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:
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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.
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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.
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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.
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Year ended December 31, 2019
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OmniMetrix
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Acorn
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Total
Continuing
Operations
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Revenues
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$
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5,490
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$
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—
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$
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5,490
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Cost of sales
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1,900
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—
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1,900
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Gross profit
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3,590
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—
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3,590
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Gross profit margin
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65
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%
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65
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%
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R& D expenses
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559
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|
|
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—
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|
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559
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Selling, general and administrative expenses
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2,854
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|
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876
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|
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3,730
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Operating income (loss)
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$
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177
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$
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(876
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)
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$
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(699
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)
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Year ended December 31, 2018
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OmniMetrix
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Acorn
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Total
Continuing
Operations
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Revenues
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$
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5,087
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$
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—
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$
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5,087
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Cost of sales
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1,965
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—
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1,965
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Gross profit
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3,122
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—
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3,122
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Gross profit margin
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61
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%
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61
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%
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R& D expenses
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542
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—
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542
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Selling, general and administrative expenses
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2,726
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1,260
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3,986
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Operating loss
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$
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(146
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)
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$
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(1,260
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)
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$
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(1,406
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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.
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.
There
are two types of competitors in the PG marketplace:
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(1)
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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.
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(2)
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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.
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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.
BACKLOG
As
of December 31, 2019, OmniMetrix had a backlog of approximately $4.5 million, primarily comprised of deferred revenue, of which
approximately $3.0 million is expected to be recognized as revenue in 2020.
RESEARCH
AND DEVELOPMENT EXPENSE, NET
Research
and development expense recorded for the years ended December 31, 2019 and 2018 for our OmniMetrix subsidiary in continuing operations
is as follows (amounts in thousands of U.S. dollars):
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Years ended
December 31,
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2019
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2018
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OmniMetrix
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$
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559
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$
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542
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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.
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.
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:
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the
liquidity of our common stock;
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the
market price of shares of our common stock;
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our
ability to obtain financing for the continuation of our operations;
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the
number of institutional and other investors that will consider investing in shares of our common stock;
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the
number of market markers in shares of our common stock;
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the
availability of information concerning the trading prices and volume of shares of our common stock; and
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the
number of broker-dealers willing to execute trades in shares of our common stock.
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In
addition, the market price of our common stock could be subject to wide fluctuations in response to:
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quarterly
variations in our revenues and operating expenses;
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announcements
of new products or services by us;
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fluctuations
in interest rates;
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significant
sales of our common stock;
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the
operating and stock price performance of other companies that investors may deem comparable to us; and
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news
reports relating to trends in our markets or general economic conditions.
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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.
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:
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failure
of the acquired companies to achieve the results we expect;
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inability
to retain key personnel of the acquired companies;
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dilution
of existing stockholders;
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potential
disruption of our ongoing business activities and distraction of our management;
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difficulties
in retaining business relationships with suppliers and customers of the acquired companies;
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difficulties
in coordinating and integrating overall business strategies, sales and marketing, and research and development efforts; and
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difficulties
in establishing and maintaining uniform standards, controls, procedures and policies, including accounting controls and procedures.
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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.
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.
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.
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.
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.
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:
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general
economic and political conditions and specific conditions in the markets we address;
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quarter-to-quarter
variations in our operating results;
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strategic
investments or divestments;
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announcements
of changes in our senior management;
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the
gain or loss of one or more significant customers or suppliers;
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announcements
of technological innovations or new products by our competitors, customers or us;
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the
gain or loss of market share in any of our markets;
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changes
in accounting rules;
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changes
in investor perceptions; or
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changes
in expectations relating to our products, plans and strategic position or those of our competitors or customers.
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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.
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 $75,000 which includes four months of free rent in 2020. OmniMetrix
is currently utilizing only a portion of these leased facilities and expects to grow into a portion of the currently unused space
and potentially sublease several available executive office spaces.
