2,000.

 

Each Director may, in his or her discretion, elect by written notice delivered on or before the first day of each calendar year whether to receive, in lieu of some or all of his or her retainer and board fees, that number of shares of Company Common Stock as shall have a value equal to the applicable retainer and board fees, based on the closing price of the Company’s Common Stock on its then-current trading platform or exchange on the last trading day immediately preceding the first day of the applicable year. Once made, the election shall be irrevocable for such election year and the shares subject to the election shall vest and be issued one-fourth upon the first day of the election year and one-fourth as of the first day of each of the second through fourth calendar quarters thereafter during the remainder of the election year. A newly-elected or appointed Director may, in his or her discretion, make such an election for the balance of the year in which he or she was elected/appointed by written notice delivered on or before the tenth day after his or her election/appointment to the Board, with the number of shares of Company Common Stock subject to such newly elected/appointed Director’s election to be based on closing price of the Company’s Common Stock on its then-current trading platform or exchange on the last trading day immediately preceding the day of such newly elected/appointed Director’s election/appointment.

 

The following table sets forth information concerning the compensation earned for service on our Board of Directors during the fiscal year ended December 31, 2019 by each individual (other than Mr. Loeb who was not separately compensated for his Board service) who served as a Director at any time during the fiscal year.

 

DIRECTOR COMPENSATION IN 2019

 

Name  Fees Earned or
Paid in Cash ($)
   Option
Awards ($) (1)
   All Other
Compensation ($)
   Total ($) 
Samuel M. Zentman   25,000(2)   2,383        27,383 
Gary Mohr   17,000(3)   2,383        19,383 
Michael F. Osterer   8,500(4)   2,383        10,883 

 

  (1) On February 5, 2019, Samuel M. Zentman, Gary Mohr, and Michael F. Osterer were each granted 10,000 options to acquire stock in the Company. The options had an exercise price of $0.31 and were to expire on February 5, 2026. The fair value of the options was determined using the Black-Scholes option pricing model using the following assumptions: (i) a risk-free interest rate of 2.5% (ii) an expected term of 3.7 years (iii) an assumed volatility of 122% and (iv) no dividends.
  (2) Represents the annual retainer of $15,000 as a non-employee director and $10,000 received for services rendered as Chairman of the Audit Committee.
  (3) Represents the annual retainer of $15,000 as a non-employee director plus $2,000 received for services rendered as a member of the Audit Committee.
  (4) Mr. Osterer waived his right to receive board fees for the first half of 2019. Represents half of the annual retainer of $15,000 plus $1000 received for services rendered as a member of the Audit Committee.

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

OWNERSHIP OF THE COMPANY’S COMMON STOCK

 

The following table and the notes thereto set forth information, as of March 20, 2020, concerning beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of common stock by (i) each director of the Company, (ii) each executive officer (iii) all executive officers and directors as a group, and (iv) each holder of 5% or more of the Company’s outstanding shares of common stock.

 

Name and Address of Beneficial Owner (1) (2)  Number of Shares of
Common Stock Beneficially
Owned (2)
   Percentage of
Common Stock
Outstanding (2)
 
Jan H. Loeb   7,497,605(3)   18.8%
Gary Mohr   1,115,147(4)   2.8%
Michael F. Osterer   2,846,308(5)   7.2%
Samuel M. Zentman   226,039(6)   * 
Tracy S. Clifford   30,000(7)   * 
All executive officers and directors of the Company as a group (5 people)   10,881,767(8)   27.2%

 

* Less than 1%

 

(1) Unless otherwise indicated, the address for each of the beneficial owners listed in the table is in care of the Company, 1000 N West Street, Suite 1200, Wilmington, Delaware 19801.
   
(2) Unless otherwise indicated, each person has sole investment and voting power with respect to the shares indicated. For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares as of a given date which such person has the right to acquire within 60 days after such date. Percentage information is based on the 39,687,589 shares outstanding as of March 20, 2020.
   
(3) Consists of 1,611,422 shares held by Mr. Loeb directly, 1,366,666 shares held by PENSCO Trust Company Custodian FBO JAN LOEB IRA, 4,372,017 shares held by Leap Tide Capital Acorn LLC, 112,500 shares underlying currently exercisable options held by Mr. Loeb, and 35,000 currently exercisable warrants held by Leap Tide Capital Management LLC. Mr. Loeb is the sole manager of each of Leap Tide Capital Acorn LLC and Leap Tide Capital Management LLC, with sole voting and dispositive power over the securities held by such entities. Mr. Loeb disclaims beneficial ownership of the securities held by Leap Tide Capital Acorn LLC and Leap Tide Capital Management LLC except to the extent of his pecuniary interest therein.
   
(4) Consists of 258,481 shares held by Mr. Mohr, 833,332 shares held by UE Systems Inc., and 23,334 shares underlying currently exercisable options.
   
(5) Consists of 1,984,392 shares held by Mr. Osterer, 833,332 shares held by UE Systems Inc., and 28,584 shares underlying currently exercisable options.
   
(6) Consists of 80,615 shares and 145,424 shares underlying currently exercisable options.
   
(7) Consists solely of currently exercisable options.
   
(8) Consists of 10,506,925 shares, 339,842 shares underlying currently exercisable options and 35,000 shares underlying currently exercisable warrants.

 

37
 

 

EQUITY COMPENSATION PLAN INFORMATION

 

The table below provides certain information concerning our equity compensation plans as of December 31, 2019.

 

Plan Category  Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)   Weighted-average Exercise Price of Outstanding Options, Warrants and Rights   Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in
Column (a))
 
Equity Compensation Plans Approved by Security Holders   1,082,861   $1.17    1,520,779 
Equity Compensation Plans Not Approved by Security Holders   2,459,486   $2.28     
Total   3,542,347   $1.51    1,520,779 

 

The grants made under our equity compensation plans not approved by security holders includes 162,500 options which were granted under our 2006 Stock Incentive Plan following the original expiration of the Plan on February 8, 2017, and 1,879 options granted in 2015 under our 2006 Stock Option Plan for Non-Employee Directors but in excess of the maximum number of options available for grant under such plan as approved by stockholders. These grants were made to directors and officers at exercise prices equal to the fair market value on the date of the grant. The options generally vest over a one-year period and expire seven years from the date of the grant. The grants made under our equity compensation plans not approved by security holders also includes 2,177,857 warrants issued as compensation to underwriters for services provided in connection capital raise transactions. In February 2019, the Company’s Board ratified all option grants made under our 2006 Stock Incentive Plan following the original expiration of the Plan on February 8, 2017 and extended the expiration date of the 2006 Stock Incentive Plan until December 31, 2024.

 

ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

Transactions With Related Persons

 

Rights Offering

 

On June 28, 2019, we completed a rights offering, raising $2,184,000 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. 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 our ownership in Holdings from 80% to 99%, with the remaining 1% owned by the former CEO of OmniMetrix, LLC.

 

38
 

 

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.

 

Purchase of Non-Controlling Interest

 

In 2015, one of our then-current directors (the “Investor”) acquired a 20% interest in the 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.

 

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

 

On May 14, 2018, Holdings and the Investor entered into an agreement whereby effective May 1, 2018, the dividend on the Preferred Stock was reduced to 8%. In addition, all the amounts due to the Investor (accrued dividends, loan and accrued interest) and all future dividends that would accrue on the Preferred Stock through June 30, 2020, were to be paid by Holdings pursuant to an agreed-upon payment schedule which was scheduled to end on June 30, 2020. During the three months ended June 30, 2019, the Company accrued $20,000 for the quarterly dividend. During the six months ended June 30, 2019, the Company accrued $40,000 in quarterly dividends in the aggregate. At June 30, 2019, the obligation to the Investor was $323,000, representing unpaid accrued dividends.