ITEM
3. LEGAL PROCEEDINGS
None.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
Our
common stock is traded under the symbol “ACFN” on the OTCQB marketplace. The following table sets forth, for the periods
indicated, the high and low bid prices on the OTCQB marketplace.
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High
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Low
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2019:
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First Quarter
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$
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0.45
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$
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0.26
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Second Quarter
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0.36
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0.25
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Third Quarter
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0.36
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0.20
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Fourth Quarter
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0.38
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0.24
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2018:
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First Quarter
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$
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0.32
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$
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0.15
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Second Quarter
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0.45
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0.29
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Third Quarter
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0.35
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0.20
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Fourth Quarter
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0.35
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0.15
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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:
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The
PG segment which provides wireless remote monitoring and control systems and services for critical assets as well as Internet
of Things applications; and
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The
CP segment which provides for remote monitoring of cathodic protection systems on gas pipelines for gas utilities and pipeline
companies.
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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.
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.
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.
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.
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.”
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
|
|
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.
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.
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.
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.
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.
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.
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.
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.
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.
|
|
(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.
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 $242,000 on June 1, 2018.
Upon the achievement by OmniMetrix and Mr. Czarnecki of certain performance goals established annually by the Board of OmniMetrix,
Mr. Czarnecki would have been entitled to increases in his annual salary and an annual bonus. If his employment had been terminated
without Cause (as defined in the Employment Agreement), Mr. Czarnecki would have been eligible for a severance payment equal to
six-months’ base salary at the rate in effect at the time of termination, to be paid in equal installments over a six-month
period subject to his continuing fulfillment of his ongoing obligations under the Agreement. Mr. Czarnecki did not receive a bonus
for 2016 or 2017.
Outstanding
Equity Awards at 2019 Fiscal Year End
The
following tables set forth all outstanding equity awards made to each of the Named Executive Officers that were outstanding at
December 31, 2019.
OPTIONS TO PURCHASE ACORN ENERGY, INC. STOCK
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
Option
Exercise
Price
($)
|
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
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.
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.
|
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.
|
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.
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).
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.
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.
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.
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.
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.
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.
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:
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.
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.
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.
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
|
|
|
|
―
|
|
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.
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.
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
|
|
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)
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
|
|
|
―
|
%
|
|
|
(―
|
)%
|
(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)
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.
|
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
|
)
|
*
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
|
|
|
|
17
|
%
|
B
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
$
|
172
|
|
|
|
18
|
%
|
|
|
$
|
|
|
|
*
|
|
|
|
*
|
|
*
Balance is not significant
NOTE
15—REVENUE
The
core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that
reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to
achieve this core principle, which includes: (1) identifying contracts with customers, (2) identifying performance obligations
within those contracts, (3) determining the transaction price, (4) allocating the transaction price to the performance obligation
in the contract, which may include an estimate of variable consideration, and (5) recognizing revenue when or as each performance
obligation is satisfied.
Sales
of OmniMetrix monitoring systems include the sale of hardware (“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.