 

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 (which included the $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 CEO of OmniMetrix, LLC.

 

Loans from Directors in 2017

 

On February 16, 2017, we secured commitments for $1.9 million in funding in the form of loans from then-current members of our Board of Directors, including $900,000 immediately funded. The $900,000 of initially funded loans accrued interest at the rate of 12.5% (payable at maturity) and was to mature at the earlier of April 30, 2018 or the receipt of proceeds from the sale of our 41.2% remaining ownership in DSIT (see below).

 

In addition to the $900,000 initially funded, one of our then-current directors agreed to loan up to an additional $1.0 million to us on or after July 7, 2017 on substantially identical terms as the February 2017 director loans. In the third quarter of 2017, we received $400,000 from the director on the aforementioned $1.0 million commitment. The $400,000 loan received in the third quarter of 2017 was to mature at the earlier of April 30, 2018 or the receipt of proceeds from the sale of our41.2% ownership in DSIT (see below) and accrued interest at the rate of 8.0% per annum, payable at maturity.

 

During the year ended December 31, 2017, we accrued $107,000 of interest with respect to the 2017 director loans.

 

Following the closing of the 2018 DSIT Transaction, we paid off the $1.3 million of principal of outstanding 2017 director loans and the accrued interest of $128,000 thereon (which included 2018 interest).

 

39
 

 

Director Independence

 

Applying the definition of independence provided under the NASDAQ rules, the Board has determined that with the exception of Jan H. Loeb, all of the members of the Board of Directors are independent. The Board has also determined that all of the members of the Audit Committee, the Compensation Committee and the Nominating Committee are independent under the NASDAQ independence standards for such committees.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Accounting Fees

 

Friedman LLP

 

The following table summarized the fees billed to Acorn for professional services rendered by Friedman LLP for the years ended December 31, 2019 and 2018.

 

   2019   2018 
Audit Fees  $115,600   $87,000 
Audit – Related Fees   400    4,800 
Tax Fees   10,500     
All Other Fees        
Total  $126,500   $91,800 

 

Audit Fees were for professional services rendered for the audits of the consolidated financial statements of the Company, assistance with review of documents filed with the SEC, consents, and other assistance required to be performed by our independent accountants.

 

Audit-Related Fees were for travel costs and administrative fees associated with our audit.

 

Pre-Approval Policies and Procedures

 

The Audit Committee’s current policy is to pre-approve all audit and non-audit services that are to be performed and fees to be charged by our independent auditor to assure that the provision of these services does not impair the independence of the auditor. The Audit Committee pre-approved all audit and non-audit services rendered by our principal accountant in 2019 and 2018.

 

40
 

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)(1) List of Financial Statements of the Registrant

 

The consolidated financial statements of the Registrant and the report thereon of the Registrant’s Independent Registered Public Accounting Firms are included in this Annual Report beginning on page F-1.

 

Report of Friedman LLP F-1
Consolidated Balance Sheets as of December 31, 2019 and 2018 F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Changes in (Deficit)/Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6

 

ITEM 16. FORM 10-K SUMMARY

 

Not applicable.

 

(a)(3) List of Exhibits

 

No.    
     
3.1   Amended and Restated Certificate of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015).
     
3.2   By laws of the Registrant (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S 1 (File No. 33 44027) (the “1992 Registration Statement”)).
     
3.3   Amendments to the By Laws of the Registrant adopted December 27, 1994 (incorporated herein by reference to Exhibit 3.3 of the Registrant’s Current Report on Form 8-K dated January 10, 1995).
     
4.1   Specimen certificate for the common stock (incorporated herein by reference to Exhibit 4.2 to the 1992 Registration Statement).
     
4.2   Form of Representative Warrant (incorporated herein by reference to Exhibit 4.1 of Registrant’s Current Report on Form 8-K filed October 15, 2013)
     
4.3   Form of Placement Agent Warrant (incorporated herein by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed December 20, 2010).
     
4.4   Form of Placement Agent Warrant (incorporated herein by reference to Exhibit 4.01 of the Registrant’s Current Report on Form 8-K/A filed November 6, 2014).
     
4.5   Form of Investor Warrant (incorporated herein by reference to Exhibit 4.02 of the Registrant’s Current Report on Form 8-K/A filed November 6, 2014).
     
4.6   Registration Rights Agreement, dated as of October 31, 2014 (incorporated herein by reference to Exhibit 4.03 of the Registrant’s Current Report on Form 8-K/A filed November 6, 2014).
     
4.7   Amended and Restated Articles of Incorporation of OMX Holdings, Inc. (incorporated herein by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016)
     
4.8   Form of Warrant, dated as of March 16, 2016, of Acorn Energy, Inc., issued to Leap Tide Capital Management LLC (incorporated herein by reference to Exhibit 4.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).

 

41
 

 

10.1*   Acorn Energy, Inc. 2006 Stock Option Plan for Non-Employee Directors (incorporated herein by reference to the appendix to the Registrant’s Definitive Proxy Statement on Schedule 14A filed July 26, 2012, and the Registrant’s Additional Definitive Proxy Soliciting Materials on Schedule 14A filed August 28, 2012).
     
10.2*   Acorn Energy, Inc. Amended and Restated 2006 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Annual report on Form 10-K for the year ended December 31, 2018).
     
10.3*   Forms of Option Award Certificate and Option Award Agreement under the Registrant’s Amended and Restated 2006 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Annual report on Form 10-K for the year ended December 31, 2018).
     
10.4*   Forms of Option Award Certificate and Option Award Agreement under the Registrant’s Amended and Restated 2006 Stock Option Plan for Non-Employee Directors (incorporated herein by reference to Exhibit 10.53 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009).
     
10.5*   Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.47 to the Registrant’s Annual report on Form 10-K for the year ended December 31, 2011).
     
10.6   Form of Registration Rights Agreement between Acorn Energy, Inc. and the Backstop Purchasers (incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-1/A filed on June 4, 2019).
     
#10.7*   Consulting Agreement, dated as of January 30, 2020, by and between Acorn Energy, Inc. and Jan H. Loeb .
     
10.8*   Consulting Agreement, dated as of June 1, 2018, by and between Acorn Energy, Inc. and Tracy Clifford Consulting, LLC (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018).
     
#21.1   List of subsidiaries.
     
#23.1   Consent of Friedman LLP.
     
#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-K for the year ended December 31, 2019, filed on March 25, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text.
     
*   This exhibit includes a management contract, compensatory plan or arrangement in which one or more directors or executive officers of the Registrant participate.
     
#   This exhibit is filed or furnished herewith.

 

42
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wilmington, State of Delaware, on March 25, 2020.

 

  ACORN ENERGY, INC.
     
  By: /s/ Jan H. Loeb
    Jan H. Loeb
    President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant, in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Jan H. Loeb   President; Chief Executive Officer; and   March 25, 2020
Jan H. Loeb   Director (Principal Executive Officer)    
         
/s/ Tracy S. Clifford   Chief Financial Officer (Principal Financial   March 25, 2020
Tracy S. Clifford   Officer and Principal Accounting Officer)    
         
/s/ Gary Mohr   Director   March 25, 2020
Gary Mohr        
         
/s/ Michael F. Osterer   Director   March 25, 2020
Michael F. Osterer        
         
/s/ Samuel M. Zentman   Director   March 25, 2020
Samuel M. Zentman        

 

43
 

 

ACORN ENERGY, INC. AND SUBSIDIARIES

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm F-1
   
Consolidated Balance Sheets F-2
   
Consolidated Statements of Operations F-3
   
Consolidated Statements of Changes in (Deficit)/Equity F-4
   
Consolidated Statements of Cash Flows F-5
   
Notes to Consolidated Financial Statements F-6

 

44
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Acorn Energy, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Acorn Energy, Inc. and the subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, changes in equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Friedman LLP  
   
We have served as the Company’s auditor since 2010.  
   
Marlton, New Jersey  
   
March 25, 2020  

 

F-1
 

 

ACORN ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

 

  

As of

December 31,

 
   2019   2018 
ASSETS        
Current assets:          
Cash and cash equivalents  $1,247   $973 
Restricted cash       290 
Accounts receivable, net   962    665 
Inventory, net   291    261 
Other current assets   189    144 
Deferred charges   741    803 
Total current assets   3,430    3,136 
Property and equipment, net   189    73 
Right-of-use assets, net   587     
Other assets   778    710 
Total assets  $4,984   $3,919 
           
LIABILITIES AND DEFICIT          
Current liabilities:          
Short-term bank credit  $136   $ 
Accounts payable   197    246 
Accrued expenses   136    430 
Deferred revenue   3,004    2,734 
Due to Acorn director (former director as of August 6, 2018)       250 
Current operating lease liabilities   53     
Other current liabilities   68    127 
Total current liabilities   3,594    3,787 
Long-term liabilities:          
Deferred revenue   1,491    1,327 
Noncurrent operating lease liabilities   542     
Other long-term liabilities   2    2 
Due to Acorn director (former director as of August 6, 2018)       33 
Total long-term liabilities   2,035    1,362 
Commitments and contingencies (Note 10)          
Deficit:          
Acorn Energy, Inc. shareholders          
Common stock - $0.01 par value per share:          
Authorized – 42,000,000 shares; Issued – 39,591,339 and 29,555,786 shares at December 31, 2019 and 2018, respectively   396    296 
Additional paid-in capital   101,655    100,348 
Warrants   1,021    1,118 
Accumulated deficit   (100,682)   (100,064)
Treasury stock, at cost – 801,920 shares at December 31, 2019 and 2018   (3,036)   (3,036)
Total Acorn Energy, Inc. shareholders’ deficit   (646)   (1,338)
Non-controlling interests   1    108 
Total deficit   (645)   (1,230)
Total liabilities and deficit  $4,984   $3,919 

 

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

 

F-2
 

 

ACORN ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT NET LOSS PER SHARE DATA)

 

   Year ended December 31, 
   2019   2018 
         
Revenue  $5,490   $5,087 
Cost of sales   1,900    1,965 
Gross profit   3,590    3,122 
Operating expenses:          
Research and development expenses, net   559    542 
Selling, general and administrative expenses   3,730    3,986 
Total operating expenses   4,289    4,528 
Operating loss   (699)   (1,406)
Finance expense, net   2    (74)
Loss before income taxes   (697)   (1,480)
Income tax expense        
Net loss after income taxes   (697)   (1,480)
Share of income in DSIT       33 
Impairment of investment in DSIT       (33)
Gain (loss) on sale of interest in DSIT, net of transaction costs and withholding taxes   50    (607)
Net loss   (647)   (2,087)
Non-controlling interest share of loss   29    86 
Net loss attributable to Acorn Energy, Inc. shareholders.  $(618)  $(2,001)
           
Basic and diluted net loss per share attributable to Acorn Energy, Inc. shareholders:          
Net loss per share attributable to Acorn Energy, Inc. shareholders – basic and diluted  $(0.02)  $(0.07)
Weighted average number of shares outstanding attributable to Acorn Energy, Inc. shareholders – basic and diluted   35,495    29,540 

 

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

 

F-3
 

 

ACORN ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN (DEFICIT)/EQUITY

(IN THOUSANDS)

 

       Acorn Energy, Inc. Shareholders   Total Acorn         
   Number of Shares   Common Stock   Additional Paid-In Capital   Warrants   Accumulated Deficit   Number of Treasury Shares   Treasury Stock  


Energy, Inc. Shareholders’
(Deficit)/

Equity

   Non-
controlling interests
  

Total (Deficit)/

Equity

 
Balances as of December 31, 2017   29,500   $295   $99,827   $1,600   $(98,215)   802   $(3,036)  $471   $281   $752 
Net loss                   (2,001)           (2,001)   (86)   (2,087)
Adjustment of retained earnings in accordance with ASC 606                   152             152        152 
Shares issued in lieu of director fees   56    1    13                    14        14 
Accrued dividend in OmniMetrix preferred shares                                   (87)   (87)
Value of expired warrants           482    (482)                                             ―     
Stock option compensation           26                    26        26 
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                   (618)           (618)   (29)   (647)
Purchase of non-controlling interest           (914)                   (914)   (36)   (950)
Rights offering, proceeds net of expenses (see Note 11)   9,975    100    2,084                    2,184        2,184 
Shares granted in lieu of professional fees   60    *    18                    18        18 
Accrued dividend in OmniMetrix preferred shares                                   (42)   (42)
Value of expired warrants             97    (97)                              
Stock option compensation           22                    22        22 
Balances as of December 31, 2019   39,591   $396   $101,655   $1,021   $(100,682)   802   $(3,036)  $(646)  $1   $(645)

 

* Less than $1

 

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

 

F-4
 

 

ACORN ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

 

   Year ended December 31, 
   2019   2018 
Cash flows used in operating activities:          
Net loss  $(647)  $(2,087)
Depreciation and amortization   56    66 
Non-cash lease expense   28     
(Gain)/loss on sale of investment in DSIT, net of income taxes and transaction costs   (50)   607 
Impairment of investment in DSIT       33 
Share of income in DSIT       (33)
Stock-based compensation   22    26 
Professional fees paid in common stock   18     
Director fees paid in common stock       14 
Change in operating assets and liabilities:          
Decrease (increase) in accounts receivable   (297)   438 
Increase in inventory   (30)   (32)
Increase in other current assets and other assets   24    (35)
Increase in deferred revenue   434    497 
Decrease in amounts due to DSIT and directors   (323)   (1,517)
Increase in operating lease liability   (47)    
Decrease in accounts payable, accrued expenses, other current liabilities and non-current liabilities   (409)   (400)
Net cash used in operating activities   (1,221)   (2,423)
           
Cash flows provided by investing activities:          
Purchases of software   (165)    
Purchase of non-controlling interest in Omnimetrix   (950)    
Proceeds from the sale of interests in DSIT, net of transaction costs       5,261 
Net cash provided by (used in) investing activities   (1,115)   5,261 
           
Cash flows provided by (used in) financing activities:          
Short-term credit, net   136    (313)
Proceeds from rights offering, net of expenses of $208   2,184     
Repayment of director loans       (1,400)
Repayments of loans from DSIT       (340)
Net cash provided by (used in) financing activities   2,320    (2,053)
           
Effect of exchange rate changes on cash and cash equivalents       (3)
           
Net (decrease) increase in cash, cash equivalents and restricted cash   (16)   782 
Cash, cash equivalents and restricted cash at the beginning of the year   1,263    481 
Cash, cash equivalents and restricted cash at the end of the period  $1,247   $1,263 
           