The
following table disaggregates the Company’s revenue for the years ended December 31, 2019 and 2018:
|
|
HW
|
|
|
Monitoring
|
|
|
Total
|
|
Year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
PG Segment
|
|
$
|
1,193
|
|
|
$
|
3,089
|
|
|
$
|
4,282
|
|
CP Segment
|
|
|
970
|
|
|
|
238
|
|
|
|
1,208
|
|
Total Revenue
|
|
$
|
2,163
|
|
|
$
|
3,327
|
|
|
$
|
5,490
|
|
|
|
HW
|
|
|
Monitoring
|
|
|
Total
|
|
Year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
PG Segment
|
|
$
|
1,152
|
|
|
$
|
2,504
|
|
|
$
|
3,656
|
|
CP Segment
|
|
|
1,223
|
|
|
|
208
|
|
|
|
1,431
|
|
Total Revenue
|
|
$
|
2,375
|
|
|
$
|
2,712
|
|
|
$
|
5,087
|
|
Deferred
revenue activity for the year ended December 31, 2019 can be seen in the table below:
|
|
HW
|
|
|
Monitoring
|
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
2,432
|
|
|
$
|
1,629
|
|
|
$
|
4,061
|
|
Additions during the period
|
|
|
2,199
|
|
|
|
3,529
|
|
|
|
5,728
|
|
Recognized as revenue
|
|
|
(1,968
|
)
|
|
|
(3,326
|
)
|
|
|
(5,294
|
)
|
Balance at December 31, 2019
|
|
|
2,663
|
|
|
|
1,832
|
|
|
$
|
4,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts to be recognized as revenue in the year ending:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
1,350
|
|
|
|
1,654
|
|
|
|
2,732
|
|
December 31, 2021
|
|
|
990
|
|
|
|
174
|
|
|
|
975
|
|
December 31, 2022 and thereafter
|
|
|
323
|
|
|
|
4
|
|
|
|
354
|
|
|
|
$
|
2,663
|
|
|
$
|
1,832
|
|
|
$
|
4,495
|
|
Other
revenue of approximately $196 is related to accessories, repairs, and other miscellaneous charges that are recognized to revenue
when sold and are not deferred.
Deferred
revenue activity for the year ended December 31, 2018 can be seen in the table below:
|
|
HW
|
|
|
Monitoring
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
$
|
2,227
|
|
|
$
|
1,337
|
|
|
$
|
3,564
|
|
Additions during the period
|
|
|
2,374
|
|
|
|
3,004
|
|
|
|
5,378
|
|
Recognized as revenue
|
|
|
(2,169
|
)
|
|
|
(2,712
|
)
|
|
|
(4,881
|
)
|
Balance at December 31, 2018
|
|
|
2,432
|
|
|
|
1,629
|
|
|
$
|
4,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts to be recognized as revenue in the year ending:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
1,353
|
|
|
|
1,379
|
|
|
|
2,732
|
|
December 31, 2019
|
|
|
731
|
|
|
|
244
|
|
|
|
975
|
|
December 31, 2020 and thereafter
|
|
|
348
|
|
|
|
6
|
|
|
|
354
|
|
|
|
$
|
2,432
|
|
|
$
|
1,629
|
|
|
$
|
4,061
|
|
Other
revenue of approximately $206 is related to accessories, repairs, and other miscellaneous charges that are recognized to revenue
when sold and are not deferred.
Deferred
charges relate only to the sale of equipment. Deferred charges activity for the year ended December 31, 2019 can be seen in the
table below:
Balance at December 31, 2018
|
|
$
|
1,438
|
|
Additions during the period
|
|
|
1,241
|
|
Recognized as cost of sales
|
|
|
(1,246
|
)
|
Balance at December 31, 2019
|
|
$
|
1,433
|
|
|
|
|
|
|
Amounts to be recognized as cost of sales in the year ending:
|
|
|
|
|
December 31, 2020
|
|
$
|
741
|
|
December 31, 2021
|
|
|
531
|
*
|
December 31, 2022 and thereafter
|
|
|
161
|
*
|
|
|
$
|
1,433
|
|
*
Amounts included in Other Assets in the Company’s Consolidated Balance Sheets at December 31, 2018.
Data
costs (COGS) for monitoring services of approximately $544 and the COGS for the miscellaneous revenue from sales of accessories
and repairs of approximately $110 are expensed as incurred and are not deferred.
Deferred
charges activity for the year ended December 31, 2018 can be seen in the table below:
Balance at December 31, 2017
|
|
$
|
1,374
|
|
Additions during the period
|
|
|
1,462
|
|
Recognized as cost of sales
|
|
|
(1,398
|
)
|
Balance at December 31, 2018
|
|
$
|
1,438
|
|
|
|
|
|
|
Amounts to be recognized as cost of sales in the year ending:
|
|
|
|
|
December 31, 2019
|
|
$
|
803
|
|
December 31, 2020
|
|
|
428
|
*
|
December 31, 2021 and thereafter
|
|
|
207
|
*
|
|
|
$
|
1,438
|
|
*
Amounts included in Other Assets in the Company’s Consolidated Balance Sheets at December 31, 2018.