Cash, cash equivalents and restricted cash consist of the following:          
End of period          
Cash and cash equivalents  $1,247   $973 
Restricted cash       290 
   $1,247   $1,263 
           
Cash, cash equivalents and restricted cash consist of the following:          
Beginning of period          
Cash and cash equivalents  $973   $481 
Restricted cash   290     
   $1,263   $481 
           
Supplemental cash flow information:          
Cash paid during the year for:          
Interest  $21   $84 
Income taxes       388 
           
Non-cash investing and financing activities:          
Purchase of equipment under installment agreement  $7   $ 
Right-of-use assets, net of deferred rent  $641     
Operating lease liability  $634     
Accrued preferred dividends to former Acorn director and former CEO of OmniMetrix (see Note 3)  $42   $67 

 

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

 

F-5
 

 

ACORN ENERGY, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 1—NATURE OF OPERATIONS

 

(a) Description of Business

 

Acorn Energy, Inc. (“Acorn” or “the Company”) is a Delaware corporation which is holding company focused on technology-driven solutions for energy infrastructure asset management., The Company provides the following services and products through its OmniMetrixTM, LLC (“OmniMetrix”) subsidiary:

 

  Power Generation (“PG”) monitoring. OmniMetrix’s PG activities provide wireless remote monitoring and control systems and services for critical assets as well as Internet of Things applications.
     
  Cathodic Protection (“CP”) monitoring. OmniMetrix’s CP activities provide for remote monitoring of cathodic protection systems on gas pipelines for gas utilities and pipeline companies.

 

The Company’s operations were based in the United States and in Israel through its investment in DSIT until the closing of the 2018 DSIT Transaction. Subsequent to February 14, 2018, the Company’s operations are based solely in the United States. Acorn’s shares are traded on the OTCQB marketplace under the symbol ACFN.

 

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

 

See Notes 14 and 15 for segment information and major customers.

 

(b) Liquidity

 

As of December 31, 2019, the Company had approximately $1,247 of corporate cash and cash equivalents including $313 that was related to a foreign tax settlement and held at a bank in Israel. The balance in the Israel bank account was reclassed to operating cash from restricted cash at December 31, 2019 as the funds were transferred to our operating bank account in the United States on January 29, 2020 and thus, were not deemed restricted cash as of December 31, 2019.

 

As of March 20, 2020, the Company had corporate cash of approximately $1,555. 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 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

Principles of Consolidation and Presentation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. In these consolidated financial statements, “subsidiaries” are companies that are over 50% controlled, the accounts of which are consolidated with those of the Company. Significant intercompany transactions and balances are eliminated in consolidation; profits from intercompany sales are also eliminated; non-controlling interests are included in equity. When the Company does not have a controlling interest in an entity but exerts significant influence over the entity’s operating and financial decisions, the Company applies the equity method of accounting in which it records in earnings its share of income or losses of the entity.

 

F-6
 

 

Reclassification

 

Certain reclassifications have been made to the Company’s consolidated financial statements for the year ended December 31, 2018 to conform to the current period’s consolidated financial statement presentation. There was no effect on total assets, equity and net loss. A reclassification of $30 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 December 31, 2018 and is included in SG&A as of December 31, 2019.

 

Use of Estimates in Preparation of Financial Statements

 

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods.

 

As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to uncertainties with respect to income taxes, inventories, account receivable allowances, contingencies and analyses of the possible impairments.

 

Amounts in the Notes to the Consolidated Financial Statements

 

All dollar amounts in the notes to the consolidated financial statements are in thousands except for per share data.

 

Functional Currency and Foreign Currency Transactions

 

The currency of the primary economic environment in which the operations of Acorn and its U.S. subsidiaries are conducted is the United States dollar (“dollar”). Accordingly, the Company and all of its U.S. subsidiaries use the dollar as their functional currency. The financial statements of DSIT whose functional currency is the New Israeli Shekel (“NIS”) have been translated in accordance with applicable accounting principles. Assets and liabilities are translated at year-end exchange rates, while revenues and expenses are translated at average exchange rates during the year. Differences resulting from translation are presented in equity as Accumulated Other Comprehensive Income. Gains and losses on foreign currency transactions and exchange gains and losses denominated in non-functional currencies are reflected in finance income (expense), net. Subsequent to the sale of our DSIT equity level investment, this is no longer applicable in the consolidated statements of operations.

 

Cash Equivalents

 

The Company considers all highly liquid investments, which include money market funds and short-term bank deposits (up to three months from date of deposit or with maturity of three months from date of purchase) that are not restricted as to withdrawal or use, to be cash equivalents.

 

Accounts Receivable

 

Accounts receivable consists of trade receivables. Trade receivables are recorded at the invoiced amount.

 

Allowance for Doubtful Accounts

 

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. This allowance is based on specific customer account reviews and historical collections experience. If the financial condition of the Company’s funding parties or customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company performs ongoing credit evaluations of its customers and does not require collateral.

 

F-7
 

 

During the years ended December 31, 2019 and 2018, $14 and $0 was charged to expense, respectively. At December 31, 2019 and 2018, the balance in allowance for doubtful accounts was $11.

 

Inventory

 

Inventories are comprised of components (raw materials), work-in-process and finished goods, which are measured at net realizable value.

 

OmniMetrix - Raw materials inventory is generally comprised of radios, cables, antennas, and electrical components. Finished goods inventory consists of fully assembled systems ready for final shipment to the customer. Costs are determined at cost of acquisition on a weighted average basis and include all outside production and applicable shipping costs.

 

All inventories are periodically reviewed for impairment related to slow-moving and obsolete inventory.

 

Non-Controlling Interests

 

The Financial Accounting Standards Board (“FASB”) requires that non-controlling interests be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and upon a loss of control, retained ownership interest be re-measured at fair value, with any gain or loss recognized in earnings. The Company attributes the applicable percentage of income and losses to the non-controlling interests associated with OmniMetrix (see Note 3).

 

Property and Equipment

 

Property and equipment are presented at cost at the date of acquisition. Depreciation and amortization are calculated based on the straight-line method over the estimated useful lives of the depreciable assets, or in the case of leasehold improvements, the shorter of the lease term or the estimated useful life of the asset, a portion of which is allocated to cost of sales. Improvements are capitalized while repairs and maintenance are charged to operations as incurred.

 

Leases

 

The Company determines if a contractual arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and noncurrent operating lease liabilities on the Company’s consolidated balance sheet. The Company evaluates and classifies leases as operating or finance leases for financial reporting purposes. The Classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option would result in an economic penalty. All the Company’s real estate leases are classified as operating leases.

 

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of the lease payments over the lease term. The lease payments included in the present value are fixed lease payments. As most of the Company’s leases do not provide an implicit rate, the Company estimates its collateralized incremental borrowing rate, based on information available at the commencement date, in determining the present value of lease payments. The Company applies the portfolio approach in applying discount rates to its classes of leases. The operating lease ROU assets include any payments made before the commencement date. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not currently have subleases. The Company does not currently have residual value guarantees or restrictive covenants in its leases.

 

F-8
 

 

The Company also made accounting policy elections by class of underlying asset to not apply the recognition requirements of the standard to leases with terms of 12 months or less and to not separate non-lease components from lease components. Consequently, each separate lease component and the non-lease components associated with that lease component will be accounted for as a single lease component for lease classification, recognition, and measurement purposes.

 

The lease obligation liability was $595 as of December 31, 2019, which includes the original office space lease, an amendment to this lease entered in to in November 2019 that becomes effective with the period beginning May 1, 2020 and an office equipment lease entered in to in April 2019.

 

Treasury Stock

 

Shares of common stock repurchased are recorded at cost as treasury stock. When shares are reissued, the cost method is used for determining cost. In accordance with GAAP, the excess of the acquisition cost over the reissuance price of the treasury stock, if any, is charged to additional paid-in capital, limited to the amount previously credited to additional paid-in capital, if any. Any excess is charged to accumulated deficit.

 

Revenue Recognition

 

The Company’s revenue recognition policy is consistent with applicable revenue recognition guidance and interpretations. The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to achieve this core principle, which includes: (1) identifying contracts with customers, (2) identifying performance obligations within those contracts, (3) determining the transaction price, (4) allocating the transaction price to the performance obligation in the contract, which may include an estimate of variable consideration, and (5) recognizing revenue when or as each performance obligation is satisfied. The Company assesses whether payment terms are customary or extended in accordance with normal practice relative to the market in which the sale is occurring. The Company’s sales arrangements generally include standard payment terms. These terms effectively relate to all customers, products, and arrangements regardless of customer type, product mix or arrangement size.

 

If revenue recognition criteria are not satisfied, amounts received from customers are classified as deferred revenue on the balance sheet until such time as the revenue recognition criteria are met.

 

Sales of OmniMetrix monitoring systems include the sale of equipment (“HW”) and of monitoring services (“Monitoring”). Sales of OmniMetrix equipment do not qualify as a separate unit of accounting. As a result, revenue (and related costs) associated with sale of equipment are recorded to deferred revenue (and deferred charges) upon shipment for PG and CP monitoring units. Revenue and related costs with respect to the sale of equipment are recognized over the estimated life of the units which are currently estimated to be three years (two years up to December 31, 2017). Revenues from the prepayment of monitoring fees (generally paid twelve months in advance) are initially recorded as deferred revenue upon receipt of payment from the customer and then amortized to revenue over the monitoring service period. See Notes 14 and 15 for the disaggregation of the Company’s revenue for the periods presented.

 

Warranty Provision

 

OmniMetrix generally grants their customers a one-year warranty on their products. Estimated warranty obligations are provided for as a cost of sales in the period in which the related revenues are recognized, based on management’s estimate of future potential warranty obligations and limited historical experience. Adjustments are made to accruals as warranty claim data and historical experience warrant.

 

The Company’s warranty obligations may be materially affected by product or service failure rates and other costs incurred in correcting a product or service failure. Should actual product or service failure rates or other related costs differ from the Company’s estimates, revisions to the accrued warranty liability would be required.

 

F-9
 

 

Concentration of Credit Risk

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, escrow deposits and trade accounts receivable. The Company’s cash and cash equivalents were deposited primarily with U.S. banks and brokerage firms and amounted to $1,247 at December 31, 2019. The Company does not believe there is significant risk of non-performance by these counterparties. See Note 14(d) with respect to revenue from significant customers and concentrations of trade accounts receivables.

 

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 instruments.

 

Research and Development Expenses

 

Research and development expenses consist primarily of labor and related expenses and are charged to operations as incurred.

 

Advertising Expenses

 

Advertising expenses are charged to operations as incurred. Advertising expense was $17 and $23 for each of the years ended December 31, 2019 and 2018, respectively.

 

Stock-Based Compensation

 

The Company accounts for stock-based awards to employees in accordance with applicable accounting principles, which requires compensation expense related to share-based transactions, including employee stock options, to be measured and recognized in the financial statements based on a determination of the fair value of the stock options. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all employee stock options, the Company recognizes expense over the requisite service period on an accelerated basis over the employee’s requisite service period (generally the vesting period of the equity grant). The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility, expected term, and forfeiture rate. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.

 

Options awarded to purchase shares of common stock issued to non-employees in exchange for services are accounted for as variable awards in accordance with applicable accounting principles. Such options are valued using the Black-Scholes option pricing model.

 

See Note 11(e) for the assumptions used to calculate the fair value of stock-based employee compensation. Upon the exercise of options, it is the Company’s policy to issue new shares rather than utilizing treasury shares.

 

Deferred Income Taxes

 

Deferred income taxes reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss, capital loss and tax credit carryforwards. Deferred tax assets and liabilities are classified as non-current in accordance with ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Valuation allowances are established against deferred tax assets if it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in operations in the period that includes the enactment date. See Note 12(e) for the impact of the Tax Cuts and Jobs Act of 2017.

 

F-10
 

 

Income Tax Uncertainties

 

The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on the two-step process prescribed by applicable accounting principles. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires the Company to estimate and measure the tax benefit as the largest amount that is more likely than not being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires the Company to determine the probability of various possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period. The Company recognizes interest and penalties as incurred in finance income (expense), net in the Consolidated Statements of Operations.

 

Basic and Diluted Net Income (Loss) Per Share

 

Basic net income (loss) per share is computed by dividing the net income (loss) attributable to Acorn Energy, Inc. by the weighted average number of shares outstanding during the year, excluding treasury stock. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares outstanding plus the dilutive potential of common shares which would result from the exercise of stock options and warrants. The dilutive effects of stock options and warrants are excluded from the computation of diluted net loss per share if doing so would be antidilutive. The weighted average number of options and warrants that were excluded from the computation of diluted net loss per share, as they had an antidilutive effect, was approximately 3,368,013 (which have a weighted average exercise price of $1.57) and 3,778,631 for the years ending December 31, 2019 and 2018, respectively.

 

The following data represents the amounts used in computing EPS and the effect on net income and the weighted average number of shares of dilutive potential common stock:

 

   Year ended December 31, 
   2019   2018 
Net loss available to common stockholders  $(618)  $(2,001)
           
Weighted average shares outstanding:          
-Basic   35,495    29,540 
Add: Warrants        
Add: Stock options        
-Diluted   35,495    29,540 
           
Basic and diluted net loss per share  $(0.02)  $(0.07)

 

Fair Value Measurement

 

The Company follows the provisions of the accounting standard which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:

 

F-11
 

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

 

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

Recently Issued Accounting Principles

 

Other than the pronouncement noted below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2019, that are of material significance, or have potential material significance, to the Company.

 

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

 

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 consolidated financial statements and related disclosures.

 

Recently Adopted Accounting Principles

 

In February 2016, the FASB issued ASU 2016-02, Leases, which is effective for fiscal years beginning as of December 15, 2018, and interim periods within those years with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right-to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term.

 

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

 

The standard includes a number of optional practical expedients under the transition. The Company has elected the package of practical expedients which allows it to not reassess prior conclusions about lease identification, lease classification, and initial direct costs. Upon adoption of the standard, the Company recognized a lease obligation liability of $44 and a right-of-use asset of $44. An adjustment of $26 was made to reduce the right-of-use asset and deferred rent to reflect the impact of the retrospective approach on adopting this guidance.

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15 (“ASU 2018-15”), Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The updated guidance is effective for annual periods beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company elected to early adopt ASU 2018-15 for the period beginning in the second quarter of 2019, applying the guidance under ASU 2018-15 prospectively. During the year ended December 31, 2019, the Company capitalized costs totaling $163 related to such contracts.