Data
costs (COGS) for monitoring services of approximately $445 and the COGS for the miscellaneous revenue from sales of accessories
and repairs of approximately $123 are expensed as incurred and are not deferred.
The
Company pays its employees sales commissions for sales of HW and for first sales of monitoring services (not for renewals). In
accordance with Topic 606, Revenue from Contracts with Customers, of the FASB Accounting Standards Codification (“ASC 606”),
the Company capitalizes as a contract asset the sales commissions on these sales. Contract assets associated with HW are amortized
over the estimated life of the units which are currently estimated to be three years. Contract assets associated with monitoring
services are amortized over the expected monitoring life including renewals. The contract asset balance at December 31, 2017 of
$152 has been recorded as an adjustment to retained earnings in adopting ASC 606 under the modified retrospective method.
The
following table provides a reconciliation of the Company’s sales commissions contract assets for the year ended December
31, 2019:
|
|
HW
|
|
|
Monitoring
|
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
107
|
|
|
$
|
36
|
|
|
$
|
143
|
|
Additions during the period
|
|
|
69
|
|
|
|
18
|
|
|
|
87
|
|
Amortization of sales commissions
|
|
|
(75
|
)
|
|
|
(17
|
)
|
|
|
(92
|
)
|
Balance at December 31, 2019
|
|
$
|
101
|
|
|
$
|
37
|
|
|
$
|
138
|
|
The
capitalized sales commissions are included in Other Current Assets ($60) and Other Assets ($78) in the Company’s Consolidated
Balance Sheets at December 31, 2019.
The
following table provides a reconciliation of the Company’s sales commissions contract assets for the year ended December
31, 2018:
|
|
HW
|
|
|
Monitoring
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
$
|
125
|
|
|
$
|
27
|
|
|
$
|
152
|
|
Additions during the period
|
|
|
91
|
|
|
|
21
|
|
|
|
112
|
|
Amortization of sales commissions
|
|
|
(109
|
)
|
|
|
(12
|
)
|
|
|
(121
|
)
|
Balance at December 31, 2018
|
|
$
|
107
|
|
|
$
|
36
|
|
|
$
|
143
|
|
The
capitalized sales commissions are included in Other Current Assets ($76) and Other Assets ($67) in the Company’s Consolidated
Balance Sheets at December 31, 2018.
NOTE
16—SUBSEQUENT EVENTS
On
January 8, 2020, 30,000 options in the aggregate were issued to directors with an exercise price of $0.375 and that vest in equal
increments on January 8, 2020, April 1, 2020, July 1, 2020 and October 1, 2020 valued at $6.5 in the aggregate.
On
January 30, 2020, 35,000 options were issued to the CEO with an exercise price of $0.37 and that vest in equal increments on January
30, 2020, April 1, 2020, July 1, 2020 and October 1, 2020 valued at $5.
On
February 6, 2020, 96,250 vested options, in the aggregate, were exercised by former directors. These options had an aggregate
exercise price of $18.
The
Company’s operations may be affected by the recent and ongoing outbreak of the coronavirus disease 2019 (COVID-19)
which was declared a pandemic by the World Health Organization in March 2020. The ultimate disruption which may be
caused by the outbreak is uncertain; however it may result in a material adverse impact on the Company’s financial
position, operations and cash flows. Possible effects may include, but are not limited to, disruption to the Company’s
customers and revenue, absenteeism in the Company’s labor workforce, unavailability of products and supplies used in
operations, and a decline in value of assets held by the Company, including inventories, property and equipment, and
marketable securities.