 

F-12
 

 

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

 

NOTE 3—DSIT SOLUTIONS, LTD. (“DSIT”)

 

On February 14, 2018, the Company closed on the sale of its remaining interest in DSIT to a group of Israeli investors for $5,800 before transaction costs and withholding taxes. Accordingly, the Company adjusted its equity investment balance in DSIT to be equal to the gross proceeds received from the sale and recorded an impairment charge in 2017 of $308. In 2018, the Company recorded its 41.2% share of DSIT’s income or loss through the closing of the 2018 DSIT Transaction as well as the Company’s estimated transaction costs and withholding taxes on the transaction ($441 and $388, respectively) offset by $222, net of professional fees less interest income, refunded by the Israel Tax Authorities related to its 2016 Israeli tax return. From the proceeds, the Company also repaid $1,600 of amounts due to DSIT and $1,428 of loan principal and interest due to directors.

 

The Company’s share of DSIT’s net income for the period from January 1, 2018 to the Closing Date is shown below:

 

   Period from
January 1, 2018
to the
Closing Date
 
     
Revenue  $4,481 
Cost of sales   2,842 
Gross profit   1,639 
      
Net income  $160 
      
Acorn’s share of net income in DSIT  $33 

 

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

 

   Equity
Investment
balance in
DSIT
 
Balance at December 31, 2017   5,800 
Acorn’s share of net income in DSIT for the period from January 1, 2018 to the Closing Date   33 
Impairment   (33)
Sale of Investment in DSIT   (5,800)
Balance at December 31, 2018  $ 

 

In the Company’s sale of its shares of DSIT Solutions Ltd. (“DSIT”), the Israel Tax Authorities (“ITA”) withheld tax of NIS 1,008, NIS 146 and NIS 1,359 in 2016, 2017 and 2018, respectively. Such amounts were recorded as expense ($266, $41 and $388) in each of those years. In August 2018, the Company received back from the ITA NIS 1,087 ($293 at the then exchange rate) consisting of $266 of tax, $21 of interest income and $6 of exchange gain. The Company received the refund following the filing of its 2016 Israeli tax return in which the Company claimed that it was due a refund of the withheld taxes in full as it believes that each of the sale transactions is exempt from tax under Israeli tax law.

 

F-13
 

 

The Company recorded the $222, net of fees of $65 offset by interest income of $21, as part of the gain (loss) on sale of interest of DSIT in the third quarter of 2018 relating to the 2016 DSIT transaction withholding. This offsets the loss on the 2018 DSIT transaction which reduced the loss recorded in 2018 to $607. The Company committed not to transfer those funds out of Israel until the completion of the ITA’s review, such funds were deemed to be restricted and were reflected as such on the Company’s balance sheet as of December 31, 2018. By statute, the funds would no longer be restricted the earlier of December 31, 2022 or the completion of the ITA’s review of the Company’s tax position which occurred at the end of 2019 as discussed below.

 

The Company filed its Israeli return for 2017 and requested a refund of the NIS 146 tax withheld (valued at $40 before interest) and filed its 2018 return and requested a refund of the NIS 1,358 tax withheld (valued at $375 before interest).

 

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

 

As a result, the Company received a tax refund in the amount of NIS 146 (approximately $42) and NIS 44 (approximately $12.5) as principal, with interest and linkage in the amount of approximately NIS 14.5 (approximately $4) and approximately NIS 1.9 (approximately $0.55), for the tax years 2017 and 2018, respectively. Prior to receiving this refund, the balance in the Company’s bank account in Israel was $313 which represented the $287 refund received for 2016 plus interest income of $21 and exchange gain of $5 (the fees of $65 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 were transferred from the Company’s bank account in Israel to the Company’s bank account in the US with exemption from withholding tax and the Company’s corporate income tax file was closed as of January 1, 2020.

 

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 of OmniMetrix Preferred Stock (“Preferred Stock”). Holdings is the holder of 100% of the membership interests of OmniMetrix, LLC through which the Company operates its Power Generation and Cathodic Protection monitoring activities. The $1,000 investment by the Investor was recorded as an increase in non-controlling interests.

 

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

 

On May 14, 2018, Holdings and the Investor entered into an agreement whereby effective May 1, 2018, the dividend on the Preferred Stock was reduced to 8%. In addition, all the amounts due to the Investor (accrued dividends, loan and accrued interest) and all future dividends that would accrue on the Preferred Stock through September 30, 2020, were to be paid by Holdings pursuant to an agreed-upon payment schedule which was scheduled to end on June 30, 2020. During the six months ended June 30, 2019, the Company accrued $40 for quarterly dividends in the aggregate. At June 30, 2019, the obligation to the Investor was $323, representing unpaid accrued dividends.

 

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 in cash (which included the $323 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.

 

F-14
 

 

NOTE 5—INVENTORY

 

   As of December 31, 
   2019   2018 
Raw materials  $260   $152 
Finished goods   31    109 
   $291   $261 

 

At December 31, 2019 and 2018, the Company’s inventory reserve was $0.

 

NOTE 6—PROPERTY AND EQUIPMENT, NET

 

Property and equipment consists of the following:

 

   Estimated
Useful Life
(in years)
  As of December 31, 
      2019   2018 
Cost:           
Computer hardware and software  3 - 5  $218   $55 
Equipment  7   151    145 
Leasehold improvements  Term of lease   339    339 
Intangible asset  Patent term   3     
       711    539 
Accumulated depreciation and amortization             
Computer hardware and software      55    55 
Equipment      142    120 
Leasehold improvements      325    291 
Intangible asset           
       522    466 
Property and equipment, net     $189   $73 

 

Depreciation and amortization in respect of property and equipment amounted to $56 and $66 for 2019 and 2018, respectively.

 

NOTE 7—LEASES

 

OmniMetrix leases office space and office equipment under operating lease agreements. The office lease which had an expiration date of April 30, 2020 was amended in November 2019 and the term was extended to September 30, 2025. The office equipment lease was entered into in April 2019, previously it was month-to-month, and has a sixty-month term. Operating lease payments for 2019 and 2018 were $109 and $97, respectively. The future minimum lease payments on non-cancelable operating leases as of December 31, 2019 using a discount rate of 4.5% are $595

 

Supplemental cash flow information related to leases consisted of the following:

 

   2019   2018 
Cash paid for operating lease liabilities  $47     

 

F-15
 

 

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

 

   2019 
Weighted average remaining lease terms for operating leases   5.72 

 

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 December 31, 2019:

 

   2019 
2020  $78 
2021   121 
2022   125 
2023   128 
2024   129 
Thereafter   99 
Total undiscounted cash flows   680 
Less: Imputed interest   (85)
 Present value of operating lease liabilities (a)  $595 

 

(a)Includes current portion of $53 for operating leases.

 

NOTE 8—DEBT

 

(a) OmniMetrix

 

In February 2016, OmniMetrix signed a Loan and Security Agreement with a lender providing OmniMetrix with access to accounts receivable formula-based financing of up to $500. In connection with this financing arrangement, OmniMetrix granted the lender a security interest in OmniMetrix’s receivables, inventory and certain other assets.

 

In October 2017, OmniMetrix renewed its Loan and Security Agreement providing OmniMetrix with access to accounts receivable formula-based financing of the lesser of 75% of eligible receivables or $1,000. Debt incurred under this financing arrangement bore interest at the greater of prime (4.50% at December 31, 2017) plus 2% or 6% per year. In addition, OmniMetrix paid a monthly service charge of 0.9% of the average aggregate principal amount outstanding for the prior month, for a then-current effective rate of interest on advances of 17.3%. OmniMetrix also agreed to continue to maintain a minimum loan balance of $150 in its line-of-credit with the lender for a minimum of one year beginning November 1, 2017. The line-of-credit expired in accordance with its terms on October 31, 2018 and OmniMetrix did not renew at that time. OmniMetrix accounts receivable payments were applied to the outstanding balance until it was paid in full on November 6, 2018.

 

In March 2019, OmniMetrix reinstated its Loan and Security Agreement providing OmniMetrix with access to accounts receivable formula-based financing of the lesser of 75% of eligible receivables or $1,000. Debt incurred under this financing arrangement bears interest at the greater of 6% and prime (4.75% at December 31, 2019) plus 1.5% per year. In addition, OmniMetrix is to pay a monthly service charge of 0.75% of the average aggregate principal amount outstanding for the prior month, for an effective rate of interest on advances of 15.8% during the year ended December 31, 2019. OmniMetrix also agreed to continue to maintain a minimum loan balance of $150 in its line-of-credit with the lender for a minimum of two years beginning March 1, 2019. From time to time, the balance outstanding may fall below $150 based on collections applied against the loan balance and the timing of loan draws. The monthly service charge and interest is calculated on the greater of the outstanding balance or $150. Interest expense for the year ended December 31, 2019 and 2018 was $21 and $47, respectively.

 

OmniMetrix had an outstanding balance of $136 and $0 as of December 31, 2019 and 2018, respectively, pursuant to the Loan and Security Agreement and $291 was available to borrow.

 

F-16
 

 

NOTE 9—OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

   As of December 31, 
   2019   2018 
Taxes  $22   $25 
Warranty provision   46    37 
Restructuring liabilities       65 
   $68   $127 

 

NOTE 10—COMMITMENTS AND CONTINGENCIES

 

On August 19, 2019, OmniMetrix entered into an agreement with a software development partner to create and license to OmniMetrix a new software platform and application. Pursuant to this agreement, OmniMetrix will pay the partner equal monthly payments over the first seven months of the term of the agreement equal to $200 in the aggregate. In addition, OmniMetrix will pay the partner a sensor monitoring fee equal to the greater of (i) $1 per sensor connected to the developed technology, or (ii) 25% of any revenue received above $10 per sensor monitored per month in oil and gas applications only. Commencing on the first anniversary of the agreement, OmniMetrix will pay the partner an annual licensing fee of $50 to be paid out on a monthly or quarterly basis as determined by OmniMetrix.

 

NOTE 11—EQUITY

 

(a) General

 

At December 31, 2019 the Company had issued and outstanding 39,591,339 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 in proceeds of which $1,628 was from related parties, net of $210 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.

 

F-17
 

 

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, 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) Shares issued in lieu of director’s fees – See Note 13(a).

 

(d) Conversion of director loan to common stock – See Note 13(b).

 

(e) 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 December 31, 2019, 1,520,779 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. In 2019 and 2018, 227,500 and 175,000 options were granted to directors and employees, respectively. In 2019, there were no grants to non-employees. In 2018, there were 5,000 grants to non-employees. The fair value of the options issued was $58 and $43 in 2019 and 2018, respectively.

 

No options were exercised in the years ended December 31, 2019 or 2018. The intrinsic value of options outstanding and of options exercisable at December 31, 2019 was $46 and $13, respectively.

 

The Company utilized the Black-Scholes option-pricing model to estimate fair value, utilizing the following assumptions for the respective years (all in weighted averages):

 

   2019   2018 
Risk-free interest rate   2.3%   2.5%
Expected term of options, in years   4.7    3.9 
Expected annual volatility   118.7%   123.6%
Expected dividend yield   %   %
Determined weighted average grant date fair value per option  $0.25   $0.24 

 

F-18
 

 

The expected term of the options is the length of time until the expected date of exercising the options. With respect to determining expected exercise behavior, the Company has grouped its option grants into certain groups in order to track exercise behavior and establish historical rates. The Company estimated volatility by considering historical stock volatility over the expected term of the option. The risk-free interest rates are based on the U.S. Treasury yields for a period consistent with the expected term. The Company expects no dividends to be paid. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in determining the estimated fair value of the Company’s stock options granted in the years ended December 31, 2019 and 2018. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

 

(f) Summary Option Information

 

A summary of the Company’s option plans as of December 31, 2019 and 2018, as well as changes during each of the years then ended, is presented below:

 

   2019   2018 
   Number of
Options
(in shares)
   Weighted
Average
Exercise
Price
   Number of
Options
(in shares)
   Weighted
Average
Exercise
Price
 
Outstanding at beginning of year   1,466,489   $3.01    1,401,489   $3.45 
Granted at market price   227,500    0.31    175,000    0.32 
Exercised                
Forfeited or expired   (329,499)   5.86    (110,000)   4.32 
Outstanding at end of year   1,364,490    1.87    1,466,489    3.01 
Exercisable at end of year   1,190,156   $2.10    1,386,489   $3.16 

 

Summary information regarding the options outstanding and exercisable at December 31, 2019 is as follows:

 

   Outstanding   Exercisable 
Range of Exercise Prices  Number
Outstanding
   Weighted
Average
Remaining
Contractual
Life
   Weighted
Average
Exercise
Price
   Number
Exercisable
   Weighted
Average
Exercise
Price
 
   (in shares)   (in years)       (in shares)     
$0.14 – $0.77   698,523    3.03   $0.42    524,189   $0.45 
$0.97 – $2.49   382,785    .58   $1.54    382,785   $1.54 
$3.51 – $5.91   115,466    .58   $4.14    115,466   $4.14 
$6.31 – $7.57   94,357    .33   $6.49    94,357   $6.49 
$7.60 - $11.42   73,359    .43   $7.92    73,359   $7.92 
    1,364,490              1,190,156      

 

Stock-based compensation expense included in selling, general and administrative expense in the Company’s Consolidated Statements of Operations was $22 and $15 in the years ending December 31, 2019 and 2018, respectively.

 

The total compensation cost related to non-vested awards not yet recognized was $30 for the year ended December 31, 2018.

 

F-19
 

 

(f) Warrants

 

The Company has 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:

 

   2019   2018 
   Number of
shares
underlying
warrants
   Weighted
Average
Exercise
Price
   Number of
shares
underlying
warrants
   Weighted
Average
Exercise
Price
 
Outstanding at beginning of year   2,392,142   $1.28    2,654,423   $1.46 
Granted                
Exercised                
Forfeited or expired   (214,285)   1.26    (262,281)   3.14 
Outstanding and exercisable at end of year   2,177,857   $1.28    2,392,142   $1.28 

 

The warrants outstanding at December 31, 2019 have a weighted average remaining contractual life of approximately four months.

 

NOTE 12—INCOME TAXES

 

(a) Composition of loss from continuing operations before income taxes is as follows:

 

  

Year ended

December 31,

 
   2019   2018 
Domestic  $(697)  $(1,480)
Foreign        
   $(697)  $(1,480)

 

Income tax expense consists of the following:

 

    

Year ended

December 31,

 
    2019    2018 
Current:          
Federal  $   $ 
State and local        
Foreign        
         
Deferred:          
Federal        
State and local        
Foreign        
         
Total income tax expense  $   $ 

 

(b) Effective Income Tax Rates

 

Set forth below is a reconciliation between the federal tax rate and the Company’s effective income tax rates with respect to continuing operations:

 

   Year ended December 31, 
   2019   2018 
Statutory Federal rates   21%   21%
Increase (decrease) in income tax rate resulting from:          
Tax on foreign activities       (―)
Other, net (primarily permanent differences)   (2)   (―)
Valuation allowance   (19)%   (21)%
Effective income tax rates   %   (―)%

 

 

F-20
 

 

(c) Analysis of Deferred Tax Assets and (Liabilities)

 

   As of December 31, 
   2019   2018 
Deferred tax assets (liabilities) consist of the following:        
Employee benefits and deferred compensation  $1,040   $1,035 
Investments and asset impairments   1,818    1,818 
Other temporary differences   (871)   (674)
Net operating loss and capital loss carryforwards   15,591    16,136 
    17,578    18,315 
Valuation allowance   (17,578)   (18,315)
Net deferred tax assets  $   $ 

 

Valuation allowances relate principally to net operating loss carryforwards related to the Company’s consolidated tax losses as well as state tax losses related the Company’s OmniMetrix subsidiary and book-tax differences related asset impairments and stock compensation expense of the Company. During the year ended December 31, 2019, the valuation allowance decreased by $737. The decrease was primarily the result of the decrease in the capital loss carryforwards.

 

(d) Summary of Tax Loss Carryforwards

 

As of December 31, 2019, the Company had various operating loss carryforwards expiring as follows:

 

Expiration  Federal   Capital Loss   State 
2023  $   $556   $ 
2025 – 2031*   2,579         
2032 – 2039   66,364        16,606 
Unlimited   2,896        938 
Total  $71,852   $556   $17,544 

 

* The utilization of a portion of these net operating loss carryforwards is limited due to limits on utilizing net operating loss carryforwards under Internal Revenue Service regulations following a change in control.

 

(e) Taxation in the United States

 

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The most significant impact of the legislation for the Company was a reduction of the value of the Company’s net deferred tax assets (which represent future tax benefits) as a result of lowering the U.S. corporate income tax rate from 35% to 21%. The Act also includes a requirement to pay a one-time transition tax (the “Transition Tax”) on the cumulative value of earnings and profits that were previously not repatriated for U.S. income tax purposes. The Company does not believe that it will be required to pay any Transition Tax on its previously unrepatriated earnings and profits of its previously consolidated foreign subsidiaries.

 

As a holding company without other business activity in Delaware, the Company is exempt from Delaware state income tax. Thus, the Company’s statutory income tax rate on domestic earnings is the federal rate of 21%.

 

F-21
 

 

(f) Uncertain Tax Positions (UTP)

 

As of December 31, 2019 and 2018, no interest or penalties were accrued on the balance sheet related to UTP.

 

During the years ending December 31, 2019 and 2018, the Company had no changes in unrecognized tax benefits or associated interest and penalties as a result of tax positions made during the current or prior periods with respect to its continuing or discontinued operations.

 

The Company is subject to U.S. Federal and state income tax. As of January 1, 2019, the Company is no longer subject to examination by U.S. Federal taxing authorities for years before 2016, or for years before 2015 for state income taxes.

 

NOTE 13—RELATED PARTY BALANCES AND TRANSACTIONS

 

a) Director Fees

 

The Company recorded fees to directors of $50 and $166 (including a bonus to the former board chairman of $50) for the years ended December 31, 2019 and 2018, respectively, which is included in Selling, general and administrative expenses.

 

Each Director of the Company may elect by written notice delivered on or before the first day of each calendar year whether to receive, in lieu of some or all of his or her retainer and board fees, that number of shares of Company common stock as shall have a value equal to the applicable retainer and board fees, based on the closing price of the Company’s common stock on its then-current trading platform or exchange on the last trading day immediately preceding the first day of the applicable year. Once made, the election shall be irrevocable for such election year and the shares subject to the election shall vest and be issued one-fourth upon the first day of the election year and one-fourth as of the first day of each of the second through fourth calendar quarters thereafter during the remainder of the election year. For the 2018 calendar year, Mr. Woolard elected to receive Common Stock in lieu of retainer and board fees of $13, which is included in the fees to directors above. Accordingly, Mr. Woolard was issued 55,435 shares of common stock for 2018.

 

b) 2017 Director Loans

 

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

 

Prior to the repayment of these loans on February 22, 2018, the Company accrued $21 of interest expense in the year ended December 31, 2018.

 

c) See Note 4 for information related to the sale of OmniMetrix Preferred Stock to one of the Company’s former directors and a loan from the director to OmniMetrix and the subsequent repurchase of this Preferred Stock on July 1, 2019.

 

d) The related party balance due to Acorn from OmniMetrix is $4,506 for amounts loaned, accrued interest and expenses paid by Acorn on Omni’s behalf as of December 31, 2019 as compared to $3,948 as of December 31, 2018.

 

NOTE 14—SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

 

(a) General Information

 

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

 

  The PG segment provides wireless remote monitoring and control systems and services for critical assets as well as Internet of Things applications.
     
  The CP segment provides for remote monitoring of cathodic protection systems on gas pipelines for gas utilities and pipeline companies.

 

F-22
 

 

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.

 

(b) Information about Profit or Loss and Assets

 

The accounting policies of all the segments are those described in the summary of significant accounting policies. The Company evaluates performance based on net income or loss before taxes.

 

The Company does not systematically allocate assets to the divisions of the subsidiaries constituting its consolidated group, unless the division constitutes a significant operation. Accordingly, where a division of a subsidiary constitutes a segment that does not meet the quantitative thresholds of applicable accounting principles, depreciation expense is recorded against the operations of such segment, without allocating the related depreciable assets to that segment. However, where a division of a subsidiary constitutes a segment that does meet the quantitative thresholds, related depreciable assets, along with other identifiable assets, are allocated to such division.

 

The following tables represent segmented data for the years ended December 31, 2019 and 2018. 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.

 

   PG   CP   Total 
Year ended December 31, 2019:               
Revenues from external customers  $4,282   $1,208   $5,490 
Intersegment revenues            
Segment gross profit   3,030    560    3,590 
Depreciation and amortization   43    13    56 
Segment income (loss) before income taxes   353    (198)   155 
                
Year ended December 31, 2018:               
Revenues from external customers  $3,656   $1,431   $5,087 
Intersegment revenues            
Segment gross profit   2,524    598    3,122 
Depreciation and amortization   48    18    66 
Segment income (loss) before income taxes   117    (323)   (206)

 

(c) The following tables represent a reconciliation of the segment data to consolidated statement of operations and balance sheet data for the years ended and as of December 31, 2019 and 2018:

 

   Year ended
December 31,
 
   2019   2018 
Total net income (loss) before income taxes for reportable segments  $155   $(206)
Loss on sale of interest in DSIT, net of transaction costs       (607)
Unallocated net cost of corporate headquarters*   (802)   (1,274)
Consolidated net loss before taxes on income  $(647)  $(2,087)

 

F-23
 

 

* Includes $22 and $26 of stock compensation expense for the years ended December 31, 2019 and 2018, respectively. Also includes $26 of interest expense with respect to former director loans for the year ended December 31, 2018.

 

   As of December 31, 
   2019   2018 
Assets:        
Total assets for OmniMetrix subsidiary  $3,965   $2,823 
Assets of corporate headquarters   1,019    1,096 
Total consolidated assets  $4,984   $3,919 

 

  

Year ended

December 31,

 
   2019   2018 
Revenues based on location of customer:        
United States  $5,484   $5,087 
Other   6     
   $5,490   $5,087 

 

All of the Company’s long-lived assets are located in the United States.

 

(d) Revenues and Accounts Receivable Balances from Major Customers

 

   Revenue   Accounts Receivable** 
   2019   2018   2019   2018 
Customer  Balance   %   Balance   %   Balance   %   Balance   % 
A   *    *    *    *   $139    14%       $115